senior couple looking shocked at laptop screen

Zillow's Zestimates were referred to by the L.A. Times as "one of the most sensitive perception gaps in American real estate".  The perception gap comes from the lack of understanding consumers have about zestimates, how they are determined, and how accurate, or inaccurate, they can be.

Zillow's 'Zestimates' are an automated valuation model applied to public data available on properties that place an estimated home value and price range on each property appearing on their website.  What consumers may not understand is that It simply isn't possible for any automated valuation model to predict the value of a home with a level of accuracy sufficient to make any kind of housing decision.  

Zillow knows this, and they say as much on their Web site (although the average consumer doesn't look for it). They have this to say about their zestimates:

The Zestimate is not an appraisal and you won’t be able to use it in place of an appraisal, though you can certainly share it with real estate professionals. It is a computer-generated estimate of the worth of a house today, given the available data. Zillow does not offer the Zestimate as the basis of any specific real-estate related financial transaction. Our data sources may be incomplete or incorrect; also, we have not physically inspected a specific home. Remember, the Zestimate is a starting point and does not consider all the market intricacies that can determine the actual price a house will sell for.

Zillow is very clear that zestimates are not to be used as property appraisals. In fact, Zillow says that for a $300,000 home in Chicago, their typical error is $29,400, but you don’t know if it’s $29,400 too high or $29,400 too low. And it gets worse because about half the time Zillow zestimates are off by more than $29,400, sometimes a lot more than $29,400.

Why is this such a problem for buyers, sellers, real estate agents, and the real estate industry as a whole?

Perhaps you have your home for sale and Zillow’s Zestimate for the house is way too low. This low estimate of your home’s value appears right below your list price so everyone that looks at your house on Zillow thinks it’s way overpriced.  Does it make you wonder if perhaps your home hasn't sold yet because of that low zestimate that consumers don't understand?  Or perhaps the low zestimate explains why you got a low-ball offer?

Does Zillow's computer valuation model know that your home was completely remodeled last year? No, they have no way of knowing the condition of your home, the appeal of your immediate neighborhood, or any of the other non-public-records things about your home.  They only know what they can determine from public records . . . square footage, number of bedrooms, baths, etc., and what other homes in your community of similar size and amenities have sold for. So, let it suffice that low zestimates are a problem.

High zestimates can be even more of a problem, if sellers actually believe the value is correct. This belief may lead them to overprice their home, which is a very expensive mistake for a seller to make.  Overpricing your home will cause it to not sell within the average market time for your area, leading to a series of price reductions, and it will ultimately sell for less . . . often much less than it would have if it was priced properly from the onset of the listing period.

How about if you are considering selling your home and buying a bigger one that better meets the needs of your growing family.  Someone told you about Zillow's zestimates, so you go on the site to see what your home might be worth.  Unfortunately, your home happens to be one of those with a really low zestimate.  If you actually believe that is an accurate number, then you may just dismiss the idea of selling your home and buying a new one because it appears that the math just won't work.  Could this be contributing to the low inventory issue we have in just about every area of the country?  Perhaps not, but it's something to think about.  

As real estate agents, we know that one of our most difficult and stressful tasks is pricing a home. That holds true whether we are representing a seller or a buyer. Market pressures change rapidly, and are different from neighborhood to neighborhood. The condition of a home and those around it are key factors determining the value. No algorithm, however sophisticated, can quantify the value of a kitchen that was remodeled just before a home was put on the market or a yard that is poorly maintained. We put a lot of time and conscientious effort into finding just the right price based on all the factors and market forces, because we know the right price means a successful transaction for our client.  Price is not an issue to take lightly . . . it will either make or break a deal.

Learn how a real estate professional prices your property.

Read more about Zillow's Zestimates in a LA Times post: When "CBS This Morning" co-host Norah O'Donnell asked the chief executive of Zillow recently about the accuracy of the website's automated property value estimates — known as Zestimates — she touched on one of the most sensitive perception gaps in American real estate.