Trusting Zillow Could Be Costly

By MICHAEL EDLEN | Special to the Palisadian-Post

I recently received a call from a local homeowner asking if I would like to list her home for sale. She explained that she had done her research and wanted us to do the same type of marketing we had done so successfully for her neighbor.

She also already knew how much her property was worth, and if we would be willing to put it on the market a bit higher than that, rather than slightly below what it was worth, as the neighbor had chosen to do.

She was surprised when my response was to ask several questions, rather than to come right over to do the listing paperwork. It quickly became clear that her decisions were mainly based on what Zillow had indicated her home was worth that day, which was $200,000 more than she recalled it said a few weeks earlier.

She did not want to delay getting it on the market while it was worth so much more and was not even willing to consider our team counseling on any preparations we could recommend to achieve top dollar.

When I gently suggested that at least it could be to her benefit for us to do a comprehensive market analysis before settling on a listing price, she reacted rather negatively because: “Everyone knows Zillow impartially does instant evaluations based on detailed online analytical processes, so why waste time trying to come up with some other numbers?”

I asked her if she thought it was reasonable to for her home value to fluctuate as much as 5 to 8% in less than a month, especially in a market where prices generally had been trending upward at an average rate of 1 to 1.5% per month.

The conversation continued for several minutes longer, until it became clear to her that her home would not likely sell for nearly as much as the neighbor’s had because her home was not as updated, had a smaller yard and did not enjoy as panoramic a view.

I offered to do her the courtesy of verifying what other online evaluation systems showed as theoretical current value of her home so she could compare them with Zillow and then reconsider the whole idea before concluding that she would like to rush to get her home on the market.

It was interesting to note that there were six different online evaluation sites that had varying estimates of value for her home, ranging from $2.7 to $3.25 million on the same day.

We have written previous articles explaining about the algorithms those sites use and why they are mostly reliable in areas such as large tracts where most of the homes are quite similar in age, size, condition and lot size. Clearly most of the Palisades areas have a wide variety of homes, including varying qualities of view and location.

While a general idea of approximate value can be derived from a review of several online evaluation sites, most people would agree that a professional comprehensive market analysis would usually be far more reliable as a basis to make pricing decisions. If an agent is quite familiar with the specific neighborhood and has seen insides of most of the homes that are on the market, as well as the ones that sold over the last couple of years, they would be far more likely to have a more accurate assessment of probable value than would a computer algorithm.

The lady asked if I could explain, though, why Zillow has been held in such high regard by so many people, and why everyone seemed to use it if it wasn’t reliable. She had not been aware of what had happened to Zillow’s earnings late last year, when they reported losses of $420 million.

What had happened was it had relied on its own algorithm in a strategy to make all-cash offers on homes and then sell them shortly after at a profit. It ended up overpaying for homes and overestimating what they would be worth when it went to sell them, thus incurring massive losses.

In fairness, there were other factors that contributed to the extremely negative results, such as delays in getting the homes ready for marketing and costs increasing due to COVID period material price increases.

Without getting into the technical aspects of how the algorithms work, they are a form of machine learning, which of necessity have to assume that what has been happening will continue to happen. As most of us know from the recent market slowdown in reaction to interest rate changes and other extraneous factors, what had been happening is no longer the case.

If real people do not carefully monitor what is going on in the real world, the computer models are not likely to be updated quickly enough to reflect the new realities and relationships between all the variables being measured.

After having discussed some of this with the caller, she decided to shelf the idea until and if the market might continue to rise for at least another few months when she would hope to achieve close to what her neighbor had gotten on his sale.

In the meanwhile, she did ask for a set of our seller guidelines so she could at least think about some of what might realistically be involved in the process. In turn, I offered to keep her informed from time to time about what the general market was doing, regardless of what Zillow might or might not reflect about her property value.

Michael Edlen has been a trusted real estate advisor to thousands of local residents since 1986. He can be reached at 310-600-7422 or michael@edlenteam.com.