How Zestimates & other iBuyer Algorithms work

Every day people wanting to sell their homes call us for an offer, and say, “but the Zillow website says my house is worth…” <sigh>

While an estimate given on Zillow may seem attractive, the Zillow AI system, by its own admittance, often lacks complete real-world data needed to give an accurate evaluation. Furthermore, Zillow makes money from attracting people to refinance their homes or listing them for sale, advertising for real estate agencies and more . The more people like what they see, the more they explore the options Zillow has, first and foremost the options paying the plethora of advertisement incentives that propel its $2.7 billion public company.

While it certainly has its benefits, it’s common knowledge among seasoned real estate professionals that Zestimates are not highly accurate for a number of reasons.

How They Work:

Zillow’s estimates of house value, popularly known as Zestimates, are often not as accurate or “zesty” as you may think. Zestimates are derived from Automated Valuation Models (AVMs), statistically-based computer programs that use various data to calculate a current estimate of the value of a property. Although these AVMs are an easy way for companies to provide quick property estimates, they are often inaccurate.

In Atlanta, 99% of Zillow’s estimates (“Zestimates”) are within 20% of the actual market value. That’s a huge margin of error. About 86% of the time they are within 5% of the actual value, but this is quite difficult to determine unless you dig deeper.

How they calculate a house value estimate:

To calculate the Zestimate for a specific property, Zillow takes into account characteristics of the individual house, such as its square footage, number of bedrooms and bathrooms, number of stories, year built, and the date and price of the last sale. It also uses information of comparable sales and publicly available data of the surrounding area, as well as current market trends and tax data. However, when any of this public/user-submitted data is incorrect or outdated, the derived estimate of the property is often inaccurate. For instance, an upgrade to a house like adding an extra bedroom naturally increases its value but this addition is rarely taken into account by the AVM in its calculation because that data hasn’t been inputted into the database. Conversely, if the Zestimate of surrounding homes is not correct, it will throw off the Zestimate of the individual property as well. With updates to Zillow’s estimation algorithm, already derived Zestimates may change even though the characteristics of the home and its surrounding properties have remained the same. Many times we notice Zestimates for houses include new subdivisions in their analytics whch skews the data for neighboring subdivisions full of houses built 30 years prior. This creates artificial inflation of prices for older homes and unreasonable expectations for homeowners who want to sell.

Zillow displays attractive Zestimates to entice you to opt-in to services with their many affiliates & advertisers and now even offering to buy your house at a decently high price. However, just like other iBuyers, the seller will be later be asked to fund necessary renovations and repairs the house needs to get that price, along with numerous incidental fees. Their goal is to lure people in with often unreasonable estimates and then drastically decrease the amount of money you actually make from the sale. This causes a big problem for real estate investors because sellers see the Zestimate of their house and expect a cash offer to match it. Even if a Zestimate is accurate, the estimate is for a house in fully rehabilitated, move-in-ready condition and doesn’t reflect how much you will actually pocket from the transaction. A cash offer accounts for all the repairs and readiness required to sell it at market value, plus all the closing costs and fees involved in the transaction. A GA House cash offer reflects your actual take-home profit of a traditional sale without all the time and money spent!

At GA House, we understand that an automated algorithm cannot assess the true value of your home. We only use the most updated and accurate information to form our offer and take into account any work you’ve put into the home. With over twenty years of experience, our trained experts will come up with a fair offer that doesn’t include any extra “surprise” incidental fees or costs that will reduce the amount of money you will actually receive. To come up with our offer, we first determine the comparable value of the house by looking at the house’s individual characteristics, the values of the surrounding homes in the area, and any work put into the house. We then subtract any administrative and rehabilitation costs. Selling a house is mentally and emotionally challenging. At GA House, we ensure that you get an offer that will benefit YOU with no surprises.

Zillow can be a very useful tool if you know when to use it AND when not to use it; it gives instant access to public information previously only available to agents. The best thing you can do when evaluating the accuracy of a Zestimate is to look at homes that actually sold within 6 months that are identical or very similar to yours, and in the same 5-mile radius or subdivision.