If you’ve ever wondered what you could get for your home, you’ve probably opened up the real estate listing site Zillow to check out the Zestimate.
The algorithm-based pricing tool estimates values for millions of homes across the country and is a popular resource for home buyers and sellers alike.
However, determining a home’s value is a delicate process — not something easily achieved with the push of a button.
Problems with the company’s valuations forced it to close its home-buying business and lay off a quarter of its staff. Zillow stock is down 80% from its peak.
Here’s why it’s been so difficult for Zillow to accurately predict home prices, and what you can learn when buying, selling or refinancing.
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What went wrong at Zillow
In 2019, Seattle-based Zillow launched its iBuyer business, called Zillow Offers, to buy homes directly from owners, fix them up and put them back on the market.
Zillow was so confident in its pricing algorithm that it said Zestimates would serve as the starting bid price on eligible homes. That didn’t last.
The company announced last year that it was exiting the iBuying business. In a quarterly earnings call, CEO Rich Barton said Zillow was unable to correctly predict future home prices amid volatility in the pandemic-induced housing frenzy.
Indeed, an unexpected desire for new housing by Americans who work from home, combined with extremely low mortgage rates, have driven US home prices to new highs.
Rick Sharga, an executive with RealtyTrac, says Zillow’s business model was flawed, noting on his company’s website that investors often overpay and underestimate the time and cost to prepare a home for sale.
“Zillow Offers appears to have made both mistakes, and done so on a large enough scale to result in hundreds of millions of dollars in losses,” Sharga writes.
The best ways to determine the value of a home
One lesson stands out from the Zillow fiasco: Real estate values can change quickly. Do your homework based on fair market value.
Find a qualified real estate agent
Your real estate agent should know your neighborhood. Good brokers analyze recent similar property sales to suggest a list price, says Corey Burr of TTR Sotheby’s International Realty in Washington, DC
“I don’t know of any experienced agents who depend on Zestimate for a pricing recommendation,” Burr tells MoneyWise.
“But because the market is so familiar with Zestimates, it could often be discussed in relation to buyers’ expectations of a property.”
Get an assessment
Although not legally required, your real estate agent will likely recommend that you get an appraisal and include an appraisal contingency in your offer.
In addition, lenders require an appraisal when you take out a mortgage – and sometimes for refinancing – to ensure that the house or apartment is worth the amount you want to borrow from them.
An appraiser examines the home and studies market trends, along with other factors such as location and whether the home is in a flood zone.
In a rapidly appreciating market, it is not uncommon for an appraisal to be below what a buyer is willing to pay. In these cases, some appraisers are willing to accept additional information about the local market and revise their valuation, Burr says. But if it isn’t, the buyer and seller may need to renegotiate the price.
Look beyond computer-based valuations
It’s tempting to accept the prices spit out by private real estate sites—Zillow is one of many—but remember that these figures are just estimates. Zillow also says buyers and sellers should supplement Zestimates with their own research.
With your realtor or on your own, compare a home to similar properties. Be sure to consider less obvious factors like school zones. Two similar homes in the same neighborhood can have very different values if only one is located in a top-rated public school.
And as another point of reference, check out the Federal Housing Finance Agency’s home price calculator, which displays home appraisal values for many areas.
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This article provides information only and should not be construed as advice. Provided without warranty of any kind.