Would You Buy a Home for The Zestimate Price?

Zillow’s Zestimate has stirred up a lot of controversy over the years. Home buyers love the transparency it presents regarding home values. While Realtors loath it because it lacks the professional expertise and transaction specific elements that need to be factored into determining a home’s value. Instead of telling you the Zestimate is bogus, I’d like to give you a little more insight into the Zestimate and provide you with the information you’ll need to make the most of it.

What is a Zestimate?

A Zestimate is an estimated value of a home determined by using an Automated Valuation Model (AVM). Zillow pulls housing data from a large number of sources and tosses the data into a bunch of complicated equations to determine a home’s estimated value within a range. Zillow’s site does a great job explaining the Zestimate and explaining what it is not.

What the Zestimate is Not

A Zestimate is not an appraisal. Zillow clearly states:  ”The Zestimate is not an appraisal and you won’t be able to use it in place of an appraisal”. Zillow goes on to state “Our data sources may be incomplete or incorrect; also, we have not physically inspected a specific home. Remember, the Zestimate is a starting point and does not consider all the market intricacies that can determine the actual price a house will sell for, such as entertaining offers, negotiating, closing costs, timing, etc.”.

How Accurate is the Zestimate?

Like wine, the Zestimate has improved over time. Here is a link to the accuracy of the Zestimate in each of the Arizona counties. Keep in mind, you’re most likely looking for homes in the Maricopa county.

According to Zillow their Zestimates in Maricopa are:

  • Within 5% of the transaction price 21% of the time
  • Within 10% of the transaction price 39% of the time
  • Within 20% of the transaction price 63% of the time
  • Half the time the Zestimate is within 13.7% of the selling price, the other half of the time it is off by more than 13.7%

Zillow gives this 3 out of 4 stars and calls it a “Good Zestimate”

Accurate or Really Well Spun?

At first glance I was fairly impressed. But what isn’t being talked about is their Value Range on each property. The Zestimate might be within 5% of the transaction price 21% of the time, but what about the fact the Value Range can be 45% below the Zestimate and 7% above the Zestimate? That particular example says the Zestimate is $398k with a low price of $219k and a high price of $426k. That is a huge spread.

Also, as the home sits on the market the Zestimate may change based on comps or the listing agent dropping the price. Zillow’s accuracy numbers are based on the Zestimate value right before it closes. Which means if the home isn’t close to going under contract the Zestimate could be even more inaccurate.

What’s Missing from Zestimates and AVMs?

The human touch. Buying a home isn’t just about the numbers. Think about what it means to live in a specific part of town, close to work , or close to family. A home’s location, condition, selling terms all have a different value and that value is not the same for everyone. Some home buyers pay a premium to move into a home that doesn’t need any repairs. While others would prefer to buy a home that could use a house wide remodel.

AVMs like Zestimate look strictly at the black and white data to tell you what the home could sell for. At the end of the day the reality is, the home is worth what a home buyer is willing to pay for it.

Fannie Mae gives three principal limitations of AVMS

  1. AVMs rely on accurate data but the source of information often includes inaccurate data.
  2. AVMs can’t be used to determine the physical condition and relative marketability of a property.
  3. AVMs will never be able to fully incorporate the breadth of knowledge and judgement of a skilled appraiser.

I would add a fourth item and say AVMs cannot factor in the special selling situations involved with distressed homes.

The Effect of Today’s Market on AVMs

In a normal, stable market AVMs can be very useful. However with all the distressed homes in today’s market there are a lot of variables impacting what a home buyer will pay for a home. Here are a few examples of how each transaction type can have a unique impact on the home’s sales price.

Short Sale Scenario

When the banks involved with a short  sale issue their approval notice they will often ask the seller to pay $30k or $50k out of their own pocket. Its not uncommon for the Seller to be financially unable to pay that extra amount. However, if the Buyer loves the home they have the option to pay the extra amount and buy the home.

Bank Owned Scenario

In the Phoenix market thousands of new homes hit the market every month. Yet many of the homes under $250k will receive multiple offers due to so much competition that comes from the lack of quality homes on the market. Bidding wars and the inventory levels of quality homes can’t be factored into and AVM.

Traditional Sale Scenario

Homes sold by owners statistically sell for more than short sales. Home buyers looking at traditional homes are largely trying to avoid the drama involved with buying a bank owned and short sale home.

Zestimate – How Should I Use It?

I can understand the desire to know how much a home is worth and to know very fast. But what good is that number if it is inaccurate or if you can’t pick it apart to understand how the math was done?

You will always be better off if you find your own comps and do you own market analysis. At least you’ll understand where the data came from and how you came to your number. Would you feel better knowing the Zestimate for the home you bought is exactly what you paid? Or would you feel better knowing your research indicates the home is worth exactly what you paid for it?

When it comes time to doing your research, the Redfin website offers solid, reliable and transparent information about the housing market. You will find Market Trends, sold home data (direct from the MLS) and a lot more. Here is some great information about how to do your own Comparative Market Analysis We provide this data free of charge to home buyers so they can educate themselves and make well informed decisions.

If you would like more information about using the Redfin site to help you determine a home’s value, feel free to send me an email or give me a call. We want you to be able to get the most benefit from the website.

Marcus Fleming

Serving East Valley, Cave Creek and Scottsdale
Homes Closed: 60+
  • Babooshka

    Thanks, Marcus. This was a very informative article.

    • Marcus Fleming

      Babooshka, you're very welcome. If you have any questions about what was covered, don't hesitate to shoot me an email.   to shoot me an email.