Bad pricing estimates by Zillow and Redfin are commonplace. Despite starting in 2004, Zillow's estimates are especially unreliable. However, you can use bad pricing estimates to your advantage when buying or selling property today.
Over years of comparing the two, I've noticed Redfin's pricing estimates are more accurate. Further, Redfin is much quicker to update the final sales price of a home after it goes pending. But even Redfin has some pricing issues as well.
In fact, Zillow's online pricing estimates are so unreliable, even Zillow doesn't trust its Zestimates! In November 2021, Zillow announced it would write-off $500+ million in losses and shut down its iBuying business. The reason? They admitted their Zestimates were unreliable.
Zillow's stock has cratered from its highs. Unfortunately, so has Redfin since it's in the same space. If you can't really trust Zillow's and Redfin's price estimates, then what is a seller or buyer supposed to do?
Different Ways To Get A Home Appraised
Zillow and Redfin's pricing estimates are only one source for estimating the value of a property. Asking real estate agents who recently bought or sold homes in your neighborhood to give you their pricing opinions is another way. It's also free and you get to learn what they are seeing.
Paying for a professional home appraisal is another common method. The appraiser also uses recently sold comps and does cost-to-rebuild and price per square foot calculations. But even these paid appraisals are sometimes done with errors.
Ultimately, to come up with the most accurate price for a home, you have to do your own due diligence. Triangulate all information available to get an accurate pricing estimate. This way, you can buy or sell more confidently.
Let's explore why Zillow and Redfin pricing estimates can be so off. Then, we'll discuss how we can use their bad pricing estimates to our advantage when buying or selling a home.
Why Zillow And Redfin Are Sometimes So Off With Their Pricing Estimates
Zillow and Redfin's pricing estimates can be very off for the following reasons:
- Zillow and Redfin often have incomplete data about your property
- Savvy homeowners are not updating their property's features after a remodel to keep the property tax assessor's office at bay
- Savvy homeowners are actually downgrading their property stats online
- Their algorithms can't update quickly enough in a rapidly declining or rising market
- Zillow and Redfin have entered into the business of buying and selling homes (iBuying aka instant buying)
- Incorrect home square footage size
Let's first talk about the last point and why it's hard to fully trust Zillow and Redfin's pricing estimates.
Zillow And Redfin Are (Were) Your Competitors (iBuying)
Zillow and Redfin are publicly traded companies that aim to increase their profits every year to appease shareholders. As a result, they must continue to expand into new markets.
For example, roughly 70% of Zillow’s revenue still comes from fees real estate agents pay for customer leads and apartment leads. About 8% of its revenue comes from fees banks pay for mortgage leads. While ~18% comes from advertising based on recent earnings results.
Given such a huge concentration in revenue from real estate agents, diversification is rational. No longer do Zillow and Redfin want to make money mainly through real estate advertising and lead generation. They want to use their vast databases to buy and sell homes for a profit.
Zillow And Redfin Gaming Home Prices
Therefore, it behooves Zillow and Redfin to try and buy homes for as low of a price as possible. This way, they can try and make as big of a profit margin as possible when it comes time to sell.
At the margin, Zillow and Redfin are incentivized to keep their online pricing estimates artificially low. The reason is because they are marketing that they will buy your home based off of their pricing estimates.
Obviously, Zillow and Redfin can't have their pricing estimates be too egregiously low. Because at some point, the public will wise up and stop trusting Zillow and Redfin's pricing estimates altogether.
However, I'm not sure if the public has wised up yet. Hence, there's an opportunity to use bad pricing estimates to our advantage when it's our turn to buy or sell.
Ultimately, Zillow shut down its iBuying business in 2022 because it couldn't even trust its own housing price forecast.
Who Would Sell To Zillow and Redfin?
Now that we understand Zillow and Redfin are our competitors, who would want to sell to them? People who either don't know better, don't want top dollar, or want an easy sale. This is fine if that's what you want. But, if you're selling to Zillow or Redfin without all the facts, this is a suboptimal financial move.
Pitching peace of mind is a smart way to get platform users to sell their homes to Zillow or Redfin. Selling a home can be very stressful, as I found out back in 2017. Even though it took a reasonable 45 days to sell my home, I was still very frustrated with the process.
Guaranteed Purchase Price Offer
To expedite a sale, Zillow will offer a guaranteed purchase price (below market) so you don't have to go through the anxiety of selling your home. Selling a home takes work. You may want to hire an agent, stage your home, market your home, negotiate with a buyer, and wait for the contract to close.
Contracts can sometimes fall through. Zillow and Redfin cut out the middle-people and provide greater assurance your home will get sold. That said, you still don't know for sure whether Zillow or Redfin will go through with their offer until the money is in your bank.
In a strong real estate market, it is better to test the open market to potentially create a bidding war rather than sell directly to Zillow and Redfin. You can first test the waters with a “pocket listing” that internally markets your listing within a brokerage. Then you can open it up to the MLS. Or, you can try and sell the property yourself.
In a weak real estate market, selling directly to Zillow or Redfin may make more sense if you are presented with an acceptable price offer. Contracts in a weak real estate market tend to be more at risk of falling through. However, Zillow and Redfin aren't stupid. In a weak real estate market, they will offer you an even lower low-ball price.
I suggest first trying the traditional way of selling your home first. If that fails, then you can consider selling to Zillow, Redfin, Opendoor or other iBuying firms.
Savvy Homeowners Make Their Properties Look Worse Online
Another reason why Zillow and Redfin often have bad pricing estimates is due to user input. All homeowners can claim their homes on Zillow and Redfin and customize the data.
One of the costs of owning real estate is property tax. Therefore, as a homeowner, your rational move is to try and keep your property tax bill as low as possible for the duration of homeownership.
The first way you can do so is to fight the property assessor's office every year. I did so for three years in a row during the Global Financial Crisis and won. I was able to lower my property tax bill by $3,000 – $4,500 a year. In the fourth year, I lost because the real estate market had finally begun to recover.
The second way to fight your property tax bill is to make your home look as small and as bad as possible online. Every property assessor goes online to check your home's pricing estimate on Zillow and/or Redfin nowadays. I know this because I've had multiple conversations with several property assessors who always do an online check.
Make Your Home Look Like Trash
In the name of privacy, safety, and saving money, you should debase your home online.
Go into your home's Zillow and Redfin profile and remove some bedrooms and bathrooms. Reduce your home's square footage as well. Price per square foot is a key valuation metric Zillow and Redfin use. If you don't want to lie, then you can just remove the square footage amount altogether.
Take down all the fancy marketing photos of your home if they are still up. Either have generic Google Street View pictures of your home's exterior or upload some crappy photos of your home. The property assessor's office will see them all.
There is no shame in trying to make your home look as crappy as possible. You are fighting to lower your taxes from a property assessor's office that has historically raised property taxes during recessions.
Further, as a stealth wealth practitioner, your goal is to look as poor as reasonably possible. Protecting your family from burglars and murderers is your responsibility!
With new customized data, your Zillow and Redfin estimates should go down. The next time the property assessor looks at your home's online pricing estimate, s/he will think twice about jacking up your home's value.
Once you want to sell your home, you must update your home's online records to its most accurate extent. The data must be accurate since you must accurately represent yourself to potential buyers. Otherwise, the buyer may back out or ask for monetary incentives.
Zillow And Redfin Pricing Algorithms Will Need To Catch Up
Unless Zillow and Redfin want to see their reputations decline, they will have to improve upon their bad pricing estimates. Otherwise, its users will stop trusting Zillow and Redfin and go elsewhere. Losing trust will also hurt their iBuying business.
Despite the pandemic, we are in a housing bull market. If you are obsessed with tracking real estate like me, you will realize Zillow and Redfin's pricing algorithms are behind the times. Many homes are selling for above asking and above Zillow and Redfin's own estimates.
Here are two examples of some very off pricing estimates. I've decided to use Redfin's pricing estimate because Zillow's pricing estimates tend to be even more off.
Example #1 Of A Bad Pricing Estimate
A 3-bed, 4-bath, single family home sold in February 2021 for $3,425,000, or $630,000 over asking. Given the square footage is not listed, chances are high the home is under 3,000 square feet.
Here's where it gets interesting. Some of you might be thinking that the home was obviously underpriced to get such a high price. However, I'm not sure $2,795,000 is that underpriced for a home that is probably close to around 2,800 square feet. This is where we should compare the final selling price of a home to an online estimate.
Redfin's estimate for the home is $3,011,416, or $413,584 less than the actual sale price of the home. Being off in price by ~5% is within a reasonable range. But being off by 14% is really bad. Data gets thrown out left and right after such a huge margin of error.
It seems as if Redfin's pricing algorithm lacked sufficient data (square footage of home not listed) and isn't properly forecasting the future. As demand for single family homes surge across the country, Redfin's pricing algorithm is still stuck in the past.
The other theory as to why Redfin's pricing estimate for this particular home is so bad, despite collecting so much data about homes since its founding in 2004, is that Redfin is purposefully keeping the price estimate low. Perhaps Redfin tried to buy the home for about $3,000,000 in order to resell it for a 14% gross profit.
Example #2 Of A Bad Pricing Estimate
Here's a nice 4-bedroom, 3.5-bathroom Mediterranean-style home that sold for $4,000,000 on Mach 4, 2021. The selling price was $705,000 over asking, or 21.4%.
Listing the home for $3,295,000 seems a little low for a home that is 3,627 square feet. Although anything over $3,000,000 is a lot of money, using a price per square feet of $1,000 is a good rough barometer in this neighborhood. Can you guess what Redfin's estimate is?
Redfin estimates the home is worth $3,502,272 or $497,724 less than what the home actually sold for. I'm guessing that Redfin's algorithm decided to lower the price per square foot given you tend to get better value per square foot the larger the home you buy up to a certain point.
Therefore, we can't fully frown upon Redfin's $3,502,276 or $965/square foot pricing estimate. That said, Redfin's price estimate is once again 14% off from the actual $4 million sales price.
Redfin has a full year's worth of home sales data since the lockdowns began in March 2020. If Redfin's data scientists had read any one of my articles since the pandemic began, it would know that real estate prices have been robust.
So what's really going on here? Redfin has to either admit that despite having so much data, its pricing estimates still aren't reliable. Or, Redfin is purposefully low-balling its pricing estimates in order to buy homes at a discount to market.
I've got endless more examples of bad pricing estimates, but I'll stop here.
How To Use Zillow And Redfin's Bad Pricing Estimates To Your Advantage
If you are a buyer in a competitive real estate environment, you've got to be preapproved for a mortgage, put together a fantastic offer, write a convincing letter, and hope for the best.
You may use Zillow or Redfin's pricing estimate to your advantage by highlighting it in your offer. For example, let's saying you were making an offer on house example #1 that sold for $3,425,000, but had a pricing estimate of $3,011,416.
You could offer $3,051,416, which would be a very enticing $50,000 over Redfin's pricing estimate. Although it's risky to bid $255,000 over the asking price, you and your real estate agent know the market well. You also know that Redfin is a competitor and is underestimating the price of the home you want to buy.
In your real estate love letter, you could explicitly highlight how you are offering $50,000 more than the Redfin estimate to make the seller feel great for choosing you. At the very least, the seller should keep you in contention in a multiple offer situation.
Of course, if the seller receives a $3,425,000 all-cash offer with a 15-day close, your chance of winning is slim. However, not all home buying situations will be as competitive.
Your goal is to estimate the true market value of a home and subtract it from the artificially low Redfin or Zillow estimate. This difference is your pot of gold or “instant equity.”
In a soft real estate market, you simply do the same but in reverse. Find homes where the Zillow and Redfin estimates are much lower than the actual market price. Then offer a price better than the artificially low Zillow or Redfin estimate and capture that economic spread.
You can even getting into contract with contingencies. If you do, buying the home will feel like you got a free call option.
Always Do Your Due Diligence
Hopefully, none of us are naive enough to take Zillow and Redfin's pricing estimates as gospel. However, I bet there are people out there who do. After all, both firms have been around for over 15 years.
Now that Zillow and Redfin are our competitors, we must use some of their pricing estimates to our advantage. As always, bargain hard and run the numbers over and over again before any transaction!
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Use Bad Pricing Estimates By Zillow And Redfin is a Financial Samurai original post. The real estate market is now in transition after big price increases and aggressive Fed rate hikes. Be as vigilant as ever when buying property.