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Are you familiar with a "Zestimate"?

Zillow CEO Spencer Rascoff may have recently given real estate agents a gift they wont 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 Rascoffs 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 $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 Rascoffs former home and the propertys 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 onRascoffs former home have certainlybeen overstatingthe propertysvalue, said Zillow Chief Analytics Officer Stan Humphries. The fact that we missed and there are empirical reasons we missed thats a great conversation that real estate agents should have with consumers, he said, citing the propertys irregular lot and locationon abusyroad as partly responsible for its Zestimates inaccuracy. But heexpressed hope that, in the same discussion, agentsalso wontinstill data nihilism in consumers, andthat they acknowledgethat humansalso can miss the mark.

Smaller gap at start

In July, theZestimate of Rascoffs former property wouldnt haveraised the eyebrows of anyone whos familiar with automated valuation models (AVMs). At $1.388 million, thepropertys 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 homes property page currently indicates that the propertys 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. 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 didnt 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 thepropertysZestimate, it was a failure. The homes 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 estatewould havesold his home for 40 percent less than it was worth.

Automated valuations vary

In addition tohighlighting the shortcomings ofZestimates, the Zestimate of Rascoffs home also brings into focus thepotential for some automated valuations to be more accurate than others. Unlike Zillows property page on the home the day after it sold, Redfins page on the home showed that the sale had occurred. At the time, it displayed a valuation of $1.1 millionmuch closer tothepropertys sales price of $1.05 million. On Thursday, May 5, Redfins estimate of the homes value was $1.3 million. Sowhile Zillows estimate had come down by around $140,000 since the home sold, Redfins 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 Rascoffs former home to its property page. Thepropertys 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 Zestimates accuracy based solely on the gap between thesales price of Rascoffs former home and its Zestimate would probably be unfair. The discrepancy isunusuallywide, according to what Zillow says is the Zestimates median error rate. Zillow puts the Zestimates national median error rate at7.9percent, meaning half of Zestimates nationwide are within 7.9 percent of a homes sales price and half are off by more than 7.9 percent.The listing portal claims an even higher level of accuracy inSeattle, where Rascoffs 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 Rascoffs homemissed by much more than normal in Seattle. Why was that? One reason is that thehomes Zestimate was comparing Rascoffs 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 Rascoffs home. Another reason was that Rascoffs 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, butwe havent 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 Rascoffs home represents the classic luxury homes problem. Zestimates cant 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 propertysvalue, but the Zestimate algorithm cant know and at this point in time, its not designed to know,she said. The reason why the Zestimate of Rascoffs former property hasnt dropped dramatically since selling at a much lower price than Zestimates leading up to the sale is that the Zestimates have a smoothing functiondesigned to keep themfromoverreacting to recent property sales. The Zestimate on the Rascoffs former propertywill gradually come down to more closely resemble its sales price. Andupcoming updates to the Zestimates 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 Zillows 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 Rascoffs former property and its sales price may have madeit easier for agents to seize that opportunity. Zillows Humphries hopesthat, when putting Zestimates in perspective for consumers, agentswill also acknowledgethat Zestimates do have a scientific basis, and thatnobodys perfect even trained professionals. He noted that a studyreleased by Zillow in 2012 showed that the typicalgap between a homes Zestimate and its sales price wasnt that much largerthan the typical gap between a homes initial list price which is often set based on areal estate agents recommendation and its sales price. We acknowledge humansare great at this, and were great too but theyre greater,Humphries said. Email Teke Wiggin. Editors 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 werent displayedon Zillow.

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