Is Zillow committing real estate malpractice with Zestimate?
October 18, 2021 – I am licensed as an attorney and as real estate broker in Iowa. I have bought and sold real estate as an investment since the 1990’s. I follow no fewer than 25 real estate markets in the United States. I enjoy investing in real estate. I enjoy evaluating real estate for value. I focus particularly on Northern Minnesota, Iowa, the Outer Banks, Savannah and the Denver markets. I have been trying to locate a home for first-time buyers in the Denver market. I check the markets daily. As an investor and real estate broker/agent I am particularly concerned with what I see as massive overpaying for the product being offered. You could say I am a value investor who employs common sense and avoids buying based on the theory of a bigger fool.
To my friends and clients, I have been expressing thoughts about this overvaluation. Here they are.
October 17, 2021 is when I wrote the following passage in an email to a friend.
I’ve been thinking about Zillow and how buying homes by Zillow is affecting the various markets. As you know I follow over 25 real estate markets. I use various tools including Zillow, Redfin, Trulia and several for commercial offerings. Based on what I have seen in price action something is going on. There is no question about it that prices have dramatically risen and many beyond what I consider to be rational. I have been asking myself a single question. How much is Zillow and Zestimate affecting prices? Are people being fooled into the belief that somehow Zestimate knows the value of a home better than they can know? At this point it is anyone’s guess whether home buyers are fooling themselves.
Let’s assume something is affecting prices because the facts indicate prices increased by at least one-third in many markets that I follow.
Here is what Zillow says about itself and what it does.
“Our Brands & Businesses
In addition to the for-sale and rental listings on Zillow.com, we now buy and sell homes directly through Zillow Offers, helping people move with less hassle and more control.
Zillow Home Loans, Zillow’s affiliated lender, provides mortgage pre-approvals and financing; Zillow Closing Services, Zillow’s affiliated title and escrow provider, offers title and closing services; and Zillow Premier Agent offers support through a trusted network of real estate professionals.
Other consumer brands include Trulia, StreetEasy, and HotPads.”
Zillow is becoming a real estate broker-investor. Read the timeline; it is interesting. Zillow has been buying homes since April 12, 2018. Considering what has happened to home prices in that three-year period and the use of Zestimate.
Jan. 30, 2019 the million dollar prize was paid out to the person or team that created the algorithm that “estimates” the market value of homes. Zestimate is an opinion. An opinion by a broker and all those agents who use Zillow to advertise.
But what is the Zestimate and how can Zillow prove it is both accurate and a legitimate opinion by a real estate broker?
Or, is the Zestimate just a self-fulfilling prophecy of what the algorithm tells us. Meaning, it tells us how uninformed people buying homes are, how naïve they are and who are willing to overpay for them because “that’s the market price” and that is Zillow’s estimate of value? At what point is a real estate broker liable for expressing an opinion as fact when there is no legitimate explanation of why it should be believed to be a fact?
May 12, 2019 Zillow Offers begins to operate. That was a little over two-years ago. What’s happened to home prices in the past two years and does it make any sense to you that home prices would skyrocket during a pandemic?
Zillow put up a million-dollar prize payable to the winner of a contest to improve the algorithm Z uses to predict home values. The Zestimate is a registered trademark and IP of Zillow Group. Home buyers regularly say whatever the Zestimate is then that’s what the home is worth; irrespective of historical values. Zillow is taking advantage of naïve and lazy buyers. Many, maybe even most, homebuyers believe Zillow knows better than people who have been in real estate for twenty-plus years. It is the Zestimate that is skewing the values in the smaller markets. It is what I am experiencing in northern MN. The local agents are quietly raking in the dough at the expense of their clients. Zestimate, as far as I can tell, is taking values based on recent sale prices, and I don’t see where it takes into consideration the condition of the property, taxes, location, etc. So if everyone else is paying outrageous prices then that is what “the market is” and it “must be a fair price”. There is no such thing as a buyer’s agent. None exist.
May 13, 2019
Zillow Offers launches in its 10th market, delivering a new way for homeowners to sell their homes with greater convenience, control and certainty.
As of May 2019 Zillow was in no fewer than ten markets. Big markets I’m sure. Denver is obviously one of them. Look below, Zillow is adding markets and brokerages. An algorithm is not a person you can talk to it will never be held responsible when the next housing price collapse occurs.
I looked at a home for sale in Bass Lake in Itasca County, MN and they were asking just shy of one million dollars for it. A million dollars? Zillow estimates the value at $964,000; you could have bought this house for $400,000 a few years ago. The effects of Zillow’s algorithm seem to be widespread. The information being added by agents on Zillow is easily manipulated. As an example, the only price history shown is the listing in June 2021 at $1.2 million. No other previous sale’s prices are shown. The assessor’s estimate is not shown. I know how to look it up. The assessed value is $400,000. Zillow shows the real estate taxes, but that is on the assessed market value, not the $1 million. It’s misleading. This is what a bubble looks like. Small deceptions turn big profits and then bigger deceptions turn the greed mill until the music stops. And this time with Zillow turning the crank it is anyone’s guess at where this was going. I personally am not in any rush to buy anything right now.
Zillow Offers is an Enticement
Read below, there is no way Zillow Offers aren’t driving the market prices. What does that mean to you as first-time home buyers in Denver or any other market? I’m not sure. Yesterday I saw my fifteenth brand new Corvette all decked out. Fire engine red. The license plate was LVGHILF, or something like that. The message was clear, this guy was living the high life. I have seen two Ferrari’s, but so far no Lamborghini. I’ll continue to look, it’s coming to town; I am more than a little sure of it.
October 18, 2021: This morning a client sent this to me. (Z) – Zillow slid 6.4% in premarket trading, following a Bloomberg report that the company has temporarily stopped its home-buying service due to overwhelming demand.
Either buyers have figured out that Zillow is overpaying, and everyone wants in, or Zillow’s management realizes this is a losing proposition and said to the CEO, “STOP!”
Consider what that says about Zillow’s Zestimate of value. It tells everyone the algorithm is wrong and everyone is overpaying. Because if Zillow doesn’t believe its own estimate, then why should anyone else!
Zillow and its agents have to hope buyers don’t start doing due diligence and demanding an actual buyer’s real estate agent or else this might turn into a landslide.
If Zillow’s house buying is affecting the market by forcing prices to go higher, then that model should create tremendous opportunities on the way down, because Zillow won’t be interested in buying as prices drop and the crutch Zillow has become will no longer prop up the mountain of overpriced deals. I’ll guess that Zillow is only interested in buying on the way up. Take away Zillow as a buyer on the way down and prices will be in free fall.