CHICAGO CHAPTER of the APPRAISAL INSTITUTE

Zillow’s Ballpark Values Raise Concerns for Consumer Misuse

A Web site offering free home-value estimates and data on more than 60 million houses in the United States that was launched in beta February 8 proved so popular that its server crashed. Its instant popularity has some in the appraisal profession concerned that consumers may misinterpret or rely on the information too heavily, despite its limitations as an automated valuation model.

Internet users visiting Zillow.com can enter their address to get their home's "Zestimate," the term the company is using for home valuation estimates calculated through Zillow. The "Zestimates" are updated daily using the company's compiled public data and an algorithm created by its statisticians to reflect the current market value.

Zillow's founder and CEO, Richard Barton, and company compare Zillow to a "Kelly Blue Book" for real estate. "Like a Kelly Blue Book, we're not saying it's an end-all be-all," company spokeswoman Amy Bohutinsky said. "It's not an appraisal – it's just a starting point to enable people to become smarter about the buying and selling process."

The prices, which the company says are within 7.2 percent, are based on tax information, prior sales of homes and comparable transactions in the immediate area. Due to those parameters, the company said its offerings are slimmer in the low- and high-end markets, and on the east coast, especially New York.

Appraisal Institute President Richard D. Powers, MAI, SRA, of Keene, N.H., lives in an area that does not yet have listings on Zillow, but reported that other Appraisal Institute board members who referenced the site found some houses that were as much as 40 percent off, either high or low, and some found inaccuracies in their home’s attributes. While the average may be 7.2 percent, he says, it is the listing at the far end that have the makings of disaster if the homeowner doesn’t follow-up with a qualified real estate appraiser to verify the data. “What AVMs miss is that they don’t have the opportunity to use judgment,” by which he means “the ability to go through the property to identify the attributes that constitute value for the consumer” such as recent upgrades, modernized appliances, floorplan utility, and the age and condition of areas such as a basement or detached garage.

In addition, Powers said an AVM doesn’t search for other detriments to the property, such as potential easements, zoning issues, encroachments and problems associated with the neighborhood.

Appraisal Institute past president Alan Hummel, SRA, also checked the site, in his case, against seven actual sales in seven different parts of the country. Hummel found that the closest Zillow came was 17 percent high and that most were off by more than 30 percent (high and low). He also found one that was valued over by 112 percent. To combat this misinformation, Hummel is considering taking an ad out on Zillow “so that when the property owner wants to be truly informed, they'll know who to call,” he said. The move fits Zillow's business model, which is to make their money off of advertising rather than the listings themselves.

Zillow differs from HouseValues, HomeSmartReports and other online valuation tools in that it does not require site registration to gain free access and also by enabling users to alter their estimated value reports based on changes or additions to the house. For example, a seller with a recently remodeled kitchen can refine the home's value based on the change. In this way, consumers potentially could use the site's tools to figure out whether a remodeling project would boost their home's value, Barton said.

Barton also created online travel giant Expedia, which transformed the traditional travel industry by using the Internet to offer travel information directly to consumers. The Seattle-based company is now positioning itself as a provider of research tools and information to help real estate consumers perform more research on their own.

The ease of access and malleability of some of the material could be a wolf in sheep’s clothing, according to Powers. “The real danger here,” he said, “is that someone will make a real estate decision based on the site rather than getting someone to perform an actual appraisal.” For example, Powers said, while users can compare their home with what the site deems a comparable, an AVM doesn’t verify those comparables with market participants, such as a Realtor or the appraiser who did the prior homes. “The consumer can look at pictures, but they’ll have a hard time assessing” the applicability of a comp, he said.

In a January interview with Inman News, Barton said Zillow will not operate as a brokerage or agent, though he does expect real estate business models to change over time as consumers become more knowledgeable about the home sale process. "Consumer behavior has begun to change… people are using the Internet to help them in the (home buying process)," he said. "I've found that in other industries behavior change leads the business model change. I'm not implying that we have some new commission model figured out, but it feels to us like … Realtor services are going to be unbundled a bit."