An Assessment of Zillow’s Automated Valuation Algorithm

By Ken DeLeon, Esq., DeLeon Founder

Within real estate, there are few things more revered or more reviled than Zillow’s Zestimate, which instantly values homes across America. The Zestimate can be revered by those who love the ease of getting an instant valuation of homes in their neighborhood. Conversely, the Zestimate is often reviled by real estate professionals since an artificially high Zestimate can inflate sellers’ expectations, whereas an artificially low Zestimate can give a buyer false optimism. This controversy begs the question: how accurate are Zillow’s valuations?

The answer is that Zillow will be most accurate in areas with a homogenous housing stock, particularly tract housing developments that are common in major urban markets throughout the nation. The uniform characteristics and building materials used in tract housing are ideal for an algorithm that relies heavily on neighborhood sales data, but does not value the custom features of a home, its location within a neighborhood, or the amenities of the specific community. A recent study of Zestimate accuracy confirmed this conclusion. According to a Washington Post article entitled “How Accurate Is Zillow’s Zestimate?,” the Zestimate was more accurate for homes priced between $500,000 to $999,999, as the Zestimate was within five percent of the sales price nearly 60 percent of the time. However, for properties that sold for over $1 million, the Zestimate was within five percent of the actual price just over one-third of the time. 

Similarly, Zillow’s algorithm fares poorly in affluent areas with relatively unique properties. For example, in Manhattan, Zestimate’s median valuation error rate is 19.9 percent. In San Francisco, the median valuation error rate is 11.6 percent (“Inaccurate Zillow ‘Zestimates’ a Source of Conflict Over Home Prices,” LA Times, Feb. 2015). In light of the relatively short time well-marketed homes spend on the market, this margin of error is simply unacceptable for sophisticated consumers. Consequently, retaining an experienced agent is essential for high-valued properties. I regularly have to explain to frustrated clients that the Zestimate becomes increasingly inaccurate as the value of the home increases.

Here are two recent examples in Atherton:

• 119 Tuscaloosa Avenue sold for over $35 million, but the current Zestimate is nearly $17 million.

• 47 Camino Por Los Arboles sold for over $30 million, but the current Zestimate is just over $18 million.

The Zestimate can also greatly overestimate valuations. For example, a home on Edgewood Drive in Crescent Park has a Zestimate of almost $8.5 million, yet it is lingering on the market for over a month at $7,688,000. The most high-profile “Zestimiss” was when Spencer Rascoff, the CEO of Zillow, sold his home in Seattle for $1,050,000, which was only 60 percent of the $1,750,405 Zestimate (“Zillow CEO Sold His Home for 60 Percent of the Zestimate,” Appraisal Today, June 2016). To add insult to injury, Mr. Rascoff also “overpaid” when he purchased his new home in Southern California. According to the Zestimate, he paid $1.5 million more than he should have for his new home (“Zillow CEO Overpaid for His Los Angeles Home, According to Zillow,” Curbed LA, July 2016). When responding to criticism about these inaccuracies, Rascoff replied, “We call it a Zestimate and not a zeppraisal and not a zeprice. It’s meant to be a starting point. To determine a more accurate opinion of a home’s value you should hire a real estate agent….” (“Even the CEO of Zillow Thinks You Should Ask a Real Estate Agent What Your Home Is Worth,” MarketWatch, Sept. 2016). And, to be fair, Mr. Rascoff’s new house sold for just under $20 million in the Brentwood section of LA, so it is not surprising that the Zestimate was not accurate.

So, while a Zestimate may be good for cocktail conversation, when the time comes for you to truly know the value of your home, it is best to reach out to the DeLeon Team. We can give you a much more accurate and insightful estimate of your home’s true market value.

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