For years, Mendocino County Realtors have had to explain to clients why their pricing recommendations don’t match the ones on Zillow. Countless sellers have said, “Wait, Zillow says my home is worth $500,000. Why are you only saying $450,000?!”
The answer is simple. Zillow uses an algorithm. No one from Zillow ever steps foot inside your home. Zillow has no way of knowing if the home has its original 1970s appliances or a brand-new kitchen from a recent remodel. Zillow “Zestimates” are based on information extrapolated from surrounding sales. Sometimes the estimates are good. Sometimes they are ridiculous.
Let’s say you live in Redwood Valley on a third-of-an-acre lot with a 2,000 square foot home built in 1947. Your neighbor’s 2,000 square foot home was built in 2017 on a half-acre. From Zillow’s perspective, those homes are comparable. The only difference is that one is a little newer.
What the Zillow estimate fails to take into consideration is that your home still has glass fuses with 75-amp service, no insulation, and single pane windows. (For the uninitiated, today’s standard amperage is closer to 200.) In 1947, no one worried about running a dishwasher, TV, computer, and clothes dryer simultaneously because many of those things didn’t exist. The house next door, on the other hand, has 200-amp service, thermal pane windows, and lots of insulation. Zillow, not having seen either house, cannot know just how different the values of these properties are.
Zillow was in the news recently because, sadly for them, they just learned the hard lesson many people in business have had to learn: it is generally best to stay within your core area of competence. Zillow’s core area was, in essence, advertising. They stepped outside of that and it cost them a bunch of money. Why? They succumbed to their own marketing hype.
They started a service called iBuying (or instant buying), where they flipped houses. They bought a bunch of houses in hopes of turning them around quickly for a profit. They were very successful at buying homes, not so successful at selling them for a profit.
The housing market can be fickle, especially when a pandemic upends the economy. Right after Zillow bought thousands of homes, people stopped buying. That sent the value of Zillow’s inventory into a tailspin. The market recovered reasonably quickly, and Zillow recovered along with it, but they misinterpreted the rebound as an indicator that the market would just keep going up. They reinvested their profits in more houses, but they misread the tea leaves and were left with houses they couldn’t sell.
What the people at Zillow failed to realize was that you don’t simply make a phone call and have carpet replaced in three days. You don’t get a new roof in two weeks. The marketplace of labor and supplies can be as fickle as the housing market itself.
In Mendocino County, if you want a quick turnaround, it helps to know people. And even relationships cannot speed things up if there isn’t enough labor or the supply chain gets interrupted. Zillow found out the hard way that delays are expensive. Zillow had a lot of equity tied up in properties, and they had to pay taxes, insurance, and maintenance on their holdings until they could sell. Even at today’s low rates, those expenses probably ranged from 1/2 – 3/4 percent of the house value per month.
Zillow CEO Rich Barton said in an interview it was probably best to exit the iBuying venture before it takes the whole company down. He acknowledged Zillow cannot trust its own pricing model; that’s quite an admission. He basically said he does not have enough confidence in Zillow’s estimates to put their own capital at risk. Wow, yet they are fine with others putting their capital at risk.
Here’s the bummer for local Realtors—everyone still checks Zillow, so Realtors have to keep advertising there. Ironically, Zillow buys market data from local Multiple Listing Services, which are populated by information provided by local Realtors.
Some people think Zillow was trying to manipulate the market. I don’t think so. The real takeaway here is that Zillow does not trust its own projections, and neither should you. Put your trust in local Realtors who establish value by touring properties and doing the legwork required to really understand the local market.
If you have questions about real estate or property management, please contact me at firstname.lastname@example.org or visit www.realtyworldselzer.com. If I use your suggestion in a column, I’ll send you’re a $5.00 gift card to Schat’s Bakery.
Dick Selzer is a real estate broker who has been in the business for more than 45 years.