Zillow or Redfin: Which Value Estimate is Correct?
Technology is known for disrupting industries, so it should be no surprise that new technologies have been entering the real estate industry over the past 15 years. What started off as a rather clunky attempt to get into the real estate space has now become a juggernaut in the day-to-day real estate conversation with companies like Zillow and Redfin. The deep pockets of these tech companies have dramatically increased their marketing exposure evident by the many TV ad spots during the recent Winter Olympic Games.
Zillow and Redfin economists have seemingly become the go-to authority for the media when discussing real estate trends and forecasting, while the online valuation estimates now play an exponentially more influential role to both buyers and sellers. With so much inertia behind this technology, I think it is timely to discuss its impact to home values and the data that drives it.
The Real Estate Market Before Technology Disruption
I’ve seen real estate change over my 17 years in the business. In my early days, the MLS was almost a DOS operating system that took almost a programming background just to navigate the key commands and data - that’s the closest I’ve come to coding! There were minimal pictures (if any) used to market a property and buyers had to visit a home to see the attributes, floor plan, etc. You found the homes via newspaper advertisements, the Open House Guide on weekends, and through your Realtor. And then there’s the part about actually showing the properties…Cars didn’t yet have navigation systems and smart phones with Google Maps didn’t exist. Getting lost driving around neighborhoods was sometimes part of the adventure, and often denoted the good Realtors from the less knowledgeable Realtors. For buyers, researching property history or stalking a seller online wasn’t an option. It’s safe to say, the technology disruption in the real estate market is for the better.
The Real Estate Market Now
Today, there is practically unlimited amounts of data online about a property and seller. There are tons of pictures, descriptions of the property, floor plans, maps, etc. You can learn about your neighbors (demographics, names, income levels, etc.), history of the home (building permits, county records, transactions, etc.), and what everyone is saying online about the neighborhood and property. You can spend hours perusing the data and even look at an online value estimator, which inevitably becomes part of your knowledge base of a property. There is so much online information of properties today that once a buyer becomes the homeowner, most prefer to remove the digital footprint of their home by removing all information on the internet: pictures, descriptions, etc. New homeowners want privacy about their purchase and it’s a balance that hasn’t been figured out with the online real estate companies.
What People are Saying: Zillow vs. Redfin
It’s like Coke vs. Pepsi, everyone has an opinion, and I have noticed a clear distinction between who uses Zillow verses Redfin. Although there are several more similar companies, these are the two most popular real estate websites amongst my clients, so that is what I will address. Most real estate professionals do not adhere to one website or the other, since the value estimator is something that professionals do not find an accurate gauge of value. To be fair, even Zillow and Redfin say that their home estimates are a starting point in determining value and not an official appraisal or replacement for a professional market analysis. Your go-to website tends to depend on if you are a Seller or Buyer.
Sellers tend to be more excited about Zillow data and believe the price estimate is more accurate. No surprise, Zillow estimates tend to be higher than Redfin. Sellers try to add information to the website to pump up their value: remodeling information, features, pictures, etc. A Seller will even start adding information to Zillow before selling their home to proactively get the online value up. Buyers tend to utilize Redfin tools, which I think has a more user-friendly interface. Redfin price estimates tend to be lower than Zillow from my many anecdotal examples and experiences. Redfin tracks the activity for a listing, such as number of page views and clicks. This “Hot Home” feature is interesting because it encourages Sellers to list their home below value to get more internet traffic, thus becoming a hot home and getting more Buyers aggressively excited about it.
How Do the Algorithms Work?
The algorithms are proprietary formulas, so we don’t know exactly what goes into the calculations, but we do know they use hundreds of attributes and variables about properties and neighborhoods in addition to the number of clicks on a listing and engagement. The two competing companies vary in their data analytics, but both have the same goal in mind – to have accurate tools for both buyers and sellers. Both update property estimates daily based on their algorithm and assert their accuracy percentage. However, I am a big believer in questioning data: is there cognitive bias, fallacies, data bias, etc? For example, if a home value changes 10 percent in a week, is that driven by the property fundamentals or more impacted by social traffic, such as more clicks on the property? If a property gets more clicks, does that directly correlate to receiving more offers in the real word or just people window shopping online?
When homes go on the market, I have noticed the estimates can change rather dramatically. Redfin even states that, “Individual estimates are likely to change more frequently in dynamic, fast-paced markets.” So, it begs the question, how fast does a home value actually change? I argue that the algorithm likely puts a high emphasis in the amount on page views. Though I doubt they have a way to determine how many of those clicks translate into aggressive offers verses casual lookers or offers since neither company tracks number of offers actually received on a property. I highlight that point because in our dynamic market, I often see quite a range of offers in price, terms, and aggressiveness. Just because you get five offers on a house does not mean they will all be in the same price range.
There are many variables that impact sales price, which is why Zillow and Redfin state it is a starting point.
Real estate is not fluid like the stock market. The data set (transactions)is much smaller, and decisions are made differently than if an institutional investor were to buy or sell a property. Buying and selling property is an emotional experience and often driven by motivating factors including family dynamics.
Unlike valuation algorithms, certified appraisers need closed transactions and actual support of comparable properties to determine value. Appraisers consider appreciation stability rather than what is happening in the moment. Just because a neighbor sells for a specific price, doesn’t mean you will get the same price. Variations in condition, floor plan and natural light, are just a few factors that impact value.
Zillow states that “Zillow does not offer the Zestimate as the basis of any specific real-estate-related financial transaction. Our data sources may be incomplete or incorrect; also, we have not physically inspected a specific home. Remember, the Zestimate is a starting point and does not consider all the market intricacies that can determine the actual price a house will sell for.” Even though Zillow states their valuation in this manner, I believe Redfin has similar limitations. They are both great tools as a starting place and their tools are valuable to both buyers and sellers, but to use their online valuation algorithm as anything more than a starting part becomes problematic.
Zillow or Redfin: Which one is more accurate?
Neither should be considered an end-all to value or the sole tool you should use to determine a final home price. It is a starting point and “not a substitute for the in-person expertise of a real estate agent or professional appraiser,” according to Redfin
It is based on information that they currently know in their analytics and both admit that it may not be accurate. Though both websites offer amazing tools to both Buyers and Sellers, the price estimator should be used with caution as both companies suggest.
As a real estate professional and Broker, I am pleased with how the real estate industry has changed with Zillow and Redfin. It has enabled my clients to ask better questions and be more prepared. It has created a collaborative environment where I can work with my clients, not at them, to reach their ultimate goals. The amount of information available for a specific property has created more productive conversations on homes and has made the home selling and buying process more dynamic.