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September 27th, 2015 by John Majalca
We know Zestimates aren’t exactly accurate, but new real estate investors rely on those numbers all too often.
Zillow states on its website that it is a “useful starting point” to assist home-buyers with valuing real estate properties. Some real estate investors say that though Zillow is indeed a data resource, it can mislead investors about the real value.
They claim that Zillow Zestimates seldom reflect what is happening on the ground in neighborhoods that they know well. However, some new real estate investors seem to rely on Zillow as their main starting point for property values.
Close examination suggests that Zillow might not be a good tool for gauging real estate investment property values.
The Washington Post reported in February that the error rate for Zestimates “can be high.”
Another article in the same paper states that Zillow’s predicted values “are wildly inaccurate and inconsistent.”
The fact is that the Zestimate utilizes data pulled from public records and some homeowners; even Zillow states that its values are mere estimates. However, many investors fail to scrutinize the fine print and take those numbers at face value.
Those investors should note that Zillow is just a listing aggregator. It largely lacks local MLS data, though CEO Spencer Rascoff stated recently that this is changing.
Still, in reality, Zillow is pulling sales data from many secondary databases that are not frequently updated. Therefore, it might take a month or longer for local neighborhood price changes to show online.
A good example of the skewed data that Zillow can rely on is shown in the following example. A house in San Antonio, Texas, in the 78201 zip code was bought by an investor for $65,000 cash in July 2015.
It sold with owner financing for $99,000 five weeks later. Zillow stated that the value is $74,100. That price is more than the investor paid by $10,000. And the owner finance sale was not reflected in the Zestimate because it was an off-market deal.
Many real estate investment purchases are done in this fashion: off-market sales are NOT reflected in Zillow data.
This article on Zillow.com states that it has a median error rate of 8 percent. This statistic suggests that Zillow might not be an effective way to price real estate investments.
Zillow can be a useful starting point for property values, but if a real estate investor wants to obtain accurate real estate investment property prices, there are better options:
You should target an active investor who does 50 or more deals per year in your chosen neighborhoods. They will most likely know what prices are like right now.
An experienced and successful investor (or turnkey provider) in your market could be the ticket to getting a real estate deal at the best price.
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