Zillow Storms the Real Estate Industry

by Bernice Ross, Ph.D. MCC
Owner, Teleclass4U.com, LLC and RealEstateCoach.com

Copyright © 2006
RealEstateCoach.com and Teleclass4U.com
All rights reserved in all media.

A hurricane on the magnitude of Katrina has just hit the real estate industry. Did you notice?

Since its recent launch, the real estate industry has been buzzing about a new website called Zillow.com. According to Alexa.com, an Amazon website that ranks web traffic, Zillow has rocketed to the top 200 websites in the world. That’s higher than Realtor.com or any other real estate website.

How did Zillow zoom to the top in real estate web traffic? First, Zillow’s founders identified what the consumer wants when they visit a real estate website—access to listings and to comparable sales data. Second, Zillow’s President was the founder of Expedia. This well-funded team understands web marketing. Third, the real estate community has been shaking in its boots—would Zillow be the next frontal assault on the full service model? Would Zillow lead to more commission compression? These questions have had brokers and agents alike flocking to the Zillow website to see how this new business model will influence their business.

If Zillow is successful, Realtors® will have to redefine their value proposition. Ever since its inception, Multiple Listing Services have provided important sales documentation that was not available to the general public. Zillow provides not only comparable sales data, market statistics that show whether prices in a given area are increasing or decreasing, it also provides its Zestimate of how much a given property is worth. The market data is particularly useful information for Realtors® to know because it can assist them in helping sellers to set accurate list prices. It can also assist buyers in identifying how much they should pay. Where Zillow faces major challenges, however, is providing accurate values for its “Zestimates.”

Ultimately, Zillow’s success will rest with how well its algorithms evaluate comparable sales data and then supply an accurate sales price. The problem with Zillow’s model is that there are several other companies who are doing a better job of supplying accurate comparable sales data. Sadly, virtually no one seems to have noticed.

Over the last six months, several new companies have entered the realm of providing comparable sales information on the web. The first entry into this foray was Trulia.com. Trulia’s goal is to become the Google for the real estate industry by working with brokers directly. This so-called “vertical” search engine will direct visitors to specific agent sites based upon the user’s search. In other words, rather than using the general Google search engine that generates lists of nursing homes when you search “homes for sale,” Trulia.com will direct its users directly to agent sites that match the client’s search request. This increases the accuracy of the search. According to Greg Sterling, an analyst with the Kelsey Group, this produces a better qualified lead as compared to leads generated by Google, MSN, or Yahoo. The Trulia search engine provides comparable sales, links to listings, as well as a mapping feature. As Trulia.com works with more brokers, their data will become increasingly accurate. Since they launched in July, their beta search engine contains a fair amount of data from California and New York, but is still unavailable many places in the country.

Information on comparable sales is now available to the public through a company with its roots in providing comparable sale information for the appraisal industry. The former President of Dataquick, Mike Ela, has launched HYPERLINK "http://www.homesmartreports.com/" \t "blank" HomeSmartReports.com that provides accurate appraisal data on a seller’s home for $24.95. This detailed report not only helps sellers estimate their prices, it also includes information on the foreclosure rate, appreciation, as well as the high and low sales for the area. For $6.95, buyers can obtain information on comparable sales data on any home they are considering purchasing. With this report they also receive the assessed value of the property, the property tax amount, a report on foreclosure activity, sales volume, and a host of other information. The site also provides a mapping feature that plans the best route to show up to six properties.

For the last six months, I’ve been hearing commercials for a company called Moveup.com. They provide comparable sales data at NO charge for your personal property in states where comparable sales data is public record. (The “non-disclosure states” where this service is not available include Idaho, Indiana, Iowa, Kansa, Missouri, Montana, New Mexico, Texas, Utah, and Wyoming.) When you visit their website, they ask for your name, property address, and email address. Their search engine cross checks the public records to determine whether your name matches as being the recorded owner of the property address where you are searching. If these match, they send you all the comparable sales for your neighborhood. Unlike Zillow that sent me comparable sales data that did not match the properties I was searching, the information for Moveup.com was spot on. EVERY comparable sale was appropriate to the property I was investigating.

Will Zillow really make a difference in our business? Will they still be in business three years from now? What challenges does this new model pose? To learn more, see next week’s article, “The Problem with Zillow.”

The Problem with Zillow

It’s probably safe to assume that the early surge in Zillow’s traffic resulted from agents and brokers who fear what Zillow may due to their business. Are Zestimates (Zillow’s estimate of what your property is worth) something brokers should fear?

The billion dollar question for the real estate industry is whether computers can do a better job of accurately pricing property than experienced agents can. Like many other brokers, I decided to put Zillow to the test by evaluating the properties that I have owned in the past.

When it came to selecting comparable sales on my home in Austin, Zillow did not select a single comparable sale from within the subdivision where I live. While the price was off by about 15 percent, the comparables were so far away that they were useless. Furthermore, every single comparable sale Zillow selected had square footage that was only 50 percent of the size of my home.

After testing Zillow for Texas, I decided to see if there were any more accurate in Southern California. When I priced the properties that I used to own in Beverly Hills, Bel Air, and Brentwood, the Zillow algorithms gave them a premium value because the lots were over 2 acres. What Zilllow didn’t take into account was that each of these properties was not flat, i.e. the large lot size resulted from the property being on a ridge with a downslope. It also didn’t differentiate between those properties with views and those that lacked views.

These examples strike at the heart of trying to use a algorithm (mathematical formula) to establish value. The computer has no way to tell whether a house has a view, is on a down slope or flat lot, or is in good or poor condition. It can’t tell if a property has airplane noise or strange smells emanating from a landfill. Ultimately, pricing a property is more of an art form rather than a process that can be reduced to pure mathematics.

I was curious to see if any of the other tools did a better job than Zillow. I have been tracking values on my house in Los Angeles and was curious what it would be worth once we expand one bedroom and add another bath. I used Zillow and Moveup.com to determine which approach would give me the most accurate value. The Zillow algorithms allow me to program in a kitchen upgrade, increase the square footage, and add in a new bath. Zillow’s Zestimate told me that without the addition, the property was worth $448,000. By adding a single bath and expanding one of the existing bedrooms, the value jumped to $660,000. A 50 percent price increase seemed way out of line given the nature of the improvements. I then went to Moveup.com. Each of the 15 comparable sales was appropriate to the area. Moveup.com provided the sales date, the square footage, the price per square foot, bedroom-bath count, lot size, and whether the property had a pool. Even with this data plus a deep familiarity with the area, I still couldn’t nail down what the exact price should be.

The challenge was with the comparable sales that were available. Normally, I would do a price-per-square foot calculation. The rule of thumb is that you should only use properties that are within 10% of the same size for both the improvements and the lot size. In California, where the improvements are worth little and the lot is worth a great deal, you can skew the results by using properties that have square footage that doesn’t fall into the appropriate categories. Even with 15 comparable sales, none of them fell into the ten percent rule that I would normally use. The price per square foot ranged from $243 per foot on the low side to $626 on the high side. The high prices per square foot were for very small homes with the high lot values. (Smaller houses in areas where the land is valuable always sell for a higher price per square foot—larger houses always sell for less.) The low price per square foot was for homes that were twice the square footage of the smaller homes. Since our home would be in the middle of this range, the best comparable sales put the property value at $450 to $518 per square foot. On a 1300 square foot property, that’s the difference between $585,000 and $673,000. In truth, the only way to resolve where the property should be valued would be to personally visit the comparable sales or to hire an agent who works the area and knows property values.

The challenge with relying on computers to establish value is the difference between stagnant data that exists in a database and knowledge that relies on human experience and complex thought processes. In the Social Life of Information, John Seely Brown and Paul Duguid, make exactly this point. A computer relies on information. When it comes to real estate, this means the features of the property including bedroom-bath count, lot size, and floor plan. Even when two properties have identical floor plans, one may sell for more because of the beautiful landscaping, the privacy, or some other factor the computer cannot access. The value of these features is often more intuitive rather than quantitative. As such, computers may estimate values, but the estimates will continue to be flawed because there is no scientific way to value these other factors.

While Zillow has made a big splash, accuracy is still the name of the game when it comes to comparable sales. In those areas where the market is flattening or declining, over pricing can cost the seller thousands of dollars. Rather than bemoaning the fact that comparable sales are now available on the web, agents and brokers must be proactive in helping sellers to understand that sites such as Zillow and Moveup.com are a starting place in determining what their properties are worth. They must also be prepared to educate sellers about the challenges of relying strictly on information rather than a human being’s wisdom of experience.