How Zestimates Cost Zillow Millions of Dollars
You may or may not have heard that Zillow recently announced that they were shutting down their home buying business, Zillow Offers and laying off 25% of their workforce. Let’s break down what this service intended (and failed) to do and why this failure is proving the point that every local realtor has been saying (maybe yelling?) for years, “ZESTIMATES ARE NOT HOME APPRAISALS!”
In 2018 Zillow began their iBuying program, Zillow Offers with the intent of getting home sellers “stress free” cash offers on their homes. Sellers saw this as an opportunity to have a hassle free process, a way to eliminate agent commissions, as well as shave time off the process. While the iBuying process is quick – it would still cost sellers 5-7% of the sale in a “transaction fee”, which is a wash, as it compares to agent commissions.
This iBuying process, in theory, would eliminate agents and open houses because Zillow would purchase the home for what they decided to offer and then they would make minimal repairs and minor renovations to turn around and sell it for a profit. While the Zillow Offer and the Zestimates would differ (because the offer will take into account the money they will be putting into the home to get it ready to go back on the market) Zillow still used their Zestimate tool in order to put together their offer.
Well, guess what happened? They were forced to sell the houses they had bought, for a loss. Not just in some markets, but in the majority of the markets where the service was offered. In the last three months alone, they lost $420,000,000 trying to flip the homes they had purchased. How could that happen?
Well, their CEO Rich Barton said, “Fundamentally, we have been unable to predict the future pricing of homes to a level of accuracy that makes this a safe business to be in.”
How were they forecasting the home prices? Algorithms. Leaving it up to technology to determine the price of the homes and market prediction. As any “boots on the ground” Real Estate Agent will tell you, pricing a home has an incredible amount of nuance. Leaving it up to a computer that has no ability to adapt for nuances in certain markets is clearly going to lead to problems.
This whole situation begs the question, are Zestimates at all accurate? Mike DelPrete, an iBuying Real Estate analyst, was quoted saying, “This is really a toy… This is to stimulate people’s interest in property.” We’ve said it before, we will say it again – Zestimates are not a home appraisal. And Zillow says on their website, “It is a computer-generated estimate of the value of a home today, given the available data. We encourage buyers, sellers and homeowners to supplement the Zestimate with other research, such as visiting the home, getting a professional appraisal of the home, or requesting a comparative market analysis (CMA) from a real estate agent.” So it is safe to say that Zillow has proven the point for us that Zestimates are not accurate.
Other popular iBuying sites (Redfin, OpenDoor, Offerpad, etc…) are still at it and we are sure that some form of this type of home selling will remain in our current landscape. There may be situations where using a service like this to sell your home makes more sense than a traditional method. As we mentioned, it can be a very quick process. There is also the appeal of not having to have your house “show ready” during the selling process. The convenience of it cannot be argued against. Depending on the situation you are in, it may make sense for you to go the iBuying route. Seeking professional guidance is the best way to get informed and discover which selling method will be best for you.
The Real Estate industry is changing and has been forced to evolve with the times. Despite the changes, we feel it remains true – a real estate professional that knows a local market will net sellers more money for their homes. Home valuation cannot be done with artificial intelligence – for now, it needs to be done with humans. As a Real Estate Brokerage, we pride ourselves on having a team full of local professionals that will be with you every step of the way. If you would like to read more about this iBuying topic, this is a great article that digs into the Zillow situation. We would also be happy to talk to you about the iBuying process and if it is right for you, even if it does eliminate our role in your journey. We want all of our clients and potential clients to do what is going to be best for them.