Harney: Zillow under fire for estimates

Emily Heffter, a spokeswoman for Zillow, dismissed Andersen’s litigation as “without merit.” A publicly traded real estate marketing company based in Seattle, Zillow has been offering Zestimates since 2006. Currently it provides them for upward of 110 million houses — whether for sale or not. Type in almost any home’s street address and you’ll likely get a property description and a Zestimate. The value estimates are based on public records and other data using “a proprietary formula,” according to Zillow.

The Zestimate feature is the cornerstone of Zillow’s business model since it pulls in millions of home shoppers, allowing the company to sell advertising space to realty agents. Zillow makes big money with the help of its Zestimates: In the first quarter of this year, it reported $245.8 million in revenues — a 32 percent jump over the year before — including $175 million in payments from “premier” agents, who pay for advertising.

Off the mark?

But there’s a flip side to Zestimates. Homeowners, real estate agents and appraisers have been critical for years about the valuation tool, citing estimates that too often are far off the mark — sometimes 20 percent or 30 percent too low or too high — and misleading to consumers. Zillow itself acknowledges errors. Nationwide, according to Heffter, it has a median error rate of 5 percent. Zestimates are within 5 percent of the sale price 53.9 percent of the time, within 10 percent 75.6 percent of the time and within 20 percent 89.7 percent of the time, Zillow claims.

A Zestimate “is not an appraisal,” the company says on its website, but instead is “Zillow’s estimated market value” using its proprietary formula.

Another way of looking at the Zestimate error rate: Roughly one quarter of the time, the value estimate is off by 10 percent or more of the selling price, and wrong by 20 percent or more 10 percent of the time. Though the 5 percent median error rate sounds modest, when computed against median sales prices, the errors can translate into tens of thousands of dollars — hundreds of thousands in high cost areas.

Also in some counties, error rates zoom beyond the 5 percent median — 33.9 percent, for example, in Ogle County, Ill., and 10 percent to 20 percent in a handful of counties in Ohio, Maryland, Florida, Oklahoma and Illinois.

Some appraisers are cheering Andersen’s suit and welcomed the idea of state by state legal challenges.

“They’ve been playing appraiser without being licensed for years and doing a bad job,” said Pat Turner, a Richmond, Va., appraiser. “It’s about time they got called on it.”

Kenneth R. Harney of the Washington Post Writers Group is a past member of the Federal Reserve Board’s Consumer Advisory Council and is currently on the board of directors of the National Association of Real Estate Editors. Reach him at KenHarney@earthlink.net.