Automated valuations and online estimates are becoming an increasingly popular way for property owners to determine their estimated home value. Various real estate sites like Realtor.com, Redfin (NASDAQ: RDFN), Trulia, and Zillow (NASDAQ: Z) (NASDAQ: ZG) all offer an automated home valuation on their platforms, but the accuracy of their valuation is heavily debated. Leading real estate investors and property owners to wonder, how accurate are Zillow and other home value estimate websites?
Let's take a look at how automated valuations like Redfin estimate, Zillow Zestimate, and other real estate industry valuation programs work to see if their valuations are accurate or not and what alternatives there are to find a home's value.
How do Zillow estimate and other home valuation services work?
Zillow estimate, or Zestimate, is one tool among many others in the real estate industry that uses an algorithm to determine an automated valuation for a property. The Zillow algorithm will use property data provided by property owners, real estate professionals, or public records (such as the tax collector or property appraiser) and compare that data to similar homes that recently sold nearby called comparable homes. Data points used by the algorithm will include things like:
- Square feet of property
- Numbers of bedrooms and bathrooms
- Age of property
- Lot size
It then calculates a likely sales price based on this information.
How accurate is Zillow?
With any automated valuation model (AVM) there is a median error, which is the margin of error from the estimated value to the real value. The median error rate will vary depending on the market the property is in.
Markets in which public data isn't widely available, there is limited sales activity, or data is inaccurately represented for the property will result in a larger median error. According to Zillow, about 80% or more of homes in major markets are within 20% or closer margin when comparing sales price to the home Zestimate. My personal experience working with Zestimate as an investor who often targets distressed homes is that Zillow's accuracy will vary.
Property location, quality of comparable properties sold in the area recently, condition of the home, among other factors all contribute to an accurate valuation. Since Zillow's algorithm only takes into account concrete features of a property like location, number of bedrooms and bathrooms, age of the home, or square footage when finding comparable properties, it's missing certain qualities that help truly determine an accurate value, such as a property's condition or features.
If the home is in relatively good condition for the area and the market has seen consistent real estate activity over the past three to six months, the Zestimate accuracy will be more or less in line with the real value of the home. But if the home is in need of repairs, has unique features that either add to it's value or hinder it, or there is a lack of sales activity in the area, it's more likely you'll have an inaccurate Zestimate as it relates to the property's likely sale price.
I personally target a lot of distressed real estate and have found Zillow to almost never be in line with the actual value of the home in its as-is condition. But with some improvements, I typically am able to achieve the Zestimate or beat it. I also have compared Zillow's Zestimate services to other industry websites and personally feel Zillow offers the most accurate valuation, but it's not perfect and is almost never the tool I use to determine a property's value.