Zillow Zestimate: Should You Use It For Important Property Valuations?
Zillow.com is a popular website for many homeowners and those who intend to go to search for specific property valuations. But how accurate can an expert system that is fully computer generated be without the benefit of actually seeing the property in question, much less the comparables, or even the location?
It was my brother-in-law who first told me about the Ziilow Zestimate utility when it was new in the summer of 2006. As an appraiser and real estate agent in a major metropolitan area for over 50 years, he was impressed by how close the Zestimate was. A real assessment, this from a guy who has little use of computers in general. I took this with a grain of salt, as our company had put a great deal of effort into developing a utility that uses statistical analysis to determine value.
To understand the problem, it is important to understand the basics of property valuation. Since the savings and loan crisis of the 1980s and 1990s, bank appraisals have been conducted according to a rigid method called the Uniform Standards of Professional Appraisal Practice (USPAP). In general, the specification requires comparing three to five similar properties within half a mile and sold within six months. These delineations can be expanded when necessary. The differences are then adjusted to arrive at a valuation. The problem was that, given the strict restrictions on which properties the appraiser could use and the small sampling (3 to 5 comparable), the results tended to be like comparing apples to oranges. And like the arbitrator’s decision, it may not always be correct, but it is always bottom line for lenders.
Our utility company takes a different approach when comparing thousands of sales over decades, since 1991. The concept was to eliminate variables by volume (large sample). Zillow should use something like this because they all have a large sample of properties (72 million nationwide dating back to 2006) even though their algorithms are unpublished.
For our algorithms, differences in the date of a sale are adjusted for area appreciation (and recent depreciation), location is based on the school district, which is relevant in our market, rather than a restricted area around the property in question that has an unfortunate tendency to cross boundaries between areas of very different values. An appraiser who is not completely familiar with the area, as is common as ordered by online lenders, might be able to compare properties in different school districts or not adjust to the proximity of an undesirable item, such as a major highway or industrial area, though Comparables fall within the prohibited distance of the property in question. A good appraiser will take these adjustments into account, although there is no universal standard other than how a particular geographic feature affects an average of other similar property sales prices. USPAP valuations tend to vary between 10% and 15% from appraiser to appraiser, especially if each uses different comparables. This is one of the weaknesses of small samples.
In general, our utility worked well. Interestingly, considering how much effort went into its creation, we rarely use it. This is because any statistical analysis ignores the really important aesthetic considerations like warmth and charm, elegance, style, etc. In addition, the utility does not take into account variables such as mortgage interest rates, the availability of funds, which hinders the current market, and general consumer confidence. When the market is perceived to be appreciating, buyers are willing to pay more, but when it is perceived to be depreciating, buyers tend to insist on better bargaining to cover any further market erosion. Nor are competing properties currently on the market considered. These tend to have a greater effect on a sale price given the comparable history. All of these factors have a great influence on how much a given property will sell for. And yet the Zestimate still manages to make a good estimate, at least some of the time.
As of June 13, 2011, Zestimate is in its third algorithm update. But how accurate is it really? After all, you can depend a lot on it. Home buyers often base their bid on a Zestimate and sellers often base their asking price on the same Zestimate. Fortunately, the lenders do not.
As a real estate agent, I often come up against both buyers and sellers who have placed a lot of faith in the Zestimate over what a municipal assessment, competitive market analysis (CMA), or even a USPAP appraisal suggests, especially if it is What they want. hear.
To find out how accurate the Zestimate really is, at least in our market, we simply compare the actual closed sale price taken directly from our Multiple Listing Service (MLS) with the Zillow Zestimate using last month’s sales data for counties. from Albany. , Schenectady, Rensselaer and Saratoga which include the metropolitan areas of Albany, Schenectady, Troy and Saratoga, New York. Of course, every market is different and may not produce the same results. What we found was that the Zestimate was surprisingly accurate in predicting the actual selling price with a few notable exceptions. Zillow uses a similar method to judge its own accuracy. However, Zillow’s precisions are presented as a median error of the actual selling prices to the Zestimate. As of the latest update to their algorithm, they claim a mere 8.5% error. (http://www.zillow.com/blog/research/2011/06/14/upgrading-the-zestimate) What is not observed is how far the Zestimate is when it is off. Let’s say at this point that no appraiser, municipal appraiser, or real estate agent is likely to miss the mark as much as Zillow fails when it fails.
Moving on to the numbers:
In terms of average error, what we found was a staggering 2.8% error (overpricing) across all price ranges. In general, the lower price ranges saw a higher Zestimate than actual sales prices, while in the higher price range the Zestimate tended to undervalue properties.
Price Range – Zestimate – Percentage Error
0 to $ 100 thousand 113.85% 13.85% MORE
$ 100 to $ 200 thousand 104.13% 4.13% MORE
$ 200 to $ 300K 98.28% 1.72% LESS
$ 300 to $ 400K 94.42% 5.58% LESS
$ 400 to $ 500K 87.22% 12.78% LESS
$ 500K and more 85.30% 14.70% LESS
As you can see from the table above, the undervaluation in the higher price ranges eliminates the overvaluation in the lower price ranges. Or Zestimate overpriced 47% of the time; undervalued 53% about half the time.
However, when the Zestimate failed, it missed by a mile. The biggest mistake was a $ 221,329 undervaluation or a 61% undervaluation. The largest overvaluation was $ 137,850 or a 44% overvaluation. This did not happen often, as noted. The graph below shows a large central tendency towards precision and greater error at both extremes.
Bottom line: If you have to be right, use an experienced and qualified USPAP appraiser who knows the area. If the use for which the titration is intended is not critical, Zillow is ideal for an excellent rough titration taking into account the possibility of significant error.
