Why you can’t trust every home valuation tool out there (looking at you, Zillow)

Buying and selling a house is a huge deal. Not only is it a lot of responsibility, but it is also a considerable investment. Both the home you’re selling and the home you’re purchasing must be valued correctly. The job of home valuation used to be reserved for real estate agents and appraisers, but with all of the technology we have at our fingertips, it’s no wonder there are several home valuation tools at your disposal. One of the more popular real estate sites out there is Zillow, and the home valuation tool they provide is called the Zestimate tool. At a glance, it seems like the tool is the best thing ever but beware — not all home valuation tools are trustworthy, and here’s why.

What exactly is a Zestimate?

We’ve established that Zillow’s home valuation tool is called a Zestimate, but what exactly is considered when establishing this number? Zillow uses data that is available as public record and a home’s known features to estimate the approximate value of the house. Zestimates are included in property listings when available. Some of the factors considered by Zillow are below:

  • Home features: Location, square footage, number of rooms, amenities, lot size, etc.
  • Off-market data: Tax assessments and prior sales records.
  • On-market data: Data about comparable houses, days on the market, listing price, etc.

Zillow does acknowledge that its Zestimates are not appraisals and fall with a margin of error. As with any statistics, the more data available for a given property, the more accurate the Zestimate will be. According to Dennis Bowers, leading Naples real estate agent with The Bowers Group at Compass,

“Since the data pulled to calculate the Zestimate is computer-generated, this can lead to inaccuracies. They will group foreclosures, distressed sales, and trust sales with traditional sales, which will skew the estimated price and may show that the home is worth more or less than it actually is.”

How off can they be?

Zestimates and other home valuation tools don’t take any updates that you’ve done to the home into consideration when calculating their numbers. Bowers goes on to state, “The system does not take into account current market conditions and market demands. For example, in Naples, Florida, right now, the market is hot due to the pandemic and a migration of Northeast buyers, and inventory is extremely limited — so sellers are getting over market value for their homes.”

Zillow’s algorithm pulls numbers from old tax records and MLS listings on the property. This is an issue since county records are sometimes incorrect, and old listing information may not be up to date. Zestimates and other home valuation tools also don’t factor location into their numbers, which makes no sense since everyone knows that location is everything when it comes to new homes. From the neighborhood to the proximity to the closest highway, location matters. Also, “Homeowners have access to input and change the data of their home on Zillow; therefore, this information should be cross-checked for user error,” Bowers cautions.

All of the above leads to Zestimate’s median error rate for homes on the market, which is 1.9% and means that only half of all Zestimates are within 2% of the selling price. The median error rate for off-market homes is 7.5%, and the error rate is even higher in some markets. All of these numbers mean one thing: Zestimate’s aren’t accurate, and neither are other home valuation tools, so don’t count on them. It may seem like a 2% error isn’t worth worrying about, but when you’re dealing with houses worth hundreds of thousands of dollars, 2% can mean the value is off by tens of thousands of dollars.

What tools to use instead

Though you shouldn’t take a Zestimate or other estimate from real estate websites as gospel, you can use them as one of many tools to figure out the actual value of properties. Real estate agents are your best asset when it comes to home valuation. Whether you are buying or selling, a real estate agent can access the stats of other houses in the area (these are referred to as “comps”) and make informed decisions regarding the value of a property.

One of the best ways to determine the value of a home is to look at the home yourself. Only you and your family can determine if a house is worth buying or not, and you have to consider curb appeal, the way a house is finished on the inside, the quality of the appliances, the size of the yard, etc. For example, if your family is growing, you may want to buy a home with more bedrooms for future children or a swing set in the yard. All of these factors fluctuate in value depending on your wants and needs.

When it comes time to buy or sell a house, do your homework regarding home values. Take Bower’s advice: “You always want to work with an experienced Realtor who knows the ever-changing conditions of the local market, researches off-market sales, and knows what buyers are looking for in your area.”

Don’t get us wrong — you can use Zestimate and other home valuation tools; just beware that they aren’t incredibly accurate. Other properties in the neighborhood, updates to the home, location, and much more contribute to a home’s final value. Be sure to use a realtor if you are unsure when looking at homes to purchase since they have the experience and resources to determine a home’s value accurately.

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