7

My wife and I purchased a townhouse almost two years ago.

I've signed up at Zillow to receive occasional (monthly?) "Home Report" emails which includes a "Zestimate" of my current home's value, as well as other info like nearby homes that are for sale or sold, how much they think I could ask for monthly rent, etc. I'm quite surprised that our home's value according to their Zestimate is about 40% higher than what we paid for it, and climbing.

I assume these estimates are fairly accurate since they seem to have good data about what nearby homes are selling for, but I don't know how they can account for things like the condition of the whole thing.

Are there any other Zillow users out there who have sold a house? How close to the "Zestimate" did you sell for?

9

If you live in a community with a larger number of similar or equally built/styled houses, and there is some turnover (a sale every three months or so), it is a pretty good value estimate.

If houses (and lots) are more differently styled and or aged (not just differently sized), it becomes a very poor predictor, as it averages and prorates only all dimensions.

Our neighbor, and a friend of mine bought/sold respectively for about Zillow value (less than 4% off), but both fall in the former group - large similar communities.

  • My townhouse is indeed one in a long row of identical (when they were built, anyway) townhouses, so your answer seems to indicate their estimate should be pretty accurate. Great! – Garrett Albright Nov 26 '17 at 4:50
  • Your answer seems reasonable, but it would be improved by citing sources for the statements you make beyond a few anecdotes. – Joe Nov 28 '17 at 22:53
13

I do know how Zillow's tool was developed. It is in the public domain. Zillow's tool is built to minimize the percentage error in its estimate. This has triggered a lawsuit by those who feel they have been harmed by the estimate. The tool is an unbiased estimator in logarithmic space and not in the price space. In the price space, the best estimator would minimize quadratic loss.

If you are not mathematically inclined, it implies that errors are multiplicative instead of additive in appraising your home. Property appraisals are additive when done by commercial appraisers. The short version of this is that Zillow is as likely to be off by $10,000 on a $100,000 house as it is off $100,000 on a $1,000,000 house. A commercial appraiser is as likely to be off by $10,000 on a $100,000 house as they are to be off by $10,000 on a $1,000,000 house.

The second issue is that Zillow cannot see the condition of your property. If your home were struck by a meteor, the Zillow price would not change until the neighborhood had reduced prices due to the catastrophe. It cannot know the actual state of affairs.

Zillow does worst with two types of homes. The first are homes built before 1920 as these homes are generally not uniform with the surrounding environment and are not similar to anything else. The second is high-value homes. This is due to the multiplicative scaling of errors combined with a lack of comparability.

This is what has triggered the suit. A commercial appraiser may say the home is worth $4,000,000 and Zillow $3,600,000 or $4,400,000. The difference is that the appraiser is required to know the territory in which the home sits and which structures are actually comparable and so the data is restricted to reasonably linked properties. Additionally, the appraiser physically observes the property and the neighborhood, is aware of local financing issues, and is very experienced in the local market. Zillow cannot approach that level of modeling difference.

People are upset because when Zillow is low, then no one will make an offer comparable to the appraiser's written estimate, but when it is high the sale can still go through if the buyer is willing to add cash out of their own pocket.

There may also be an endogeneity issue present in their regression model, but that is unclear. It is also unclear as to whether it would have an impact.

Depending on what you are paying for the estimate and how important it is for you to know the value, I would say that the Zillow estimate is likely reasonable. It is important to understand that the method used averages over the "sample space," so that it is a great tool on average for what it is trying to do, but not a substitute for a commercial appraisal.

An additional potential source of information is your local property assessor if you live in a property tax state. Most states require assessors to value properties in roughly the same manner that commercial appraiser value properties. If you can reverse engineer the assessor's method, you can get a pretty good idea of your property's value.

EDIT per the request in the comments. Information on the suit and its dismissal can be found at: https://www.washingtonpost.com/realestate/zillow-faces-lawsuit-over-zestimate-tool-that-calculates-a-houses-worth/2017/05/09/b22d0318-3410-11e7-b4ee-434b6d506b37_story.html?utm_term=.fc60d061f894

https://www.reuters.com/article/us-zillow-group-lawsuit/zillow-wins-dismissal-of-zestimate-lawsuit-in-u-s-idUSKCN1B32RN

I can no longer find enough data to link to the specific mechanism Zillow uses. You can find some loose validation information at: https://www.zillow.com/zestimate/

  • I think this would be a very good answer if you added some citations- such as a link to details/coverage/etc. about the lawsuit, where the specifications of the estimate are, etc. to make your answer very solid. – Joe Nov 28 '17 at 22:51
4

Zillow says:

Zillow's accuracy has a median error rate of 4.3%. This means half of the home values in the area are closer than the error percentage. For example, in Seattle, Zestimate values for half of the homes are within 5.4% of the selling price, and half are off by more than 5.4%.

Zillow also publishes region specific accuracy information here: https://www.zillow.com/zestimate/#acc

3

I have worked in companies developing online property valuation software (not Zillow, and I have no knowledge of Zillow's specific tool), and I can tell you that it's mostly wildly inaccurate, and the more diverse the properties in your area the worse it is. It's simply not possible to value a property accurately based on data that you can capture in a web form. It's a marketing gimmick to get you engaged with the company, and you should treat it as such. If you want a proper valuation, get an agent to physically visit your property.

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