[SOLD!] Are Online Home Price Estimates Reliable?

Category: Finance

When buying or selling a home, it’s natural to seek independent opinions of the property’s value. Historically, buyers and sellers relied on real estate agents, “the neighborhood professionals” who have years of experience with local markets. But today, online real estate price estimators are considered by many to be more objective and honest than the appraisals of realtors. But who is right? Read on to learn why computerized home valuations are not always on the mark...

Zillow, Schmillow

The thinking is that a realtor has a conflict of interest. He or she wants to close a deal and earn a commission, and that generally means persuading a buyer to bid more and a seller to ask less. It’s just common sense that a disinterested party will come up with a fairer market valuation. But "disinterested" does not always mean "fully informed."

Zillow has become “the Google of real estate” by promoting that rationale. Founded in 2006, the company received 73 million online queries in December, 2015. The site allows users to enter an address or zip code to retrieve listings of homes that are on the market with asking prices. It also provides “Zestimates” of the market value of listed homes and surrounding homes that are not on the market. Key details are included, such as square footage, lot size, number of bedrooms and baths, photos, taxes, school district, etc.

Sellers and shoppers rely heavily on Zestimates, and that makes life difficult for realtors. Zestimates “are the bane of my existence,” said an anonymous realtor the industry blog ActiveRain. People tend to take Zestimates as gospel, and argue with the realtor’s valuation of a property. Such disputes are killing a lot of deals, say some realtors.

Online house value estimators

Zestimates “are a good starting point,” according to Zillow CEO Spencer Racoff. He admits to the LA Times that Zestimates have a nationwide “median error rate” of 8%. On a home worth $500,000, that’s a $40,000 disparity! If that’s the median error, then half of Zestimates are off by more and half are off by less.

The median Zestimate error rate gets much worse as we look at local markets. In Manhattan, it’s 19.9%. In San Francisco, it’s over 11% - an error of more than $110,000 on a $1 million home. In some rural California counties, Zestimates are off by as much as 26%. In Somerset County, MD, it’s an astounding 42%! Sounds like a “good starting point” for an unproductive negotiation, to me.

A Real Estate Distortion Field?

Apple is so good at marketing their products that some people have joked that they use a "reality distortion field" to persuade consumers that there is no alternative to their brand. In similar fashion, the popularity of Zillow may be creating a real estate distortion field.

Realtors all over the country have done their own studies comparing Zestimates to actual sale prices. One realtor found Zillow underestimated the final selling price up to 70% of the time, by as much as $70,000. In 25% of sales, the Zestimate was lower than the contract price. (So 5% of the time, Zillow got it right.) In another ZIP code, Zestimates were off 100% of the time, by as much as $190,000.

On the flip side, Zillow's home price estimates seem to reflect reality pretty well in my town. That could be because it's an active real estate market, so there's a lot of current data (actual sales prices) on which to base estimates. If you want to estimate what a home is worth right now, you need to look at recent sales of comparable nearby homes. That is what realtors do every day.

Zillow does provide an interactive map which shows nearby homes that are sold, or listed for sale. But it's very difficult for a computer program to understand which of those homes are truly comparable to yours, or the one in which you are interested. Matching up homes with similar square footage, number of bedrooms, etc., may not take into account the fact that one home had a recent kitchen remodel, a new roof, or other important factors in determining the value. The moral is that Zillow estimates should be just one factor in determining the value of a home.

There are other online real estate price estimators, including Eppraisal, Trulia, and Redfin. They all rely on data pulled from local government records, which are notoriously outdated, incomplete, and inaccurate. But they must use other factors as well, because if you query each one of them, you'll get three different estimates for a given property. The good news is that most of them allow you to login, claim your home, and update the details if they're not correct.

Have you checked the estimated value of your home using one or more of these tools? Your thoughts on this topic are welcome. Post your comment or question below...

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Most recent comments on "[SOLD!] Are Online Home Price Estimates Reliable?"

Posted by:

11 Mar 2016

Yes Zillow made it more difficult for my daughter to sell her home in Texarkana. She had a very savvy RE agent but Zillow kept reducing the "zesstimate." So people didn't want to even look at the home because it was considered overpriced. I do NOT like this so called online "service."

Posted by:

11 Mar 2016

Very informative although I do not know much about this field.

Like the idea of the option to link this article to a site or blog.

Definitely something to think about for people currently going through the process.

Great research Bob



Posted by:

11 Mar 2016

While I think the estimates on these sites are a bit generous, they recently came in handy when we needed an appraisal for a refinance. It's hard to find comps for our property, and using Zillow and Trulia made the process a lot simpler.

Posted by:

11 Mar 2016

uuuhh, "Zillow underestimated {Selling price} 70% of the time." Next sentence, "Zestimate was lower than the contract price {20% of the time.}" Isn't that the same thing with different %'s?
Was the second one supposed to be "Higher?"

Posted by:

11 Mar 2016

A few years ago, I saw a view of my neighborhood from above with the values of the homes on each house. According to that, my neighbor's house was worth about 50 K more than mine. I have a three bedroom, two bath with tile roof and a two car garage. His is a two bed, bath and a half with shingle roof and a single car carport. My lot i larger than his also.

Posted by:

11 Mar 2016

we did a refin on our house and Wells used Zillow to tell us how much it was worth without coming out. I disagreed and We had our house appraised and It was set for much more, So I updated Zillow and within a month they lowered it again. Its a scam and its hurting people.

Posted by:

11 Mar 2016

WV changed a great many addresses to help first responders. Zestimate on new address (no history) $317k, on old address $769k. no way to correct.

Posted by:

Daniel Wiener
11 Mar 2016

We made some major home improvements (adding rooms) several years ago which are not reflected in Zillow's Zestimate of our house's value. Which is fine with me; I have no interest in contacting Zillow to update their information, even though that's supposedly possible. However, I do use Zillow to track the value of my house. I know what it was officially appraised at when I refinanced after the home improvements. I can see from Zillow's charts what they think the percentage change in the value of my house (and in my zip code and city) has been since then. So I know approximately what it's currently worth, and what my equity is. All of which is mostly for curiousity's sake, since I have no intention of selling my house, and I'm not likely to be able to refinance it again at a lower interest rate than the 3.25% 30-year fixed that I now have.

Posted by:

Florida beach Realtor
11 Mar 2016

I'm a Realtor on Florida's Gulf beaches. The market is a mixture of houses and condos, both waterfront & non-waterfront. Zillow typically uses both condos and houses, waterfront and non-waterfront, in coming up with a Zesstimate. These are not comparable types of properties and the resulting value shown is commonly way off base. This makes the Zesstimate worse than useless.

Posted by:

Mary Montgomery
11 Mar 2016

Zillow is really poor at finding 'comps' in a smaller town, which has greatly different values in a small area. I've checked my home (not for sale) and the comps are sometimes laughable.

Posted by:

Ron & Ana
11 Mar 2016

The best way is to look up city, county records going thru a good title company or a local Realtor
Finding the last six or more sales with in the last six months or year if needed. Always lean towards the high side of the comps you find when it comes to listing your home. But also be smart and do not over price the home. I could go on a lot more about how to price a home, but fact is the more eyes you have come look at it the better chance you have of getting your full asking price.

Posted by:

13 Mar 2016

I think the realtors have brought much of this on themselves. My recent experience with selling two houses was the same. They come out and look at your property and try to get you to list it below market value -- then when it sells quickly they want to tell you how good they are at selling houses. If you get the price cheap enough there's no selling involved, just an order taker. You have to do your own homework! On the second house the realtor was 15% below the selling price and didn't even brother to look at it. Needless to say I didn't list it with him. I guess he thought since he got the first listing he didn't need to work for the second one. Not much difference between realtors and car dealers in my book.

Posted by:

14 Mar 2016

I have used Zillow for years as a source to estimate where clients may or may not need a revocable trust. There is site my employer paid for us to use that actually gets the Deed and the last sale info. It is called RealQuest. That has been very helpful and more accurate than Zillow.

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