The Zestimate Part II

zestimate_noAs a realtor in Southern New Hampshire I get a lot of questions from buyers and sellers about the Zillow.com “Zestimate”. The most common questions include: How accurate is the Zestimate? Why is the Zestimate lower than the seller’s asking price? Why is the Zestimate higher than the seller’s asking price? Why is the Zestimate so intent on preventing me from selling my home?

The simplest answer to those questions is that the Zestimate is flawed. It is only accurate, or close to accurate, when the comparison properties it uses to price a particular home are 1) good comparisons, 2) recently sold comparisons, and 3) comparisons with a reasonably accurate Zestimate. You see, all too often the Zestimate of a home is based on already existing Zestimates of other homes that it has determined are good comparisons. For the system to work, those Zestimates have to be right. It is a problem when the comparisons used to estimate a home’s value are based on other estimated values that do not really reflect true activity in a housing market.

Last May I wrote about some of these issues and said I was going to track some Zestimates for homes on the market to determine how closely they mirrored the home’s sale price later on. As an initial example, I used one of my own listings to show what most realtors already know: the Zestimate is more of a nuisance than a helpful resource. Zillow’s automated home value estimate is not exactly the gold standard for determining a property’s worth. Moreover, these estimated values have the potential to impact a buyer’s perception of a home’s market value.

Why is this a problem? Well, if the Zestimate is lower than the asking price then a buyer might interpret it as confirmation the seller/s (and/or the seller’s real estate agent) priced the property too high. That’s not outside of the realm of possibility, right? Sometimes sellers and realtors do over price homes, and it is not always done intentionally either. Depending on the market and variables influencing it at the time, a price determined by a thorough market analysis may or may not reflect what a buyer is willing to pay for the home.

The Zestimate being low is an understandable problem, but what happens when it is too high? If the Zestimate is much higher than the asking price it may prompt buyers to ask what is so wrong with this house that the seller has discounted it so significantly. Realistically, the home may be priced appropriately when compared to recently sold comparison properties, but how would a buyer know this without being told? How would they know the Zestimate is potentially false without seeing evidence showing this? The sad fact is they wouldn’t. It is troubling for buyers when they are faced with a Zestimate that varies considerably from the asking price – especially when there is no clear explanation as to why.

When I wrote about this topic before, I used 1 Grove Court in Litchfield, NH as an example. I selected it mainly because of how large the gap was between the asking price at the time and the Zestimate. At the time my original post on this topic was written, the asking price was $460,000. The Zestimate, however, was $387,805. That is a big difference.

The above Zestimate was based on two specific properties: 47 Garden Drive and 2 Garden Drive. I described these properties in detail previously to demonstrate the reasons why they were not good comparisons. One glaring problem with these two comparisons is that when they were used for comparison purposes by Zillow they were still on the market. Many real estate agents use active and pending listings to evaluate a home’s worth, but it is important realtors use recently sold comparisons in a market analysis to show what buyers have paid for similar homes in the market. If a comparison property is still active it is helpful in terms of indicating what buyers probably won’t pay for the home, but it does not show how much lower the seller would need to price their home to sell it.

Getting back to the property I used as an example, 1 Grove ultimately sold for $455,000. According to the buyers’ lender, the home appraised at that value. The Zestimate was wrong and not just by a little. It was off by $67,195.

Even though the home sold for much higher, the Zestimate can’t or won’t admit when it is wrong. It does not seem to be coded in a way that takes real market activity pertaining to the property into account. I say “seem” because perhaps it does and it just does not attach enough weight to make a difference in the Zestimate after the property sale is complete. For instance, as I am writing this Zillow reports that 1 Grove is worth less than the final selling price of $455,000. However, I should point out that instead of the original $387,805, the Zestimate has increased ever so slightly and currently values the house at $389,889. That could change though. Tomorrow it might suggest the value is more or less. The bottom line is that it’s wrong today. 

Putting aside the home on Grove Court, what about the properties Zillow used as comparisons for that home when it was on the market in May? What became of those properties? Did they sell for as much, or even near, the same price as 1 Grove?

Let’s take a look at that.

47 Garden was the first comparison included in Zillow’s estimate. When I wrote last about the Zestimate this home was being sold by the owner. The owner eventually got a realtor and then the home sold for $330,000. The current Zestimate values the home at $347,906 (as of the time of this writing). If accurate, this home has increased in value substantially in just a matter of months. Such a massive improvement does not seem likely, does it?

Then we have the other comparison Zillow used for Grove Court: 2 Garden. This property sold shortly after my original post about the Zestimate. The actual closing price in June of 2016 was $290,533. Right now the Zestimate considers the value to be $337,500. Does it matter though if buyers will not really pay that much for the home? Apparently not. 

Since it does not seem as though the Zestimate is going anywhere soon, realtors and sellers have to find ways to overcome the estimated values that are not in line with the market. One way of addressing the issue is to have accurate comparison sales ready to show buyers and/or their agents why the selling price is different than the Zestimate. It also helps to have currently active and pending comparisons to illustrate what is happening in the market at a particular moment in time. Another means of breaking down this barrier is for sellers to claim the property through Zillow as their own and update the description and features. This action comes with a warning though: it may or may not help to bring the Zestimate in line with the price the owner is asking. It may increase or decrease the value, depending on how accurate the description of the property was before the changes. And that value is still based on other Zestimates.

Ultimately we are all at the mercy of Zillow and it’s seemingly arbitrary selection of properties it deems as comparable, and so it helps to understand how the Zestimate works, and doesn’t work.

About Melissa Higgins
Client-centered realtor to assist with renting, buying, and selling needs. I work for BHG / The Masiello Group which has a wide range of services to assist in allowing me to help you realize your real estate goals. I serve all of Southern New Hampshire, including Nashua, Merrimack, Bedford, Manchester, Hooksett, Milford, Hollis, Pelham, Brookline, and many others. Contact me to talk about how I may help you.

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