Cue the Zillow jokes (my favorite: the “a” in Zillow stands for accuracy), but love it, hate it, or really really hate it, the Zestimate is here to stay. We’ve seen it all: the homeowner who sends screenshots at midnight of a Zestimate change, the client who ignores local expertise in favor of the Zestimate, and the buyer who wants to offer far less than the Zestimate because there’s no way it’s valid. But just how accurate is the Zillow Zestimate? And how can we use it to our advantage as real estate agents?
Zillow can be opaque and shrouded in mystery, standing on (hiding behind?) an algorithm. But when it comes to the Zestimate, there’s actually a fair amount of information out there to help us understand generally what it is and how it’s calculated. We’re going to demystify the Zestimate and offer some strategies for how to talk to your clients about it. And probably throw in a few more Zillow jokes.
What Is the Zillow Zestimate?
Zillow uses their proprietary (code word for top-secret) technology to offer an estimate of a home’s market value for almost every residential property in the U.S.* Each valuation is based on a sophisticated algorithm that takes many factors and data points into account (more on this below), and is delivered in real time for both on- and off-market properties.
It can also be the source of a lot of confusion and tension, especially between sellers and their listing agents. So let’s be clear: There is one thing that the Zestimate is not, and that’s an appraisal. An appraisal is performed in-person by a trained, unbiased professional to ascertain a property’s fair market value.
*At the time of publication, there were Zestimates for 1.3 million on-market properties and 102 million off-market properties.
How Is a Zestimate Calculated?
A property’s Zestimate is calculated by complex software using an “automated valuation model” that analyzes a wide variety of data points collected from users, public records, and multiple listing services. According to Zillow, here’s what goes into that equation:
Zillow is constantly tweaking and improving the algorithm and the information input can change over time. For example, it used to be that Zillow didn’t include listing price data, but now it does.
Not all MLSs participate in Zillow’s massive data collection. This results in a much more limited data set, further skewing a Zestimate, which is why understanding your MLS’s relationship with Zillow is also important.
When putting a Zestimate into the broader context, it’s important to note that an appraisal only takes lagging indicators, in the form of previously sold properties, into its equation. It’s more of a reflection of a market in the past, whereas comparative market analyses (CMAs), broker price opinions, and automated valuations consider listing prices in their comps. Because they use what we would call leading indicators, it means they often reflect an analysis or prediction of the market right now.
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How Accurate Is a Zestimate?
If you ask Zillow, it’s very accurate. In fact, Zillow boasts a “nationwide median error rate” for on-market homes of 2.4%. However, for off-market homes, the error rate is more than three times that rate, coming in at 7.49%.
Of course, the more information that Zillow can pull on a property, the more accurate the Zestimate. If there are scant sales in the geographic vicinity or a home is missing some key information, like its square footage, it’s going to impact the accuracy of the Zestimate. Also, what constitutes “public data” varies from state to state. If your area doesn’t allow commercial use of certain data points around a home’s value, local Zestimates will be less accurate.
On-market Zestimates
Some savvy agents (and clients) have noticed that the Zestimate often changes once a property is listed to become much closer to, if not exactly, the new listing price. This means an on-market Zestimate benefits from the local, on-the-ground expertise of real estate agents (the ones who are actually pricing the properties) and has a much better chance of being on-target. It could be argued, therefore, that the on-market accuracy rate of Zillow’s Zestimate makes us look good—or maybe I should say agents are making Zestimates look good?
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Off-market Zestimates
Let’s take a closer look at off-market Zestimates, because this is where there is a higher error rate and it can really impact a client’s expectations. When you break down the numbers (which, to Zillow’s credit, are all transparently published, organized by metro area, state, and nationwide), there’s plenty of error in the off-market Zestimates.
Let’s first look at the national median error rate: 7.49%. Zillow breaks it down even further (again, to their credit since they don’t have to provide this information) and shows the percentage of properties within 5%, 10%, and 20% of the sale price.
Here’s a range of possible home prices to put these numbers into context:
These numbers show that the Zestimate is generally pretty good at getting within 20% of the market price, gets it within 10% a little more than half the time, and only gets it within 5% a third of the time. Roughly 20% of properties are off by 20% or more. This is real money that clients might be leaving on the table—or expecting to pocket.
If you had to tell a client in a listing presentation that your list prices are within 10% of sale price only six out of 10 times, they might question your comparative market analysis process (if you need a refresher, here is a great step-by-step guide on creating a stellar CMA).
Geographical Differences
When you look at the state-by-state data, there are areas where the Zestimate is less likely to be accurate. The Zestimate in West Virginia, for example, misses the sale price by more than 20%, nearly a third of the time. Other states do much better. Zestimates for properties in western states, like Utah and Nevada, for example, are within 5% almost half the time.
Metro area data also varies widely. The cities with the most accurate Zestimates, Colorado Springs, Denver, and Las Vegas, are also out west. It would stand to reason that areas with lots of high-density, planned communities tend to have more accurate Zestimates because the properties are much more homogeneous, making it easier to calculate accurate comps.
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So Are Zestimates Accurate?
The on-market Zestimates? Yes. But as I noted, they appear to be using the list price data.
Nationally, the off-market Zestimate error rates are OK, but not amazing, especially compared to a specialized market valuation from an experienced real estate agent. If I priced a home at $500,000 and it sold for $450,000, my clients would not be impressed. However, if you are in a state like Nevada or a city like Denver, you can probably count on those off-market Zestimates being pretty close to accurate.
Interestingly, back when Zillow was buying properties, it used the Zestimate as its offer, mostly in homogenous planned communities where the Zestimate is most accurate. Of course, that business model famously collapsed. Take from that what you will.
In any case, a Zestimate is generally a good jumping-off point, and maybe even a catalyst for someone’s decision to hire a top-notch real estate agent.
Santa: What do you want for Christmas?
Me: A dragon.
Santa: Be realistic.
Me: OK, an accurate Zestimate.
Santa: … What color dragon do you want?
Strategies for Talking to Clients About a Zestimate
Word has gotten out and the public seems to realize that you can’t understand the market value of a home with the Zestimate alone. You can advise most clients that their Zestimate is a great starting point, but that you need to do a full, professional, customized CMA to get the most accurate recommended listing price.
But every once in a while, you’ll get that client who watches the ebb and flow of their off-market Zestimate with the obsessive intensity of a recent retiree watching their bird-feeder. This is usually the same type of client who believes that anyone can be a Realtor (in fact, they would do a better job than you of selling their own home, but they just don’t have the time). Unfortunately, the Zestimate arms these clients with the misguided confidence to decide their own list price. That’s when you have to get creative.
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Use Your Data
Explain how a Zestimate is calculated. Take them through your listing presentation with care, showing exactly why you are so confident in your listing price. Show them how you’ve successfully listed homes in the past.
If this isn’t convincing enough, spend a little time comparing a list of local sale prices to the Zestimate. This data should reveal what we all know—that if you priced a home solely based on the Zestimate, the actual sale price could be wildly different.
Use Your Local Expertise
You know your local community better than Zillow does. Use this expertise to illustrate how your price takes new zoning into account, or a great new donut shop coming in around the corner, or whether you’ll need flood insurance, or that buyers paid more for the neighbor’s house because it had a brand-new HVAC system. You have the advantage of proximity.
Remind your clients that when they are making giant financial life decisions, it’s OK to back away from a computer and rely on an actual human being. After all, one of my favorite Zestimate lines is “Zillow can’t smell your cat.”
Bringing It All Together
So Zestimates: What exactly is the truth behind the numbers? Maddeningly, it depends. Sometimes a Zestimate is pretty on the mark and sometimes it’s wildly off. The algorithm is going to continue to get better, and a Zestimate is definitely a tool in the toolbox. But the good news is that it is not accurate enough to replace a professional appraisal or a thorough CMA from you, the experienced local real estate agent.
Have you had experience with Zestimates, good or bad? Any stories to share? Comments or questions? Let us know in the comment section below!
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