There is no exact science to arriving at a 100% accurate value on a property, since no two houses can be 100% alike inside and outside, even two in a homogeneous development.
There are many accepted methods of valuation that consider a variety of factors in a subject property to arrive at a final number, including:
- Assessment by a municipality: Shelter Island follows NY State guidelines that aim to arrive at a market value based on comparable sales over the prior three years
- Appraisal by a certified appraiser: There are industry-accepted formulas used by appraisers that lending institutions and the government rely upon. In a home purchase, sales of comparable properties over the prior 12 months are examined
- Comparative Market Analysis by a real estate agent: It considers the prior twelve months of sales for comparable properties, the current market, as well as the near future. It is less scientific, however sellers, buyers and often banks (e.g. for bank owned properties) rely upon a “CMA” from an agent who is well versed in a particular market, as well as an appraisal.
In recent years, the popularity of real estate websites has grown, including Zillow, Trulia, and Redfin. Each has its own formula of valuation based on public sales data, municipal assessments, multiple listing services and input from homeowners online about their own properties.
The “Zestimate” home value is Zillow’s estimated market value for a home, calculated for 100 million + /- homes throughout the country. According to a Washington Post article in May, it is “the cornerstone of Zillow’s business model because it pulls in millions of house shoppers, allowing the company to sell advertising space… In the first quarter of this year, it reported $245.8M in revenue, a 32% jump over the year before, including $175M in payments” from real estate agents who pay for ads. Zestimates do not consider unique characteristics that set the home apart from others including site, views, renovations, landscaping and pools, among other amenities.
BusinessWire.com writes that Zillow “has used stockholder equity and realtor ad revenue to acquire key competitors… While Zillow forecasts 2017 revenue at $1.04 Billion, it has yet to show a profit.” In January of this year, Zillow acquired Realnet, its offshoot multiple listing service “Open Real Estate Exchange” and its website HREO.com (“Hamptons Real Estate Online”). Realnet is the database for over 40 agencies throughout the Hamptons, providing Zillow a wealth of historical information for this market.
Greg Hague, a real estate broker-attorney and writer for Huffington Post wrote: “Zillow is not what many perceive it to be… Zillow’s website is not designed to sell homes, it uses homes to generate traffic and revenue for Zillow.” He continued, “Zestimates hurt sale prices. Zillow typically displays its opinion of your home’s value on its website… Zestimates have been proven to be inaccurate. Zillow’s own CEO sold his home 40% different from the Zestimate value… If Zillow’s Zestimate value is lower than your asking price, this can cause buyers to pay less. Unfortunately homebuyers rely on Zestimate values because of Zillow’s big brand.”
Hague describes how his sister contacted him, “…her voice was strained and emotional, ‘Greg, my bank canceled my equity line because Zillow lowered the value of my home. Other houses in my neighborhood have appreciated. I just spent $60,000 building a barn. How can mine go down?” Linda is a retired police officer in Cincinnati. She lives on a pension. Her home equity line is a big deal, her financial lifeline. Turns out her bank relied on Zillow’s Zestimate to decide whether to renew her home equity line. They gave her a choice. Pay for an appraisal or lose the line.” Hague has a petition of over 16,000 signatures protesting Zillow which has been presented to the National Association of Realtors.
“Zillow itself concedes its automated math isn’t perfect,” the Washington Post article writes. “[According to Zillow] Zestimates are within 5% of the actual sale price about 54% of the time, within 10% of the sale price about 76% of the time, and within 20% about 90% of the time.” This summer, Zillow announced a contest with a $1M prize to whoever could improve their data science. As an example, a recent Shelter Island property closed at $725K. Zillow’s Zestimate for this property was $917,793, while Redfin’s valuation was $566,551. Several other recent Shelter Island sales are not listed on Zillow.
A homeowner in Illinois filed a lawsuit against Zillow, “claiming the company’s controversial Zestimate tool repeatedly undervalued her house, creating a ‘tremendous road block to its sale” according to the Washington Post… “The suit, which may be the first of its kind…alleges that despite Zillow’s denial that Zestimates constitute ‘appraisals,’ the fact that they offer market-value estimates and ‘are promoted as a tool for potential buyers to use in assessing [the] market value of a given property,’ shows that they meet the definition of an appraisal under state law. Not only should Zillow be licensed to perform appraisals before offering such estimates, the suit argues, but it also should obtain ‘the consent of the homeowner’ before posting them online for everyone to see.”
Susan Athey, an economist and professor at Stanford University said in a recent NY Times article that she is impressed with Zillow’s 5% median error rate for something as variable as homes, adding that Zestimates are valuable for making a market like real estate function more smoothly. “If individuals do not understand the market value of their property, they may pass over offers, making both buyers and sellers worse off,” Ms. Athey said.
“Even as they improve,” writes Nick Wingfield in the NY Times, “it makes more sense to look at internet home estimates the way we look at Yelp reviews of a restaurant – helpful but hardly the final word.”