Understanding Zillow and its limitations

Zillow home page

If you’ve bought or sold a home in the last 10 years, there is a good chance you’re familiar with Zillow. Zillow is an online real estate database founded in 2005 that has become a power in the real estate industry because of its wealth of information and high-end user experience. But it’s important to understand what Zillow is, what its information means and what its limitations are.

There is an enormous amount of public information about houses throughout the United States — information like property taxes, home sales, building permits, etc. Multiple listing service databases compile all of this public information and put it in a form that makes it easier to compare different properties. Zillow’s database includes much of the same information and makes it conveniently viewable to the public.

A basic definition of a home value is the maximum price someone will pay on the open market. One way to determine that is by looking at comparable houses that have recently sold nearby. There are several types of property evaluations during the selling process: property tax assessment, comparative market analysis and home loan appraisal. All serve different purposes and are calculated differently. They all factor in the physical characteristics of a property like the size of the lot and house, the number of rooms and the home’s age.

This is where we run into difference in the evaluation methods. Property tax assessments, comparative market analyses and home loan appraisals all utilize professionals who make subjective judgments in tandem with specific guidelines to come up with a final property evaluation. An experienced professional can usually produce very accurate property value estimates. 

Zillow, on the other hand, determines the value strictly by the physical facts, the sales history and its Zestimate (Zillow’s computation formula). The process completely removes human bias. Sounds great, right? Don’t you want a totally objective estimate?

Well, the issue is that Zillow’s process fails to consider unique conditions that might add to or hurt a property’s value — conditions like a damaged roof, high-end kitchen appliances or gorgeous landscaping. In a comparative market analysis, several comparative properties that recently sold nearby are identified and a value is determined and then adjusted after factoring in a property’s unique conditions.

Many Zillow users make the common mistake of only looking at Zillow’s Zestimate number. Zillow does have the advantage of accessing a huge amount of data, but its data differs greatly by region. Before even looking at a Zestimate, you should figure out the accuracy for your city or county. You can find this by clicking on the Zestimates hyperlink at the bottom of Zillow’s home page. States, cities and counties are then rated 1-4 stars based on how accurate Zillow’s information is. As you can see, every county in Missouri is given just one star, which means a Zestimate probably shouldn’t be used at all. Even areas with four stars often give estimates that vary significantly from the actual sale price.

Zillow Missouri rankings

Zillow even admits that that relying only on a Zestimate is probably not a good idea when trying to determine a selling price. The information might be a bit more useful to buyers since buyers aren’t able to have appraisals done for every house they look at. Zillow can provide an accurate picture about a property’s size, lot area and how it compares to other nearby properties.

In short, if all you need is a quick calculation based solely on facts, Zillow can be very useful. But if you need to factor in other subjective factors that are critical during the home-buying and home-selling process, then you probably need the help of an experienced real estate professional.

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