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What the Zillow fiasco can teach homebuyers and sellers about property pricing

What the Zillow fiasco can teach homebuyers and sellers about property pricingIf you’ve ever wondered what you could get for your home, you probably pulled up the real estate listing site Zillow to check its Zestimate.

The algorithm-fueled pricing tool estimates values for millions of homes across the country and is a popular resource for homebuyers and sellers alike.

However, determining a home’s value is a delicate process — not something easily accomplished at the push of a button.

Problems with the company's estimates forced it to shut down its home-buying business and lay off a quarter of its staff. Zillow stock plunged 80% from its peak value.

Here's why it was so hard for Zillow to accurately predict home prices and what you can learn for when you buy, sell or refinance.

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What went wrong at ZillowIn 2019, Seattle-based Zillow launched its iBuyer business, called Zillow Offers, to purchase homes directly from owners, make repairs and put them back on the market.

Zillow was so confident in its pricing algorithm that it said its Zestimates would serve as the initial offer price on eligible homes. That didn’t last.

The company announced last year that it was exiting the iBuying business. In a quarterly earnings call, CEO Rich Barton said Zillow was unable to correctly forecast future home prices amid volatility in the pandemic-driven housing frenzy.

Indeed, an unexpected desire for new housing by work-from-home Americans, combined with ultralow mortgage rates, drove U.S. housing prices to new highs.

Rick Sharga, an executive with RealtyTrac, says Zillow’s business model was flawed, noting on his company’s site that house-flipping investors often pay too much and underestimate the time and cost to ready a home to sell.

“Zillow Offers appears to have made both mistakes and done so at a large enough scale to result in hundreds of millions of dollars of losses,” Sharga writes.

The best ways to determine a home’s valueOne lesson stands out from the Zillow fiasco: Property values can change fast. Do your homework on fair market value.

Find a qualified real estate agentYour real estate agent must know your neighborhood. Good realtors analyze recent similar property sales to recommend a list price, says Corey Burr of TTR Sotheby's International Realty in Washington, D.C.

“I don’t know any seasoned agents who depend on the Zestimate for a pricing recommendation,” Burr tells MoneyWise.

“But because the marketplace is so familiar with Zestimates, it often would be discussed relative to what buyers’ expectations of a property might be.”

Get an appraisalWhile not legally required, your real estate agent will likely suggest you get an appraisal and include an appraisal contingency in your offer.

Plus, lenders require an appraisal when you take out a mortgage — and sometimes for a refinance — to ensure the house or condo is worth the amount you want to borrow from them.

An appraiser examines the home and studies market trends, along with other factors such as location and whether the house is in a flood zone.

In a rapidly appreciating market, it’s not unusual for an appraisal to come in below the price a buyer is willing to pay. In those cases, some appraisers are willing to accept additional information about the local market and revise their valuation, Burr says. But if they’re not, the buyer and seller may have to renegotiate the price.

Look beyond computer-based valuationsIt’s tempting to accept the prices spit out by private real estate websites — Zillow is one of many — but remember that those figures are simply estimates. Zillow even says buyers and sellers should supplement Zestimates with their own research.

With your realtor or on your own, compare a home with similar properties. Be sure to consider less obvious factors such as school zones. Two similar houses in the same area can have wildly different values if only one is zoned to a top-rated public school.

And as another point of reference, check the Federal Housing Finance Agency’s house price calculator, which projects home appreciation values for many areas.

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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
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