“I know the value of my house and I’m sticking to it!” exclaimed the property owner.
The new real estate investor sighed and took a step back, figuring negotiations for buying this house ended right there. Like many others, this Chicago homeowner had looked up his property on Zillow and found a valuation higher than what the investor offered. Even though he was in financial straits, the Zestimate gave the homeowner the gumption to hold out for more. This seemingly dead-end scenario happens frequently to new real estate investors, but it doesn’t have to cut off investment possibilities. As a regional investor Development Agent with HomeVestors®, I coach my mentees that finding a mutually-beneficial solution requires understanding the nature of Zillow data—and being able to explain it to intractable sellers.
Millions of homeowners check the value of their properties on Zillow every month and, while most understand that the website provides only a ballpark estimate, some take the numbers to heart. Sellers will sometimes insist on setting their home’s sale price based solely on information that they get from the website and refuse to budge in negotiations. They are not aware of how Zillow compiles property data to get the Zestimate or what that means for the accuracy of property valuations. But, investors who are in-the-know about Zillow’s data accuracy are better positioned to education sellers and engage them in a fair deal.
How does Zillow Figure Property Values?
Zillow gets its data from a variety of sources and, based on that, uses a proprietary algorithm to determine value estimates for properties nationwide. Fundamental property details, such as square footage, lot size, and sales histories come from public records kept by municipal government offices. Sometimes the listings are manually inputted by real estate agents when they put a property up for sale and advertise it on the site. Information on local schools and their ratings come from GreatSchools.org. Many properties listed on the website are also represented by photos which are derived from other companies like Bing, Google’s StreetView, or real estate brokerages. However, property owners can upload their own pictures as well.
While the information provided to property owners online is perhaps more comprehensive than what they could otherwise access without the help of a real estate agent, it’s accuracy is uneven at best. At root, the dependability of the valuation relies on the availability of data in each region. Some regions track less data in their public real estate transaction records or maintain records that are outdated. Sometimes public records can be missing altogether. When information is scarce, Zestimates are based on a larger—and potentially more diverse—geographic area than what real estate agents typically consider when evaluating comparable property values.
What Zillow’s Valuations Mean for Chicago Properties
Surprisingly, given the relatively high amount of real estate transactions in Chicago, Zillow’s property valuations for this area are less accurate than those of other major metropolitan areas. On Zillow, about half of the properties listed are Zestimated within 5% of the sale price, or true market value. However, of the 3.1 million Chicago homes listed on their site, about 30% are valued more than 10% off of the actual market value. In effect, there are around 930,000 Chicago homes listed on Zillow with values that are more than 10% off.
Let’s take a look at how such a large error in Zillow’s valuations can skew a homeowner’s understanding of what their property is worth. Let’s say a homeowner looks online and sees that their home is Zestimated to be worth $200,000. If we assume that the valuation is 10% away from of the actual selling price, there is a $20,000 disparity between what the seller is expecting to receive from the sale and what the property is worth on the market—that’s significant! Without knowing how Zillow works, the homeowner will not likely understand the real market value of their home. It takes a lot of communication to bridge the gap when approaching distressed homeowners facing foreclosure and make a deal when the seller’s expectations are so far from what the market will actually bear. A bigger issue is that Zillow does not know the actual condition of the property, and what repairs are needed.
Closing the Communication Gap with Sellers
Helping homeowners understand the information they find about their property on Zillow can be critical in successfully closing a deal. The HomeVestors® franchisees that I work with are better positioned than most to navigate a seller’s misunderstandings of property market value because the proprietary software, ValueChek™, helps them calculate repairs needed on the property, and determine the actual value of the house in its current condition. In addition, each franchisee is trained and supported in communicating this information to homeowners effectively and negotiating deals. And, if the franchisee needs support in moving the transaction forward, Development Agents like me are always on hand to provide guidance. Get in touch today!
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