Zillow fiasco teaching homebuyers and sellers 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.
However, determining a home’s value or property pricing is a delicate process — not something easily accomplished at the push of a button.
Problems with the company's estimates forced it to shut down its home-buying business and lay off a quarter of its staff. Zillow stock plunged 80% from its peak value.
Here's why it was so hard for Zillow to accurately predict home prices and what you can learn for when you buy, sell or refinance.
What went wrong at Zillow
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 its Zestimates would serve as the initial offer price on eligible homes. That didn’t last.
The company announced last year 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
One lesson stands out from the Zillow fiasco: Property pricing and 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
Get an appraisal
While not legally required, your real estate agent will likely suggest you get an appraisal and include an appraisal contingency in your offer.
Plus, lenders 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 from them.
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.
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.
Run an Impact Check report
With our free tool at your finger tips, you can see if there are any current or future impacts to the potential home or property you are considering purchasing. You can also purchase an Advanced Check report to learn about all details found in the free report. This report can bring to light information your real estate professional may not be aware of.
You owe it to yourself to to exhaust every possibility to research and learn about the home or property you are considering purchasing.
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