Friend or Foe?

Zillow and websites like it are valuable tools — but they don’t tell a full story

Back Article Apr 1, 2019 By Ryan Lundquist

My wife loves Zillow, which she sometimes apologizes to me for — she worries that her love for the website somehow disrespects me as an appraiser. Truth be told, I like Zillow too. But I do question whether consumers trust it and other similar sites too much, and in doing so, make pricing mistakes.

Founded in 2004, Zillow originally seemed to simply be an innovative website where consumers could get a ballpark valuation of houses both on and off the market. But now Zillow is a household name with over 4,000 employees and astonishing brand recognition. 

For years, the real estate community has been wondering about Zillow’s end game. Many figured the company’s business model was built on earning revenue from agents paying to advertise on its site. When you find a home on Zillow and click “contact agent,” you are connected with somebody who has paid to be listed as a “premier agent” — whether that person is a neighborhood specialist or not.

Websites like Zillow, Redfin and Trulia have a striking problem: Not all listings in the market are actually on each of their sites.

These days, however, we’re beginning to see Zillow’s strategy is actually much bigger. Zillow recently bought a mortgage lender, and the company is beginning to buy and sell homes. It seems The Big Z (as I like to call it) is emerging far beyond its beginning as a valuation website and trying to be a one-stop real estate shop for consumers. But it’s the listings that seem to attract most visitors to the site.

Yet, websites like Zillow, Redfin and Trulia (which has been owned by Zillow since 2015) have a striking problem: Not all listings in the market are actually on each of their sites. Some of the listings are outright missing, and I have even seen homes listed for sale that have already sold. This is why real estate agents frequently squash the joy of buyers after they find that perfect house: Sorry, it’s in contract — even though Redfin says it’s available. In our area, real estate brokerages have to opt in to share information. I would say the bulk of them do, but missing a few listings here and there can make all the difference for buyers when house hunting. 

What about the accuracy of value? These real estate websites are hit-and-miss. Sometimes, they’re spot-on, and other times they’re easily off by 10-20 percent or more. On a practical level, we can’t expect these sites to be accurate because they don’t know the condition of a home or whether it’s been remodeled or not. These sites don’t know if 57 cats live there (sorry, cat owners).

Regardless, sellers still tend to say, “I know Zillow isn’t perfect, but I believe my house is worth that amount.” In other words, sellers get emotionally tied to the estimate and give it real weight. It’s not just a ballpark figure: To them, it’s concrete and written in stone, and sellers may struggle to budge from the number. Likewise, buyers sometimes wrestle with offering more on a property if Zillow’s Zestimate is lower.

What does a site like Zillow say about its own accuracy? According to the company, in California its median error rate is 4 percent. That sounds pretty impressive, but this is the “median” error rate, which means Zillow is basically within 4 percent of the sales price only half the time. Does that reek of accuracy to you?

But there’s something more we need to understand. Zillow states that “Zestimate accuracy is computed by comparing the final sale price to the Zestimate on or before the sale date.” Let me explain why this matters. 

Imagine a property listed for $380,000 and the Zestimate was also $380,000. But then after a series of price reductions, the home sold for $350,000. That would be 8 percent lower than the original Zestimate. That’s not very good, right? Well, now imagine as the list price was reduced, so was the Zestimate, and the most recent Zestimate was $353,000, which is only 1 percent higher than what the property sold for. Here’s the kicker: The home may have sold for 8 percent below the original Zestimate, but for its accuracy rate Zillow can claim 1 percent because it uses the most recent Zestimate instead of the original one. (It’s amazing how we can use numbers, right?) 

Two closing tips:

Definitive source: Zillow, Redfin and Trulia can serve as a relevant tool for home shopping, and these websites have a place in real estate today. I recommend using them, especially since they’re easy to navigate. But consumers ought to look to their local MetroList (Sacramentans, check to ensure they see 
every listing.

Grain of salt: Sellers and buyers too often get hung up on digital values. My advice? Don’t make that mistake. Don’t let yourself become emotionally tied to the number. Listen to your real estate agent’s pricing advice, and be sure to pay close attention to similar properties in your neighborhood that have sold or are on the market. 

By the way, a few years ago Zillow’s prior CEO listed his home for sale, and it ended up selling for 40 percent below the Zestimate. What does that tell you?