I have written several articles demonstrating the inaccuracy of AVMs like Zillow’s Zestimates. You might enjoy reading “AVM’s & Punxsutawney Phil’s Accuracy“, “AVM’s… The Wonder Bread of Value“, “Appraiser vs. AVM vs. Zestimate…Ten Properties” and finally, “iBuyers…The Pawn Shops of Real Estate“. Obviously, this topic is of interest to me, seeing is that value is my profession.
In the news, you’ve no doubt seen that Zillow is selling off the homes it owns and getting out of the home-flipping business. Why? There are several reasons. One big one is their Zestimate’s inaccuracy at predicting market value, and more specifically, they were relying on their own Zestimates to make important decisions like buying & selling homes.
Zillow’s Zestimates can be accurate. However, much of the time, they are off. For years, Zillow Zestimates have been zinged by real estate professionals for creating angst in the market by their unsupportable value estimates.
My friend and colleague Jonathan Miller explained what their 2% median accuracy rate really means…
Don’t get me wrong, Zillow is a smart company. They wouldn’t have got to the size they are if they were not. They are excellent at marketing. They are also good at data collection. And to be honest, they do provide some useful information to the public. However, I believe that they’ve put too much value in their “values”. Valuation is not their expertise. I think they were beginning to think it was.
My appraiser compadre and fellow blogger Ryan Lundquist, at the Sacramento Appraisal Blog, wrote an excellent piece this week on the situation with Zillow. He made this comment, “We are coming out of one of the most aggressive markets ever and Zillow was not able to succeed despite massive appreciation. Just think how much more difficult it would have been to flip in a declining market.”
I wonder what would have happened if they had hired appraisers to appraise the homes they were buying, and relied upon a professional real property appraisers’ opinion of value when making their decisions? They may have been in better a situation today! I regularly work for investors who hire me to appraise a home they are interested in buying. They want to know how much it will be worth once some specific improvements are made. And they’ve been successful.
What Zillow would have paid to have an appraisal completed by a state-licensed or certified appraiser, would have been a drop in the bucket compared to their profits. It seems that they went about things a little backward. It seems that Zillow got zinged by their own Zestimates!
VALUATION IS NOT EASY OR SIMPLE
Valuation is not simple and not nearly as easy as many think it is. It does still usually require human verification and analysis.
An article in GeekWire, by John Cook, entitled “Why the iBuying algorithms failed, Zillow, and what it says about the business world’s love affair with AI”, said, “Just because a business process can be automated, doesn’t necessarily mean it should be automated. And maybe – just maybe – there are components of business that are not better served with AI algorithms doing the job.” The article went on to say that “Research has long shown these computer models are loaded with biases and flaws. This is causing a backlash against AI and machine learning algorithms, and you can see it playing out in some of the chatter following Zillow’s decision.”
In a CNN article by Rachel Metz entitled, “Zillow’s home-buying debacle shows how hard it is to use AI to value real estate”, said, “The fallout from this business venture doesn’t just point to the challenges in buying and selling homes for profit, however. It also highlights how hard it is to use AI to help make expensive, real-world decisions, particularly in an ever-changing market that can be hard to predict months or even weeks out, and with prices that can be based as much on feel as on clear data points. Zillow CEO and co-founder Rich Barton explained the shuttering of Zillow Offers by citing “unpredictability in forecasting home prices” that “far exceeds” what the company had expected.”
The article went on to quote Mike DelPrete, a global real estate tech strategist, and scholar-in-residence at the University of Colorado Boulder, as stating the following, “It’s a good tool for what it is,” DelPrete said of the Zestimate, but it’s a mistake to think it can be used to accurately predict house prices now or in the future. He sees it as “almost a toy,” meant more for piquing your curiosity when looking up your home or your neighbor’s home online.”
Interestingly, I have said basically the same thing. In my view, Zestimates are a toy, not a tool for making serious decisions.
To further demonstrate this, let’s see if their Zestimates have gotten more accurate since my earlier articles. I appraised these four properties within the last month…
PROPERTY 1
Property Location – City of Brecksville (Lower Density Suburban)
Type of property – Single-Family Residential
My opinion of value – $345,000
Zillow’s Zestimate – $267,500
My comments – I was hired by a potential buyer homebuyer to develop an opinion of the home’s market value to aid them in making a decision as to whether to buy the property. Zillow reflects this home as having 2 bedrooms and a partially finished basement. This home has three bedrooms, multiple bathrooms, and a finished walk-out basement. This home has also been renovated in recent years. Zillow’s Zestimate range is $246,000 to $289,000. Not even close!
PROPERTY 2
Property Location – City of South Euclid (Higher Density Suburban)
Type of property – Single-Family Residential
My opinion of value – $178,000
Zillow’s Zestimate – $139,300
My comments – I was hired by the homeowner to appraise the home to assist them in coming up with an asking price. If they had gone with Zillow’s Zestimate, well, that would have been a bummer. I have no idea where Zillow is getting their number. Their Zestimate range is from $116,000 to $160,000. Not even close!
PROPERTY 3
Property Location – City of Brecksville (Lower Density Suburban)
Type of property – Single-Family Residential
My opinion of value – $494,000
Zillow’s Zestimate – $648,700
My comments – I appraised this property for a tax appeal. This property’s finished square footage was hundreds of square feet less than what Zillow reports. Zillow’s Zestimate range was $590,000 to $714,000. Again, not even close!
PROPERTY 4
Property Location – Twinsburg (Lower Density Suburban)
Type of property – Condominium
My opinion of value – $272,000
Zillow’s Zestimate – $290,000
My comments – This was a purchase. This property is actually about three hundred sq. ft. larger, in terms of gross living area, than Zillow is reporting. Zillow’s value was the same as the property was listed for. Imagine how much higher the Zestimate would have been if their algorithm had used three hundred more square feet? Yikes!
I cannot share the addresses of these properties for confidentiality reasons. But I think you get the idea. Interestingly, not only can Zillow’s Zestimates be incredibly high, but they can also be incredibly low.
If this is the same kind of results Zestimates are pumping out to Zillow in markets where they have been buying properties, this little exercise shows how Zillow may have missed out on good opportunities to buy homes with the potential to make a decent profit, while at the same time overpaying for other properties. Either way, their lack of accuracy is clearly part of the reason they are getting out of the iBuyer business.
Some in social media are saying that this is an indicator of a pending housing crash. Interestingly, it seems that some may be reading too much into the situation. In my opinion, their failing at being a successful iBuyer, is simply a sign that they don’t know valuation and put too much weight on their Zestimates. Of course, I am a real property appraiser, so clearly, I am biased. When flipping homes, having a realistic idea of what the market value of the home is, or what it will be once renovated, is a crucial piece of the puzzle.
If you’re looking to buy a home, or sell yours, don’t get Zillow Zinged by a Zestimate! Hire a state-licensed or certified appraiser to help you determine the market value of your home. No, it won’t be instant, and it won’t be free. But you get what you pay for.
On that note, I leave you with a much cooler ZZ! ZZ Top that is! I bet Zillow’s saying “I gotsta get paid” right now too. Zing!
Have a great weekend!
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Here are some links to other articles I’ve enjoyed recently! I hope you will also…
What A Housing Collapse Actually Looks Like – Housing Notes by Jonathan Miller
Goodbye Zillow – Sacramento Appraisal Blog
Appraiser Retirement? – APPRAISAL TODAY
USPAP and Hot Sauce – The Appraiser’s Advocate (PODCAST)
What is the Market Value in ‘Market Value’? – George Dell’s Analogue Blog
Zillow’s home-buying debacle shows how hard it is to use AI to value real estate – CNN by Rachel Metz
What the rest of us can learn from Zillow’s real estate stumbles – Ben Carlson at Yahoo Finance
Why the iBuying algorithms failed Zillow, and what it says about the business world’s love affair with AI – John Cook at GeekWire
Can I Sell My Home For Its Appraised Value? – Birmingham Appraisal Blog
Thanks for the mention Jamie. I really appreciate it. Great job here. Zillow really flopped. Now let’s see what Zillow 2.0 looks like. I suspect they are not finished flirting with other ventures. We’ll see though.
You are very welcome my friend! And thank you! They really did. I bet you’re right on their not being done yet. Perhaps they’ve learned some valuable lessons, with emphasis on value.😁
Great job Jamie!!
Thank you very much!