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Are you familiar with a "Zestimate"?

Zillow CEO Spencer Rascoff may have recently given real estate agents a gift they won’t soon forget: a sure-fireway to showthat Zestimatescan miss by a mile. How? By selling a property formuch less than its Zestimate. On February 29, Rascoff solda Seattle home for$1.05 million, 40 percent less than theZestimateof $1.75 millionshown on its property page a day later. Thegap between the Zestimate of Rascoff’s former property and itssales price has decreased only modestly sincethen. Zillow readily acknowledgesthat Zestimates can be inaccurate, but someconsumers can still take them at face value, causing headachesfor agents.
Screen shot shows Zestimate of property formerly owned by Spencer Rascoff the day after it sold for $1.05 million

Screen shot shows $1.75 million Zestimate of property formerly owned by Spencer Rascoff the day after the home sold for $1.05 million

Citing the chasmbetween the sales price of Rascoff’s former home and the property’s Zestimate may be one wayfor real estate professionalsto showclients thatZestimatesare, as Zillow says, only a conversation starter for pricing a home, not the final word on its value.
PhilipGray, aSan Leandro, California-based appraiser, is taking this approach. Bringing up the Zestimate of the property Rascoff recently offloaded willhelp him deal withthe frequent pushback he receives from homeowners “whothink Zillow is the magic 8-ball,” he said.

‘We missed’

Zestimates onRascoff’s former home have certainlybeen overstatingthe property’svalue, said Zillow Chief Analytics Officer Stan Humphries. “The fact that we missed and there are empirical reasons we missed — that’s a great conversation that real estate agents should have” with consumers, he said, citing the property’s irregular lot and locationon abusyroad as partly responsible for its Zestimate’s inaccuracy. But heexpressed hope that, in the same discussion, agentsalso won’tinstill “data nihilism” in consumers, andthat they acknowledgethat humansalso can miss the mark.

Smaller gap at start

In July, theZestimate of Rascoff’s former property wouldn’t haveraised the eyebrows of anyone who’s familiar with automated valuation models (AVMs). At $1.388 million, theproperty’s Zestimate was 7.3 percent higher than its listing price of $1.295 million at the time. Since Zillow only shows revised historical Zestimate data on property pages, the home’s property page currently indicates that the property’s Zestimate was around $1.6 million in July 2015,somewhere in the neighborhood of$200,000 more than theZestimate that actually appeared on itsproperty page on July 17, 2015.
Screen shot showing historically revised February Zestimate of Rascoff's former property.

Screen shot showing historically revised February Zestimate of Rascoff’s former property.

For all anyone knew in July 2015, theproperty might have eventually sold at a price closer to its Zestimate than its listing price. But that didn’t happen. The home later sold for $1.05 million, 19 percent below its July listing price.Undergoing a number of price cuts, theproperty was listed and de-listed several times between when itwas originally listed on July 7, 2015 and when itsold on February29, 2016. If Rascoff thought his home was worth its July listing price, the outcome of thesalemighthave come as adisappointment.But ifthesuccess of the transactionwere judged by theproperty’sZestimate, it was a failure. The home’s Zestimate was $1,750,405 on March 1, the day after the property sold for $1,050,000. If that Zestimate were accurate, itwould mean the chief of the biggest name in real estate and the recentco-authorof a book about “the new rules of real estate”would havesold his home for 40 percent less than it was worth.

Automated valuations vary

In addition tohighlighting the shortcomings ofZestimates, the Zestimate of Rascoff’s home also brings into focus thepotential for some automated valuations to be more accurate than others. Unlike Zillow’s property page on the home the day after it sold, Redfin’s page on the home showed that the sale had occurred. At the time, it displayed a valuation of $1.1 million—much closer totheproperty’s sales price of $1.05 million.
Redfin property page of Rascoff's former property shows a home value estimate of $1

Redfin property page of Rascoff’s former property shows a home value estimate of $1.1 million the day after it sold.

On Thursday, May 5, Redfin’s estimate of the home’s value was $1.3 million. Sowhile Zillow’s estimate had come down by around $140,000 since the home sold, Redfin’s had increased by about $200,000. Both differed from the price the home sold for a little overtwo months agoby hundreds of thousands of dollars. Zillow has since added thesales price of Rascoff’s former home to its property page. Theproperty’s Zestimate had slipped from $1,750,405 the day after it sold to$1,608,670 on May 5, but itsZestimateon May 5 still only represented 65 percent of what the home sold for a little over two months before. To judge the Zestimate’s accuracy based solely on the gap between thesales price of Rascoff’s former home and its Zestimate would probably be unfair. The discrepancy isunusuallywide, according to what Zillow says is the Zestimate’s median error rate. Zillow puts the Zestimate’s national median error rate at7.9percent, meaning half of Zestimates nationwide are within 7.9 percent of a home’s sales price and half are off by more than 7.9 percent.The listing portal claims an even higher level of accuracy inSeattle, where Rascoff’s former home is located. There, Zestimates for half of homes are supposed to be within6.1 percent of their sales price, while half are supposed to be off by more than 6.1 percent. This suggests that the Zestimate of Rascoff’s homemissed by much more than normal in Seattle. Why was that? One reason is that thehome’s Zestimate was comparing Rascoff’s former home, which is located on a triangular lot, to recently sold homes located on rectangular lots, according to Humphries. Since rectangular lots provide more utility thantriangular lots, he said, that meant the Zestimate was overvaluing theplot of Rascoff’s home. Another reason was that Rascoff’s home was located on an “arterial” road while nearby recently sold homes sat on quieter streets. Zillow continues to research how to program Zestimates to account for such factors, but“we haven’t fully cracked the nut on that one” yet, Humphries said.

‘The classic luxury homes problem’

Zillow Senior Economist Skylar Olsen added that the Zestimate of Rascoff’s home represents “the classic luxury homes problem.” Zestimates can’t take into account “non-quantifiable facts,” such as layout design or lighting, and these facts can have muchmore of an effect on the values of luxury homes than less expensiveproperties, she said. Realestate agents can see howspecial features impact a property’svalue, but the “Zestimate algorithm can’t know” and “at this point in time, it’s not designed to know,”she said. The reason why the Zestimate of Rascoff’s former property hasn’t dropped dramatically since selling at a much lower price than Zestimates leading up to the sale is that the Zestimates have a “smoothing function”designed to keep themfromoverreacting to recent property sales. The Zestimate on the Rascoff’s former propertywill gradually come down to more closely resemble its sales price. Andupcoming updates to the Zestimate’s algorithms will adjust thesmoothingfunction so thatthe Zestimate of a home that sells will come to moreclosely mirror its sales price much faster. Also worth noting is that Zillow does not have access to sold listing data from theNorthwest Multiple Listing Service, the MLS that covers Seattle. Automated valuation models (AVMs)that crunchsold MLS datacan have an advantage over AVMs that only use public sales records —which are the only sales records used by Zestimates covering Seattle. While Zillow says on its website thatmost consumers understand that Zestimates truly are only estimates, the listing portal concedes that, sometimes, “someone will come along that insists on setting the price they are willing to buy or sell for based solely on the Zestimate.” Zillow goes on to saythat “education is the key” and that, armed with knowledge of how Zestimates are calculatedalong with their local median error rate, agents canexplain “why the Zestimate is a good starting point as well as a historical reference, but it should not be used for pricing a home.” WhileZestimates cancreatehassles for agents, some agents would certainly agree with Zillow’s assertionthatunderstanding how a Zestimate iscalculated,along with its strengths and weaknesses, “canprovide the real estate pro with an opportunity to demonstrate their expertise.” The gap between the Zestimate of Rascoff’s former property and its sales price may have madeit easier for agents to seize that opportunity. Zillow’s Humphries’ hopesthat, when putting Zestimates in perspective for consumers, agentswill also acknowledgethat Zestimates do have a scientific basis, and thatnobody’s perfect — even trained professionals. He noted that a studyreleased by Zillow in 2012 showed that the typicalgap between a home’s Zestimate and its sales price wasn’t that much largerthan the typical gap between a home’s initial list price —which is often set based on areal estate agent’s recommendation — and its sales price. “We acknowledge humansare great at this, and we’re great too — but they’re greater,”Humphries said. Email Teke Wiggin. Editor’s note: A previous version of this story incorrectly stated that has access to the Seattle MLS, and that showed status changes to a property that weren’t displayedon Zillow.

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