Zima, Zillow, and Zestimates

Zillow

Warnings of Zestimates

In 1993, Zima was thrust upon the country as “Zomething Different.”  Coors introduced the beverage to fill the previously unknown void between beer and wine coolers.  Turns out that drinkers of beer and wine coolers actually preferred their respective products and have no desire to mix the two.   Zima was mercifully discontinued in 2008.  Other than the public shame of those who ordered Zima at a bar or the moral dilemma created for those who bought a 6-pack to try and then had to decide whether to waste money or actually consume the other 5, consumers were generally unharmed.  The real estate website, Zillow also offers Zomething different.  Unfortunately, its Zestimates are far more dangerous.

The Fine Print

“The Zestimate® home valuation is Zillow’s estimated market value, computed using a proprietary formula. It is not an appraisal. It is a starting point in determining a home’s value. The Zestimate is calculated from public and user submitted data; your real estate agent or appraiser physically inspects the home and takes special features, location, and market conditions into account.”

If a company creates a product and then states it should not be used for its intended purpose, there is a really good chance the product is just a gimmick.  Zillow encourage buyers, sellers, and homeowners to supplement their information by:

  • Getting a comparative market analysis (CMA) from a real estate agent
  • Getting an appraisal from a professional appraiser

In other words, pretend you never saw our Zestimate and ask a professional.  Amazingly insightful!  At least Coors, pretended their product was good.

Problems

accuracy, after repair value

How accurate are Zestimates?

Inaccurate Information

One huge issue is that Zillow does not get its information directly from an MLS feed.  Instead it relies on info that agents and homeowners upload directly to the site or to other sites that are then scraped.  Obviously, this can create a tremendous amount of bad or outdated data points that are factored into the equation.

More from The Washington Post

Missing Information

As a rehabber, you are going to be putting a top-notch product on the market.  It will have new flooring, a remodeled kitchen and/or updated bathrooms.  Your masterpiece will look nothing like Ma & Pa Sluggo’s disheveled dump down the street.  Zillow cannot discern the difference the finish and may show your house as having lower value.  Other items, such as finished basements can be particularly troubling for the algorithm.

More from an appraiser

Incorrect Information

To its credit, Zillow attempts to remove foreclosures from their algorithm.  There is no reliable way to do this and other distressed properties (short sales, estate sales, crazy cat lady sales) get factored in.  This means the Zestimated (is that a word?) value of the home may be low.  If you rely, on this value you may pass on a good deal.  In fact,  half of all sales are generally above the Zestimate.

Unlike local agents and appraisers, Zillow cannot differentiate between neighborhoods.  This can lead to a huge problem for rehabbers.  If you are considering a deal in a lower-priced neighborhood that backs up to a higher-price area, the Zestimate may be inflated.  Finding out after you own the home that your entire profit margin was fantasy is a little disheartening.

One Final Point

The ValueRange shows the high and low estimated values of a home (e.g., the Zestimate may be $260,503, while the ValueRange is $226,638 — $307,394).  I don’t know about you market, but in ours +/- $30,000+ will make a difference in the success of our project.

Conclusions

Other than as fodder for blogs, Zestimates have no value to society.  In fact, as we discuss above, they may cause damage.  Zestimates will, hopefully, join Zima on the list of discontinued products that we all look back on and say, “What the heck were they thinking???”  Until then, we do agree with Zillow on the proper way to obtain both as-is and ARV values….  Call your agent and ask for a CMA.  Better yet, discuss the project with him or her over a beer.

Erik Hitzelberger has been Real Estate Investor since 2007. While learning the ropes in the market down-cycle, he now teaches others how to use his systems and leverage other people’s expertise to achieve their own goals.

Erik Hitzelberger – who has written posts on Part Time REI.


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About Erik Hitzelberger

Erik Hitzelberger has been Real Estate Investor since 2007. While learning the ropes in the market down-cycle, he now teaches others how to use his systems and leverage other people's expertise to achieve their own goals.

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