Did Zillow Prove their Zestimates are Unreliable?

Will Zillow buy your house for cash? Nope. Not any more.

At the end of September, Zillow CEO and cofounder Rick Barton tweeted “Enjoyed talking about the future of #realestate w/ @INC: Virtual 3D tours + digital closings will be the norm. No mountains of closing docs to sign. Many will sell w/ an app, skipping the sweat & expense of preparing a current home for sale.”

His next tweet is on November 2nd: “Today is a tough day at Zillow. We made the difficult, but necessary decision to wind down the Zillow Offers operations and lay off 25% of the workforce.” 

Zillow won’t be buying any more homes in Minnesota – or anywhere else. 

According to its quarterly results, it purchased 27,000 homes using this method from April 2018 through September 2021, and sold nearly 17,000. During the third quarter, Zillow said it bought 9,680 homes and sold 3,032 of them, with the sales producing an average loss in gross terms of more than $80,000 per house. Based on estimates from Zillow disclosures, they will be pushing total losses on those houses to more than $550 million after third-quarter gross losses.

The fallout from this business venture doesn’t just point to the challenges in buying and selling homes for profit, however. It also highlights how hard it is to use AI to help make expensive, real-world decisions, particularly in an ever-changing market that can be hard to predict months or even weeks out, and with prices that can be based as much on feel as on clear data points. Zillow CEO and cofounder Rich Barton explained the shuttering of Zillow Offers by citing “unpredictability in forecasting home prices” that “far exceeds” what the company had expected.

Not only was Zillow overpaying based on faulty algorithms, the inability to detect market nuances and future prices, but they were driving up the local markets by doing it and pricing would be buyers out in an already low inventory market. Higher prices (inflation) also drive up taxes and insurance for homeowners. 

“Your estimates are unreliable” they were told by thousands of real estate agents around the country… but Zillow was too cocky to believe it. Then they did what could have been predicted by their solo focus on dollar signs, they jumped into the iBuyer market as they saw other tech companies taking advantage of this niche. As a local Real Estate Advisor, I quickly saw a trend in “Owned by Zillow” homes in Minnesota – overpriced. They bought too high, they now have holding/selling expenses and they are trying to recoup through listing homes higher than their market value.

Bye bye “Owned by Zillow” in Minnesota.

Even though local real estate experts have cautioned buyers and sellers about the inaccuracies of “Zestimates” and Zillow published “margins of error” on their website, Zillow remained so confident in its ability to use artificial intelligence to estimate the value of homes that it announced a new option in February 2021: for certain homes, its so-called “Zestimate” would also represent an initial cash offer from the company to purchase the property. Introducing Zillow Offers.  Just eight months later, however, the company is shutting down that business entirely.

Zestimate — which is not an appraisal, but a “computer-generated estimate of the value of the home today, given the available data” is artificial intelligence that can look at far more information, far more quickly, than a single human could when considering a fair price for a home, weighing factors like comparable home sales in an area, how many people are looking in a specific neighborhood and so on.

After the initial Zestimate, Zillow conducts an in-person evaluation of a property, determines the amount it deems necessary for repairs before it could resell the house, and then makes a final offer that may be adjusted for repairs.  But an algorithm plus a repair bill doesn’t replace the experience of a skilled real estate agent that can take one look at a house and in quickly pick out one or more critical factors of the valuation that just can’t be quantified in any database. There are also many unquantifiable aspects of putting a price tag on a home such as the emotional value of living in the neighborhood. These can vary from person to person, which makes it even harder to outsource a home valuation process to a computer.

Will this prove that Zillow is a reckless corporation that trusts data and big profits over the consumer and the local (small business) agents serving these consumers?

Will this failed flipping business finally prove to homeowners that hiring an experienced real estate advisor to do a skilled analysis of a property before selling is a skill worth paying for?

I hope so. 

There were a few winners… those homeowners that Zillow overpaid…but their gains certainly don’t make up for the massive market inflation. 

I’m not sad to see the “Owned by Zillow” signs disappear in Minnesota. 

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