Algorithms are more popular in recent years and used by companies such as Zillow, Redfin, and Realtor.com, but it’s important to understand the issues these tools share.
This article will provide a deep dive into Zillow’s Zestimate system to help understand the benefits and pitfalls. You’ll learn how this and other systems like it are not the final answer to the true value of a home.
What is Zestimate?
Zestimate is Zillow’s property evaluation formula tool. It displays a price at the top of a listing in a bold, large font, as well as an estimated price range below it.
Zestimate is just an estimated value and not an official value. As a result, the pricing is not shared with financial institutions. Other algorithms like Zestimate share this same trait and are quick to point out the pricing is not official. Zillow has already run into hot water by providing estimated pricing. The company was sued by homeowners in 2017 due to the estimate appearing as an actual appraised price and being referenced as such.
Using the Tool When Researching Austin Homes
The tool accounts for various factors like square footage, the year the condo or house for sale was built, the number of bedrooms and bathrooms, property condition, and the home location. It also takes into account comparable sales found in surrounding public data, and various state and national data factors and tax records.
Zestimate also reads photos of each listing to gauge its overall appeal. It looks at outdoor factors like patio space and landscaping and inside factors like natural light and kitchen quality, accounting for appliance quality and granite countertops.
The tighter the resulting price range is, the more accurate the estimate is due to the availability of a large amount of comparable data from surrounding properties.
But with all the high tech photo and data analysis, there are still issues with this method of estimating. Let’s take a look at some of the biggest.
Issues with Real Estate Upgrades
Systems like Zestimate aren’t accurate regarding upgrades and improvements, and in fact they may not be included at all in the price. When a permit for an upgrade is approved by the city, a record is forwarded to property tax authorities and placed in public record. Zillow relies on this record in providing its data, so a full record must be logged.
This sounds simple enough, but the problem is that not all home improvements require city permits. Many are considered superficial but do a lot for a home’s appeal and can come at a significant expense. New kitchen and bathroom upgrades, new flooring, and fresh paint are an example of this.
Let’s say you are a seller and your realtor accounts for upgrades into the price. Zillow’s system may review your pictures for curb appeal, but the algorithm doesn’t know all the details or costs of your upgrades; instead, it makes an educated guess. This can underestimate your true value in the marketplace.
Another issue with algorithm evaluations is that the home for sale is seen as equal to comparable homes that don’t have upgrades. This leads to two issues: The home for sale may become undervalued by seemingly “comparable” homes in their systems, or the home may have an inflated value due to the higher selling price of a “comparable” home – one that may had more significant upgrades.
Both issues can only be corrected with a professional evaluation from a realtor and assessor.
Real Estate Data is Not Always Accurate
The data these systems use is a blend of public data and user-provided data. User input, such as lot size and square footage, directly affects the value. If any data is incorrect and remains in the system, other home values in the area are affected. Zillow relies heavily on comparable sales as part of its estimate.
In some cases, paid property taxes and tax assessments are also manually provided. If they aren’t accurate, the value is thrown off.
Real Estate Inaccuracy in Areas of Low Demand
Part of how Zestimates work is by assessing surrounding data. If a home is in a densely populated area, there are more homes to compare, resulting in a more accurate price and tighter price range. If the home for sale is in a rural area with a low turnaround, the pricing is less dependable.
The Margin of Error
Zestimate price estimates have a margin of error of 4.3%, which may already be an issue for sellers, but there is another problem: this statistic is true only half the time. This means that the other half of the time, the pricing is way off.
This 4.3% percentage factor is stated by Zillow. This percentage is down from 5% thanks to improvements to the algorithm, and they expect it to fall below 4% further down the road.
Though Zillow remains open about the discrepancy, the data is misleading. The 4.3% accounts for a 2 to 20% variable 50 or 60% of the time, and there is a full 40 to 50% that is way off the mark. In both cases, you can be unlucky.
Issues with the Algorithm
Zillow periodically updates its systems to improve its results, resulting in ongoing changes in value, and both buyers and sellers can be negatively affected. Instead of more comprehensive factors that realtors and assessors typically follow that fall outside an algorithm, the system itself is creating price differences here and there in its evaluation process, leaving everyone unclear of the true value.
This means you could do a review of a home and other homes in the area to get an idea of pricing and expect the price to line up accordingly, only to find the rate increases or decreases too late during a sale, leading to a painful buyer or seller remorse. You’ll wish you chose another method of evaluation.
Other Real Estate Algorithms
As stated above, Redfin, Realtor.com, and Zillow all have their own systems and ways of doing things, and this means you will never have consistent pricing across each system. All the companies are clear on the fact their systems are tools designed to get you started and that you need to enlist a realtor or appraiser for an accurate price.
Why a Realtor?
When it comes to comparing algorithms and realtors, the short answer is realtors are more accurate.
Local realtors know the ins and outs of an area that an algorithm can’t see, and they have a greater understanding of what is going on behind any comparable sales. Many also have first-hand knowledge of a neighborhood and even individual properties and bring a knowledge of local buyers and sellers that they draw on – a key factor to strong negotiations.
As an additional benefit to sellers, agents also know what buyers are looking for in today’s homes. If a home works better for remote living during the coronavirus, the benefit can be price accordingly.
Realtors also provide a comparative market analysis (CMA) that outlines the data behind comparable in more depth than what Zestimates and other algorithms can generate. Here at Smart Austin Realty, we offer this service. The documents include any adjustments made to data on other relatable properties, shining a better light on their actual value.
All of this work from a realtor results in pinpointed pricing that captures the home’s real value in the local marketplace, with all pricing justified and accurate.
Zillow may help as a starting point, but when it comes time to buying or selling, systems such as this state you should enlist a professional realtor to get a realistic look at its value. As shown in its name, Zestimate is just an estimate. Systems like this should not be used for an accurate understanding of a home’s appraisal value. That 4 to 10% variance is a hefty amount, and it can be much more.
If you are looking to sell or buy Austin real estate, we here at Smart Austin Realty work with talented realtors who understand house and condo values in your area. We also know the players in the market and offer intelligent incites as to what makes a better home evaluation in the Austin area.
In addition to realtors, we offer a number of guides on our real estate website to help make selling your Austin property easier, including our Austin Home Seller’s Guide. And for buyers, we offer a comprehensive list of properties to choose from to make your Austin home search easier.
Contact us to find out all the ways we can help.