Zillow, Zillow, A Reliable Fellow?

What do I think about Zillow? I get this question quite a bit from current, past and potential clients. Much of the media seems to fallen in love with Zillow, showering it with praise and predicting the demise of the real estate agent. I’ve been intrigued with Zillow from way back when all we knew about them was their quirky name and that it was started by the same guy who started Expedia. Since Expedia transformed the travel industry, it was very exciting (and a bit nerve-wrecking for my profession) to see what they were going to do. When they finally did come out with their “product” it was to me at least, a bit of a let down. I remember thinking.. “that’s it?” Online valuation? Well, conceptually, I think it’s a nice idea. It empowers the public to find out info that’s traditionally guarded by real estate agents. However, on the flip side, it also gives inaccurate information….sometimes extremely inaccurate.

If people took Zillow’s information with a grain of salt, …fine. As Zillow’s own website says, “It is a starting point in determining a home’s value.” The problem is, first impressions last the longest. If a client of mine who wants to sell his house goes to Zillow and it says the house he bought 5 years ago for $300k is now worth $500k, he’s going to be super excited. Even if he acknowledges that Zillow isn’t super accurate…he’s probably going to think, ..well..it should be in that ballpark. What happens when I tell him …uh..sorry, ..you’re house is more in the $400k area. I’m going to have an extremely steep uphill battle to change his impression and get him to realize and accept the truth. Of course the flip side could be to my advantage when Zillow undervalues a property. But my point is…inaccurate information can be extremely damaging.

So how accurate is Zillow? Their website has a great chart that lays out their accuracy for the top metro areas. The column to really notice is “Within 10% of Selling Price.” The values in this column range from a low of 50% to a high of 78%. I guess from first glance you may think, well, that’s not too bad. At worst, it’s within 10% half the time. For the Seattle area, Zillow as the accuracy at 73%. That’s almost 3/4 of the time, Zillow is within 10% of the selling price. Unfortunately, the key number here is the 10%. In our market where the median price of a house in Seattle is around $400k (if my memory of a Seattle Times article is accurate), 10% is a whopping $40,000.00!!!!! In reality, real estate purchases will fall apart over only a few thousand dollars. I’ve heard from colleagues that they’ve had deals fall apart over $2000 dollars. So, if Zillow is telling me that they’re within 10% only 3 out of 4 times, ..that means 3 out of 4 times, (for my imaginary $400k house) Zillow’s price is somewhere between $0.00 and $40,000.00 off from the actual value, and 1 out of 4 times they’re more than $40k off. To me, that amounts to a whole lot of worthless information. To me, for this info to be worthwhile, accuracy has to be within 1%….so for the $400k house, it has to be within $4000 or so.

So how should value be determined? Valuation, in my opinion, is a balance of science and art. The science will tell you the market value. This is typically done by doing comparisons to similar homes in the same area. I like to also look at homes sold in the previous year and then calculate based on the area’s average appreciation, what that house would be valued at if it were on the market now (kinda like a cross comparison). Mix that in with some $ / sq. ft analysis and you can arrive at a fairly accurate market value. That’s the science part. The art part of valuation is a little trickier. You’ve heard of the phrase, beauty is in the eye of the beholder. In real estate, I call it the “Love-it Factor.” You’ve got a house to sell (or buy). My science tells me its market value is …let’s say… $445k to $450k. However, let’s say the house has a remodeled kitchen with high-end appliances. For the buyer who loves cooking, that feature will make them love the house even more; the house to them is worth toward the $450k …maybe even more! But to the guy that doesn’t even own a frying pan, the only value the remodeled kitchen has would be resale and the wow factor. He won’t necessarily pay a premium for it. He’d rather have the house at $445k or lower. Maybe the layout works for some and not for others. Etc. etc. The art part of valuation is different for every individual and can vary widely. The house can be perfect in every possible way and a buyer would be willing to pay a huge premium for it! There’s no reliable way to gauge or predict that.

Valuation incorporates things tax records or listings can’t really illustrate. Zillow’s data is based on these records so there’s no way their valuation can reflect that.

So in a nutshell, part of me likes what Zillow is trying to do, but the other part of me feels there’s more harm than good being done. Now Zillow is taking listings and FSBO’s on their website. I haven’t had enough time to research it and figure out what to think about that!