"Zestimates" Wildly Off Target

Zillow's Secret (Agenda)?
Maximizing Online Ad Revenues

"Yuppie Crack." That's what a technology pro I spoke to recently called Zillow and its admittedly addictive array of real estate search and pricing tools. Unfortunately, if you're relying on a "Zestimate" to price your home, you'd frequently be better off throwing darts, or simply picking numbers out of a hat.

According to Zillow's own "Data Coverage and Accuracy Table," its data for the Twin Cities -- which carries a "four star" ranking for accuracy, the company's highest -- can be expected to come within 10% of a home's eventual sales price just 54% of the time. Put another way, the odds of a Zestimate mispricing your home by more than 10% are practically 50-50. The chances of a Zestimate being off by more than 20% are almost 1-in-4!

Based on my experience as a realtor, if anything those numbers overstate Zillow's likely accuracy (company disclaimers are careful to characterize Zestimates only as "starting points").

To take just one example, a home that I'm currently helping the owner prepare for market has a Zestimate of $764k. Because the home hasn't sold in several decades, Zillow's "proprietary algorithms" rely on recent, nearby home sales to fill the vacuum.

Unfortunately, Zilllow doesn't know that my client's home needs a new Kitchen; requires substantial repairs to the roof and exterior; and needs all new mechanicals (plumbing, electric, and heating/cooling systems) as well as extensive landscaping. The three contractors who I've brought in to estimate the required work have come up with budgets of $150k-$250k. Likely selling price? Around $500k.

A mile away, Zillow makes the opposite mistake. Another client's home is located on a block of rehab's and tear-down's that are dramatically changing the neighborhood's character. However, because the work is being done by the homeowners themselves rather than as "spec" projects by builders, there are no resale statistics that capture the block's upward trajectory. "Zestimated" price? $645k. Actual fair market value? North of $800k.

It's not just home updates (or lack thereof), condition, floor plan, and neighborhood trends that Zillow fails to take account of. It also fails to recognize geographic markers like freeways; school district boundaries; and the presence, if any, of nearby foreclosed properties that have yet to show up in the published sales statistics that Zillow tracks.

So what gives? Zillow's real secret likely isn't its formula for calculating home prices -- it's the company's business model.

Zillow doesn't want to sell or even accurately price homes; rather, its goal is to attract and keep as many eyeballs online as possible. Why? So that it can maximize its online ad revenue, which (apparently) is its main source of income.