Zillow Offers: Are They Putting Their Money Where Their Zestimate Is?

Zillow Offers: Are They Putting Their Money Where Their Zestimate Is?
Looking at Zillow's cash offers tells us how
good they think their own Zestimates are.

Zillow has gotten themselves into a bit of an awkward position with their new Zillow Offers program. They are now in both the business of providing ostensibly unbiased estimates of home values AND buying and selling homes. It's awkward because, on the one hand, if they determine home values using something other than their Zestimates then they are essentially admitting that their Zestimates aren't that good. On the other hand, if they do use their Zestimates then people would worry that there is an incentive for them to make their Zestimates low to help them buy homes or make them high to help them sell homes.

So what do you think Zillow did? When push comes to shove they rely on a real estate agent to come up with their home values. I think that tells you everything you need to know about just how accurate their Zestimates are. The folks that produce it don't even trust it! Here is how they explain it in the Zillow Offers FAQs:

We use the Zestimate as a starting point, then look at the information you provided about your home (current condition, recent updates) and the valuation of a local real estate agent. We factor in potential costs of renovations or repairs, and confirm or adjust our offer based on an in-person evaluation.

In other words "Our Zestimate doesn't mean squat because the computer has no idea what your home looks like."

Even so, Zillow is very conscious of the potential perception of a conflict of interest between these two sides to their business because look at the next FAQ: "How do we know you're not changing the Zestimate - making it lower so you can buy homes more cheaply, or making it higher so you can sell them for more?" And here is their answer:

The Zestimate is a computer-generated estimate of a home’s value based on millions of data points. It’s a trusted tool for consumers, and we take its credibility very seriously. Factors that can influence the Zestimate include homeowner updates to their home facts, the sale prices of recently sold nearby homes, changes in tax-assessed values and other updates or additions to independent public data related to the home. A Zillow Offer will not change the Zestimate.

In other words "Our Zestimate doesn't mean squat because the computer has no idea what your home looks like."

So how do their purchase and list prices compare to the Zestimates? I'm not in a position to do a comprehensive analysis of all their purchases but I did check out the history on the first 5 homes that showed up on my list in the Phoenix area (they are not in Chicago yet) that are owned by Zillow and are currently on the market. The results are summarized in the table below with the first column the Zestimate just prior to purchase, the second column the purchase price, and the last column the current list price. Keep in mind that the current list price might reflect one or more price reductions from the original list price.

Zillow offers pricing examples

The Zillow Offers program appears to ignore the Zestimate when buying and selling homes.

Clearly Zillow buys homes well above and below the Zestimate, confirming that they themselves don't trust their own black box.

The other interesting observation from these particular examples is just how thin the margins can be - especially considering the risk they are taking on and the carrying costs they are incurring. In fact, this is confirmed by looking at their reported financials. If I'm reading it correctly, the latest 10-Q shows a 4.7% margin - below what most people pay a realtor who doesn't incur either the risk or the carrying costs of ownership. Do they really want to be in this business?

#Zillow #Zestimates #HomeSelling #HomePrices

Gary Lucido is the President of Lucid Realty, the Chicago area's full service real estate brokerage that offers home buyer rebates and discount commissions. If you want to keep up to date on the Chicago real estate market or get an insider's view of the seamy underbelly of the real estate industry you can Subscribe to Getting Real by Email using the form below. Please be sure to verify your email address when you receive the verification notice.

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