You can’t trust Zillow and its estimates, or Zestimates as the company likes to say. Redfin has a much better user interface with superior property value estimates. Redfin’s algorithms are more sophisticated. You also get updated on what a property ends up selling for on Redfin much faster. However, you can’t fully trust Redfin’s property pricing estimates either.
When Zillow launched its website in 2005, the world was a buzz with the company’s ability to bring appraisals 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 its 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. By cutting out a lot of unnecessary middlemen, maybe Zillow could lower selling commissions from 5-6% down to perhaps just 1-2% of selling price. Boy was I wrong. Zillow has done nothing for lower commissions and cannot be trusted.
Zillow Could Have Helped The Industry
The main reason why you can’t trust Zillow and its estimates because the majority of its revenue comes from realtor advertising on its platform.
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.
Erratic Zillow 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, all-time low mortgage 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. That’s it. Their Zestimates and Rent Zestimates give only ball park figures. However, they are just one of many considerations one should take before setting a price.
There was one time when Zillow had my house $400,000 over the market price. It was absurd.
The Biggest Problem With Zillow
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 and Trulia 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.
Zillow Revenue Composition
In 2021, over 70% of Zillow’s revenue still comes from fees agents pay for customer leads and apartment leads. 8% comes from fees banks pay for mortgage leads. While 18% comes from advertising based on their latest earnings results.
Zillow is also now in the business of trying to buy homes from owners at a discount and flipping them. In other words, Zillow is in direct competition with homebuyers and sellers, the very users on its platform!
As a result, Zillow hasn’t joined the fight to lower selling costs for sellers, which ultimately creates higher prices for buyers. Zillow’s advertising revenue from realtors is just too great.
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.
A New Reason Why You Can’t Trust Zillow’s Estimates: Zillow Offers
With the launch of Zillow Offers, you can now sell your home to Zillow based on its Zestimates. Think about this from an incentive post of view. Zillow is incentivized to buy a home from you for as low a price as possible to make as much money as possible when it sells.
Therefore, Zillow is incentivized to keep it’s estimates of your home’s value artificially low. The same thing is opening with firms like Opendoor.
Do not sell your home to Zillow, Opendoor, or other companies that claim to make it easier to sell your home! With all their data and resources, they are likely ripping you off! You can’t trust Zillow and its estimates.
Instead, internally market your listing with a brokerage first, go on the MLS, or try and sell the property yourself.
And as always, haggle like crazy on the selling commission price. If you can get down to a 3% total selling commission, I think that’s reasonable. At least get down to a 4% total selling commission in this internet day and age!
Even though you can’t trust the Zillow and Redfin estimates entirely, you can use their bad estimates to your advantage when buying and selling. After all, if you can’t beat them, join them!
Shop around for a mortgage. Check the latest mortgage rates online through Credible. They’ve got one of the largest networks of lenders that compete for your business.
Mortgage rates are near all-time lows and all of us should at least refinance. Demand for property is also high thanks to rising affordability and more time spent at home. Get free mortgage rate quotes in minutes with Credible, my favorite online lending marketplace.
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Updated for 2021 and beyond. You really can’t trust Zillow and its estimates. After all these years, Zillow still hasn’t done anything to lower commissions, like Redfin has. Now, Zillow is in direct competition with buyers and sellers. Don’t trust Zillow’s estimates. Do your own due diligence.