You Can’t Trust Zillow And Its Estimates

When Zillow.com launched its website in 2005, the world was a buzz with the company’s ability to bring appraisals, called Zestimates, to everyone’s fingertips. It was fun to type in your own home address, or that of your colleague’s or boss’s house to see what they paid. Some of the estimates were way off and were course corrected by owner’s ability to log on, claim one’s home, and update the data will all relevant features under oath.

Zillow empowered buyers to become smarter shoppers by understanding comparables and knowing when and at what price the house was last sold. When you know the seller paid $1,000,000 at the top of the market for example, you know it would be ludicrous to pay more by definition.  Zillow brought once exclusive information, available only to real estate agents and people who paid for it to the masses. There was hope for an industry which generally is maligned for it’s two-faced ways, shady appraisal practices, and aggressive lending standards.

My biggest hope was that Zillow would make the markets more efficient for buyers and sellers, thereby cutting out a lot of unnecessary middlemen, and ultimately lower fees from 5-6% down to perhaps just 1-2% of selling price.  Boy was I wrong.

ZILLOW COULD HAVE HELPED THE INDUSTRY

Zillow has created a heard of zombies who rely on their zestimates to tell them what value a particular property is.  Here’s a news flash for all of you: A property is only worth what someone is willing to pay for it.  As a seller, you can’t go around sticking to a selling price because Zillow or your real estate agent said your house is worth $1,000,000. If nobody has bought it after 6 months, it’s definitely worth less!

Buyers are no better when it comes to relying on Zestimates. A big problem with Zillow’s database is that it is based off comparable sales.  In the downturn, volume dried up, making real-time comparables hard to find.  All the data is lagging. Feel free to pull up estimates around the entire neighborhood to educate yourself, but if you have only one or two sales in the past 6 months to a year, they are hardly reliable.

Eratic Estimates

I’ve had Zillow increase the value of my house by 23% during the housing collapse.  As we begin to recover, their estimate has gone down by about 7% from the peak.  One of my rental properties also skyrocketed by about 25% during the housing downturn to about 50% higher than when I purchased it 4 years earlier.  Now the estimate is only about 17% when I’ve seen comps trade at 40% higher this year.  And one of my other properties can’t even get a Zestimate, even though there are many units in that building and is located in one of the best places in Lake Tahoe.

The point is, anybody trying to buy my properties during the multi-year downturn would be scratching their heads at ever increasing prices.  In fact, anybody trying to buy any property using Zillow during the downturn would be misled.  Now that prices are recovering with all the pent-up demand, low rates, and internet money, my estimates are declining.  Go figure.  There is a serious lag and volatility in their estimates.

Zillow’s best use is for trying to figure out what the seller paid and when. Their Zestimates and Rent Zestimates give ball park figures, but they are just one of many considerations one should take before setting a price.

 The Biggest Problem

The biggest problem I have with the real estate industry is not the shady appraisers, or the unscrupulous agents whose motto is, “It’s always a good time to buy, or sell real estate.” No. The biggest problem I have with the real estate industry is the absolutely ridiculous 5-6% selling fee the homeowner has to pay the real estate agent.

If it costs $10,000 to sell a $200,000 home, does it really cost $40,000 to sell an $800,0000 home based on a 5% selling commission?!  One could argue that it might take more effort to sell the $200,000 home, because it is likely in a less desirable, or lower demand area. Imagine if you owned a $2 million home, which is quite typical in places such as San Francisco and New York City. Are homeowners really expected to pay a whopping $100,000 to sell their home? This is utterly ludicrous and something that companies like Zillow, Trulia, and Redfin should have fixed.  But they haven’t.  Why is this?

The reason is simple.  Zillow is in cahoots with the real estate industry. They derive advertisement revenue from real estate companies and agents who want to use Zillow’s platform to broadcast their services and homes for sale. As a result, Zillow goes limp dick on the fight to lower selling costs for sellers, which ultimately creates higher prices for buyers.

One of the biggest reasons homes remain illiquid and turnover remains low is transaction costs. If it only cost $10 bucks to sell your home, you’d probably be more willing to sell. But if it costs $50,000, you’ll think twice and might be stuck and lose money because of it. If the industry can drop down to a fixed fee model, or a scaling percentage fee which declines as the price of your house goes up, that would go a long way into helping the industry get out of its funk. The barriers to selling is just too high.

My proposed selling fee structure is simply $2,000 for every $100,000 value range in a home up to a $1,000,000 value cap. Hence, a $500,000 house will cost $10,000 to sell (2%). A $1,000,000 house costs $20,000 to sell (2%). While a $4,000,000 house also costs $20,000 to sell (0.5%). Sounds like a great solution doesn’t it?  Bring it up to any real estate agent and they’ll scoff.

ZILLOW’S ESTIMATES ULTIMATELY CANNOT BE TRUSTED

Zillow relies on the industry to survive, and therefore will do nothing to disrupt the hands that feed them. Zillow’s product is producing a Zestimate which they claim to be accurate +/- 10%. That could be the case, but ultimately, if they are so accurate, and they have provided such a killer product, transactions costs should have come WAY down by now. The very fact that every broker here in San Francisco won’t go below 5% selling fee, even on a multi-million dollar house after the launch of Zillow and many other similar companies proves that consumers are the ones who are being screwed the most.

Zillow could have helped millions of sellers and buyers save millions more in transaction costs.  They should have stood up and announced to the world their mission to save people money and provide for a better real estate experience. Then, users would be clamoring hand over fist to use their product and transact instead of be part-time voyeurs who never will spend a dime or user their advertised agents.  Instead, Zillow decides to stay quiet in the face of a crime and follow the robbers hoping to catch hundred dollar bills that occasionally fall out of their stolen bags.

The main thing I use Zillow.com for is checking comparable homes sold in the area to get an idea on price. It’s good to see what their Zestimates are, but always take the values with a grain of salt. It’s fun to punch in your neighbor’s, colleague’s or boss’s house to see what they paid too.

Updated 5/1/2014.

Recommendations For Homeowners Or Potential Homeowners:

* Check your credit score: Take a moment to check your free TransUnion credit score through GoFreeCredit.com, a company I trust. 30% of all credit records have errors which can derail your homebuying process. I had a $8 late payment from two years ago which slammed my credit score by 100 points! The kick in the pants is that it went undetected for so long until my last mortgage refinance with a bricks and mortar bank. A credit score check also makes sure you aren’t a victim of identity theft. Furthermore, know that the average credit score for rejected mortgage loans is 729!

* Refinance Your Mortgage. LendingTree Mortgage Refinance offers some of the lowest refinance rates because they have a huge network of lenders to provide mortgage loans, home equity loans, and home equity lines of credit. If you’re looking to buy a new home, consider using LendingTree to get multiple offer comparisons in a matter of minutes. When banks compete, you win.

* Manage Your Finances In One Place: The best way to become financially independent and protect yourself is to get a handle on your finances by signing up with Personal Capital. They are a free online platform which aggregates all your financial accounts in one place so you can see where you can optimize. Before Personal Capital, I had to log into eight different systems to track 25+ difference accounts (brokerage, multiple banks, 401K, etc) to manage my finances. Now, I can just log into Personal Capital to see how my stock accounts are doing and how my net worth is progressing.

Regards,

Sam

Sam started Financial Samurai in 2009 during the depths of the financial crisis as a way to make sense of chaos. After 13 years working on Wall Street, Sam decided to retire in 2012 to utilize everything he learned in business school to focus on online entrepreneurship.

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Comments

  1. Untemplater says

    I am totally guilty of using Zillow to look up my boss’s house, haha. I completely agree their values are volatile and far from real time. It’s fun to look up places in the neighborhood though to get more color on values and prior sales.

    You make so many interesting points on the agent fees. I like your $2,000 for every $100,000 proposal.

  2. John Border says

    I used to look up in Zillow in the past however given the volatility in the estimates I have stopped using it. Real estate agents are not be trusted anywhere in the world is my motto. I have seen that in action in India, Canada and in this country. They are the same breed everywhere.

  3. Tony @ Investorz' Blog says

    The thing about house prices is that your house is only worth as much as people are willing to pay for it. For example, in the 2008 crisis, many banks were threatened with writing off their real estate assets as $0 because no one wanted to buy it! Hence, it’s literally impossible to make an accurate prediction as to how much a house is worth.

  4. Darwin's Money says

    I used Zillow quite a bit last year when looking for homes but I didn’t trust the “zestimates” at all. What I liked was you could easily click on a property and see the prior home sales, prior list prices, etc. So, it was good for real historical data, but the zestimates were always completely off in my experience.

    • No Debt MBA says

      That was our experience as well when looking for homes. Personally I prefer to use Redfin if it covers the area you’re looking at – it’s a much better interface and if you’re hung up on estimates it shows Zillow’s as well as eppraisal’s where available.

  5. Elle says

    I take Zillow’s estimate, recent sales, and the county’s assessment to come up with a ballpark figure for our home’s worth for our monthly review. Most of the time the Zestimate is within the current range, but I’ve seen where it’ll jump up for no reason and then go back down next time I check.

    It’s a bit volatile for my tastes.

  6. Moneycone says

    In the absence of anything better, I’m forced to go with Zillow. It does make it easy to do a quick lookup! :)

    Now that they are a public company, they’ll have to get even more creative to make profits which of course, may not be aligned with what home owners would like to hear.

  7. Sunil from The Extra Money Blog says

    as a real estate investor, i find myself on Zillow quite a bit. that said, it’s more a sniff check than anything else. fluctuations are beyond belief, and mostly determines by the very last sale in the area (may it be a foreclosure sold at a significant discount). it’s good to use as a benchmark, but certainly not as a bible. i like broader MLS comps to get a “truer” / better picture of values. from an internet perspective, i like Trulia better between the two as i find it more accurate . . . here comes another dot com bubble.

    • Financial Samurai says

      It’s a good sniff test, and better than nothing for sure. But, why haven’t they been able to lower selling commission rates from 5% down to 2% if they are so good? This is the real point of the article.

      • slug | sunkcostsareirrelevant.com says

        The simple answer is that’s not their business model. You stated that your “hope was that Zillow would make the markets more efficient for buyers and sellers, thereby cutting out a lot of unnecessary middlemen, and ultimately lower fees from 5-6% down to perhaps just 1-2% of selling price.” The key word there is HOPE and the fact that it is your HOPE. Zillow does bring efficiency. I used my Zillow price to justify an artificially higher valuation on my home that allowed me to re-finance at a lower rate, get out of escrow, and pay off a HELOC. Could I have done it without Zillow? Probably, but being able to hand that data to the appraiser along with Trulia data and tell him the number I wanted surely helped and made my process far simpler.

        • slug | sunkcostsareirrelevant.com says

          I’m not sure how it’s logical? How does reducing the rate that all buyers/sellers pay in commission help increase their website utilization? How does one monetize this because logic would dictate that Zillow should profit by making a market more efficient?

          Maybe you should create a website where realtors can bid on the opportunity to represent a property owner in a buying or selling transaction based on reduced commission percentages. This could achieve your hoped for Zillow goal. #givingawaybusinessmodels

        • slug | sunkcostsareirrelevant.com says

          I’m not sure how it’s logical? How does reducing the rate that all buyers/sellers pay in commission help increase their website utilization? How does one monetize this because logic would dictate that Zillow should profit by making a market more efficient?

          Maybe you should create a website where realtors can bid on the opportunity to represent a property owner in a buying or selling transaction based on reduced commission percentages. This could achieve your hoped for Zillow goal.

  8. Money Beagle says

    Zillow is a tool and nothing more. I never expect that it accurately reflects what a home will go for. I do use it as one input to estimating my home price when I calculate my net worth, but there are other factors that go in.

    As far as real estate fees, on one hand I agree. On the other, I’m compelled to tell what happened when we bought our house and sold my condo in 2007. I complained openly that the realtor seemed to be making out excessively as he got the full commission on my condo and half on the house. When we were negotiating on the house, I was prepared to take the seller’s ‘final offer’. My realtor said, ‘Let’s go $5k lower’. We did and they accepted. He very politely pointed out that a good chunk of the fees I’d been b*tching about had just been erased because of his work. I couldn’t really argue. The risk with capping / lowering realtor fees is that the good ones stop working as hard, and buyers/sellers will end up paying, just in other ways.

    • Financial Samurai says

      That’s a decent example, but is only known after the fact. If the seller didn’t have to pay 5-6% and only 1-2%, calculate what 2% times the price of the house you bought. That’s theoretically what you could have saved, which blows $5,000 out of the water.

  9. krantcents says

    I always thought the sales commission was somewhat negotiable particularly for higher priced homes. Although that can be a double edged sword since sales of homes depend on brokers who connected with the negotiation to sell it. They may back off it the commission is too low. I think there are some companies who offer a flat fee, but they are not the predominant force, so they are at a disadvantage. This smacks of a monopoly doesn’t it.

    Zillow and the other online services are dependent on real estate people for information which may contribute to the inaccuracy. When the market is moving up or down quickly, the information is even more inaccurate. I think I checked once and never went back. I find out more calling a real estate friend.

  10. Mike - Saving Money Today says

    “Zillow’s best use is for trying to figure out what the seller paid and when.”

    Sam, that’s public information and many states and counties have sites that let you run a search on that sort of thing. The one for NJ lets you search by street address and it shows the actual price that the buyer paid as well as current property taxes, assessments, etc. I managed to find something similar for San Francisco but it doesn’t seem to have as much information. Here’s the link if you want to play around…

    http://www.sftreasurer.org/index.aspx?page=65

    It’s not exactly what you’re looking for but if you dig around a little you might be able to find what you need.

  11. slug | sunkcostsareirrelevant.com says

    (This is a reply to your comment on the Sunil thread – for some reason I could not reply there)

    I’m not sure how it’s logical? How does reducing the rate that all buyers/sellers pay in commission help increase their website utilization? How does one monetize this because logic would dictate that Zillow should profit by making a market more efficient?

    Maybe you should create a website where realtors can bid on the opportunity to represent a property owner in a buying or selling transaction based on reduced commission percentages. This could achieve your hoped for Zillow goal.

    • Financial Samurai says

      If you can’t understand how a reduction in transaction costs helps the market, I can’t help you. And if you can’t understand the reason why commission rates remain high and Zillow hasn’t pressed to reduce bc the real estate industry pays most of its revenue, I can’t help you.

  12. Everyday Tips says

    I love Zillow, but more for amusement than an actual way to price the market. Besides price, I like the square foot and other info Zillow provides.

    When we sold our last house, someone tried low-balling us using some internet info and we walked away from them.

    We have always sold our homes ourselves, but that was always in good markets. I just don’t think it is realistic to expect Zillow to really know the value of a house. Sure, it can be a starting point, but then you have to take other aspects into consideration. For instance, our home backs up to a park and is totally updated. There is no way that Zillow incorporates that info into their price. Hopefully buyers are smarter than that, but if Zillow is underestimating (which they seem to be doing here), the buyer still may feel like they are getting a bad deal.

    No way would I invest in a Zillow IPO.

  13. Ginger says

    My reason for using zillow is to see how long the property has been on the market, how much it has dropped and how much they bought it for. I agree the zillow estimates don’t work.

  14. Matt Wegner @ Financial Excellence says

    “Here’s a news flash for all of you: A property is only worth what someone is willing to pay for it.”

    Amen, Sam! And it doesn’t matter how much you owe on the house or how much money you poured into upgrades and renovations, either. A lot of people make the mistake of thinking since they spent $30k on a new kitchen that the house is worth $30k more. Unfortunately it doesn’t work that way.

  15. Sandy @ yesiamcheap says

    Zillow isn’t the only one in the game either. If I compare estimates from Zillow to eppraisals.com and to trulia.com, they’re all different and the highs and lows are absolutely not in the same ballpark. In the same token, the valuation determined by the country is WAY overpriced but then it’s in their best interest to do so, right? Anyway, if you’re not selling or getting a mortgage on the home then it doesn’t matter.

  16. Sheree Hudgins says

    I have noticed a street in my city where almost everyone has pulled their houses off Zillow. I don’t know how they did this or their rationale. I suspect it is the volatility of the market and that it is hurting property values. How is it possible to remove your property off Zillow?

  17. Lisa Jonsson says

    As a Realtor, it’s a real problem when sellers strongly believe in Zillow’s “Zestimate” of their home. When all of the comparable sales within the past month show a different story, it still can be difficult to convince them otherwise. I’m not sure how Zillow’s algorithm works, but I think it needs a little work.

    I want to also comment on the “unscrupulous agents” thing. Being an agent myself, I know hundreds of agents. 99% of us are good, hard-working people who work often more than full-time just in order to make an average living. Remember, if you are paying 5% commission, that gets split four ways. It goes to the buyer’s agent’s broker, the seller’s agent’s broker, the buyer’s agent, and the seller’s agent. On top of that, as agents we have off the chart fees in order to be agents. We must be in the Association of Realtors, the national, state, and local, as it’s required by most brokers. We have MLS fees, lockbox fees, E&O insurance, advertising fees, etc. The average full-time Realtor income is in the 30,000′s, and that’s for those who put in at least 40 hours a week! With a few very rare exceptions, most of us have our client’s best interests in mind. I have often given up a decent commission for a lousy one in order to help out my buyers and sellers. Just the other day, I paid for a seller’s roof to be repaired, out of my own pocket, before escrow even closed! Realtors get enough bad talking, because people don’t know how the industry really works.

  18. Don Petersen - FDCPA Lawyer says

    Too many people automatically rely on “authoritative” websites such as Zillow despite their own better judgment. When I ask clients what their house is worth and they begin by responding “Zillow says …” — I know it’s probably going to be way off in the rapidly declining central Florida real estate market. I ask them to tell me about the sales prices of homes like their home which are situated in their neighborhood, how many homes are in foreclosure, etc. Even the clients who start by reciting a Zestimate have a much better idea of the comparables, prices and market conditions. The Zillow data base is not remotely accurate enough to reliably establish comparables upon which to base their Zestimate.

  19. Marcia says

    I find that Zillow hurts home sales rather than helps them. Of course they’re promoting the buyers market and by listing their so-called zestimates which are always low, (besides including a lot of wrong data) they kill the chances of a seller ever selling their home for a decent price. We might as well give them away.

    • Financial Samurai says

      Yes, with imperfect information comes imperfect bidding and selling. Zillow can be one of MANY factors used to assess a property. I hope people don’t use it as more than a 10% factor.

  20. babapapa says

    I think the “biggest problem” statement regarding realtors is a common misconception. However, one does not realize how much a “good” realtor can save a potential buyer or seller or realize how much work a “good” realtor does for their fee. One does not quibble about paying a high price when hiring a lawyer to look over complex contracts that could potentially leave an unsuspecting individual at a massive loss or in a legal mess, had they not consulted a professional. Buying and Selling Real Estate is not that much different. Just like all the professions it takes a few bad ones to tarnish those who are more than worth the money they are paid

  21. Martin Murphy says

    They based their estimates on previous sales. That means if someone sells their home at a rediculously low, you could get screwed with their appraisal of your home.

    Someone should sue them for false claims. Or better yet, they should leave out that portion on their web site.

  22. GG says

    Zillow estimates are way off many times. I was able to buy a distress sale in my building for about 20-20% lower than the market. Ever since, Zillow continues to list the unit at 20% lower than every other unit in the building(even lower than my purchase price), even though there are sales going off at 30% higher per sqft price in the same building (in many cases in units not nearly as good).

  23. Let Them Starve says

    Zillow is a complete DISAPPOINTMENT! I still can’t believe after 40-50% decline in sales volumes for 3 years in a row the 5% selling commission has not been lowered.

    Every single business has seen lower commissions thanks to the internet. Not the real estate market b/c they are in collusion.

    Zillow estimates cannot be trusted. Too easily manipulated.

  24. Alan Wendt says

    There are two identical vacant lots across from my house at 1120 W Ironwood Dr in Phoenix. Zillow thinks that one of them is worth $11,000 and the other one’s worth $272,000.

  25. Robert Davis says

    Zillow took my property 5 years ago in Florida from around $1,000,000, down to $400,000 then in the last year up to 2,300,000, and now down to 1,600,000. Talk about a roller coaster ride.

  26. Ryan says

    I completely agree with your complaint about selling costs and for the exact reasons…it HAS to be a fixed fee model and it’s amazing that competition hasn’t come in to force it down. The huge costs (I’m a new homeowner in a currently hot neighborhood of San Francisco) to ever sell has me contemplating alternatives (getting my own real estate license, self-listing, etc…but I know the market doesn’t make it easy)

  27. Gareth says

    Spot on. Also I have left negative, but well considered and honest feedback for unscrupulous realtors on Zillow – and they simply don’t publish it. Until the agents get out of their pocket it isn’t anywhere near an honest guide to anything relating to home buying or renting.

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