A Look Into "Zestimates"

Dated: November 4 2021

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Zillow Offers collapse is proof of the Zestimate's inaccuracy

Zillow’s decision to shut down its iBuying business is more than just a response to the volatility of the Zestimate, but rather an indication that technology can't solve everything

"For almost two decades, real estate professionals have been told they will be disintermediated by technology innovation.

Zillow’s decision to stop its iBuying operations is more than just a response to the extreme volatility of the Zestimate and their inability to accurately forecast prices. It’s a recognition that real estate investing, real estate brokerage, and mortgage are fraught with problems that technology companies seldom encounter.

When Zillow first launched in 2006, I wrote several columns citing the inaccuracy of the Zestimate. As a result, Zillow founder Rich Barton invited me to join him for lunch at the 2007 Real Estate Connect to discuss Zillow’s business model in more depth. At that meeting, Barton shared the following:

  • Zillow’s business plan was to rely on its advertising platform as their primary source of revenue.
  • Concerns that Zillow is competing with brokers were unfounded. Instead, their goal was to work as a partner to real estate companies.
  • Barton also told me that Zillow launched its Zestimate tool because “that’s all we had at the time.” He went on to say, the original inaccuracy of the Zestimate tool (an average of 7.2 percent), would improve as Zillow collected more data.

Zillow stood by that promise until  they launched their iBuyer program, Zillow Offers, which they first piloted in 2017 as Zillow Instant Offers. At that point they were no longer advertisers. They were now competing directly with agents to obtain the listing.

In January 2021, Zillow launched its brokerage operation to streamline their iBuying process. They hired salaried agents to work with sellers who were seeking a cash offer from Zillow Offers. Zillow Home was the broker of record.

According to the Real Deal, Zillow made this decision to grow their revenue. When they initially launched the iBuying business in 2017, no one anticipated the pandemic, the labor shortages, and the severe problems in the supply chain that impacted Zillow’s ability to rapidly purchase, update and the sell their iBuyer inventory.

The result had undermined the accuracy of their Zestimates. On a recent earnings call with investors, Barton stated, “Our observed error rate has been far more volatile than we thought possible.”

He later added that, “Fundamentally we have been unable to predict future pricing of homes to a level of accuracy that makes this a safe business to be in.”

Zestimates: A thorn in the side of Realtors since 2006

Since their launch in 2006, Zillow’s Zestimates have been a thorn in the side of agents and for good reason. One of the most common objections agents still face today is, “But Zillow says my house is worth more!”

Unfortunately, very few agents know how to successfully defend against the Zestimate. One clever agent I interviewed back in 2007 overcame the Zillow objection by saying, “I don’t give estimates — I give exactimates.”

Today the best approach is to quote the values generated by other AVMs (automated valuation models) including HomeSnap, realtor.com and The Chase Home Value Estimator Evaluator. You could also include offers from iBuyers such as Opendoor.

When you present sellers with several different AVM values, they are usually confused as to which value is correct. At that point, take out your CMA and explain how you arrived at your price based upon your square footage CMA and local market knowledge.

Cheers from the Inman community

After struggling with the “Zillow objection” for 15 years, the Inman community welcomed Zillow’s admission that their Zestimates were no longer accurate due to extreme market volatility. Michael Scoffner summed up the mood like this:

“What? You mean you can’t rely on a Zestimate?……shocker! (yawn). You gotta admit that the irony in this failure is epic!”

What’s unclear at this point, however, is did Barton only refer to predicting “future value,” not the present value? The problem is with properties sometimes selling for 10 to 30 percent over asking price, predicting the price where they will sell now has become problematical for almost everyone.

What Zillow didn’t say

Over and beyond market volatility and supply chain issues, Zillow’s foray into iBuying and becoming a brokerage has resulted in headaches that may have played an additional role in their decision to abandon their iBuyer program.

One of the most notable issues may be antitrust lawsuit filed by REX Real Estate against NAR and Zillow that resulted in the DOJ intervening.

On September 2, 2021, U.S. District Court Judge Thomas S. Zilly ruled in REX’s favor, saying the brokerage has provided sufficient evidence to back up their antitrust allegations, which hinge on Zillow’s execution of NAR’s “No-Commingling Rule” to separate non-multiple listing service listings from MLS listings on its website."

- if anything, the evidence is clear of the value a local real estate expert provides.

- original article from inman found: Here

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