Homebuyers and sellers: What Zillow’s fiasco can teach you about property pricing

 Homebuyers and sellers: What Zillow’s fiasco can teach you about property pricing

Homebuyers and sellers: What Zillow's fiasco can teach you about property pricing

Homebuyers and sellers: What Zillow’s fiasco can teach you about property pricing

If you’ve ever wondered what you could get for your home, you probably pulled up the real estate listing site Zillow to check its Zestimate — the popular algorithm-fueled pricing tool that estimates values for millions of homes across the country.

Those estimates, however, are facing new scrutiny amid the company’s recent financial woes that forced it to shut down its home-buying business and lay off 25% of its staff.

Why was it so hard for Zillow to accurately predict home prices? And what can you learn for when you buy, sell or refinance into a lower mortgage rate? To be sure, determining a home’s value is a delicate process.

What went wrong at Zillow

Two nice looking houses with blue sky as a background  in a sunny  day.

romakoma / Shutterstock

In 2019, Seattle-based Zillow launched its iBuyer business, called Zillow Offers, to purchase homes directly from owners, make repairs and put them back on the market.

Zillow was so confident in its pricing algorithm that it said earlier this year its Zestimates would serve as the initial offer price on eligible homes. That didn’t last.

The company recently announced that it was exiting the iBuying business. In a quarterly earnings call, CEO Rich Barton said Zillow was unable to correctly forecast future home prices amid volatility in the pandemic-driven housing frenzy.

Indeed, an unexpected desire for new housing by work-from-home Americans, combined with ultralow mortgage rates, drove U.S. housing prices to new highs.

Rick Sharga, an executive with RealtyTrac, says Zillow’s business model was flawed, noting on his company’s site that house-flipping investors often pay too much and underestimate the time and cost to ready a home to sell.

“Zillow Offers appears to have made both mistakes and done so at a large enough scale to result in hundreds of millions of dollars of losses,” Sharga writes.

The best ways to determine a home’s value

Side View Of Serviceman Examining The Edge Of Closed Door With Torch Light

Andrey_Popov / Shutterstock

One lesson stands out from the Zillow fiasco: Property values can change fast. Do your homework on fair market value.

Find a qualified real estate agent

Your real estate agent must know your neighborhood. Good realtors analyze recent similar property sales to recommend a list price, says Corey Burr of TTR Sotheby’s International Realty in Washington, D.C.

“I don’t know any seasoned agents who depend on the Zestimate for a pricing recommendation,” Burr tells MoneyWise. “But because the marketplace is so familiar with Zestimates, it often would be discussed relative to what buyers’ expectations of a property might be.”

Get an appraisal

Your lender will require an appraisal when you take out a mortgage — and sometimes for a refinance — to ensure the house or condo is worth the amount you want to borrow.

An appraiser examines the home and studies market trends, along with other factors such as location and whether the house is in a flood zone.

In a rapidly appreciating market, it’s not unusual for an appraisal to come in below the price a buyer is willing to pay. In those cases, some appraisers are willing to accept additional information about the local market and revise their valuation, Burr says. But if they’re not, the buyer and seller may have to renegotiate the price.

Look beyond computer-based valuations

It’s tempting to accept the prices spit out by private real estate websites — Zillow is one of many — but remember that those figures are simply estimates. Zillow even says buyers and sellers should supplement Zestimates with their own research.

With your realtor or on your own, compare a home with similar properties. Be sure to consider less obvious factors such as school zones. Two similar houses in the same area can have wildly different values if only one is zoned to a top-rated public school.

And as another point of reference, check the Federal Housing Finance Agency’s house price calculator, which projects home appreciation values for many areas.

More ideas to save

African American Accountant Doing Accounting And Tax

Andrey_Popov / Shutterstock

  • The best mortgage rates go to the borrowers with the strongest credit histories, so check your credit score for free to see if it might need some work.

  • If you’re carrying extra debts and need to boost your credit score, consider rolling your high-interest balances into a single, lower-interest debt consolidation loan to try to wipe out your debts sooner.

  • And even if your budget doesn’t allow for a lot of discretionary purchases, it can be surprisingly easy to wring some income out of the stock market. A popular app lets you invest in a diversified portfolio using just your “spare change” from everyday purchases. That’s money that could go toward a future down payment on a home.

This article provides information only and should not be construed as advice. It is provided without warranty of any kind.

Related post