For years Zillow has been buying houses, but they have refused to use the Zestimate as their purchase price. The cards have now turned with Zillow announcing that the “Zestimate” is now the price they will pay for your house. How will this change allow Zillow to dominate the real estate dating game? 5 changes to real estate that will impact buyers, sellers, investors, and realtors.
Zillow will pay cash for your house based on the Zestimate
In the past, Zillow, would provide an instant offer based on an internal evaluation of your property and this number would not be the Zestimate. Now the real estate giant is putting cash behind its number-crunching, turning its often controversial “Zestimates” into offers to buy homes.
For more than 500,000 properties across 20 markets in the U.S., the company has added language on its websites and apps inviting owners to “sell to Zillow for your Zestimate.” When an offer is accepted, Zillow sends an inspector to make sure its information on the home is accurate, then pays cash for the property, makes light repairs, and puts it back on the market.
Before getting into how this new cash offer radically changes the real estate game, it is important to discuss how a Zestimate is calculated, when the Zestimate is most accurate and inaccurate, and highlight the properties Zillow is focusing on.
How is the Zestimate calculated
First Zillow (Trulia/Realtor.com, etc. use similar methodology) has a proprietary algorithm that estimates the present market value of a property. Zillow calculates this by comparing the subject property with similar properties close by. On paper, this sounds very plausible and theoretically should give an accurate assessment on value. How does this pan out in real life?
When is the Zestimate accurate?
The good news is that Zillow is pretty accurate in certain circumstances. Through my research, I have found that if a property is in a very uniform high-density area developed with similar houses on similar lots all of a similar age, Zillow is close on its valuation. An example would be certain subdivisions in Highlands Ranch (a master planned community on the South side of Denver) that were developed in the 80s and 90s where many of the houses look like each other. The valuation is not 100 percent since one house could have a brand-new kitchen and new windows, etc. versus a neighbor that has no updates, but it is typically in the range of the correct value (within 5-10 percent this could be high or low).
When is the Zestimate not accurate
The reality check: Zillow, or any other automated method, should not be relied on in many instances. I have seen Zillow off on their value by over 50 percent (higher or lower than market value). I will provide two examples (I could list hundreds). First, I recently inspected a property in the foothills of Denver. I looked at the subject property that I was going to lend on as well as several comparables. One of the properties I looked at for a comparable had a Zillow value of $315,000. When I drove by the comparable, it looked about the same size as the property that I was inspecting that was selling for $190,000.
Which houses is Zillow buying?
You guessed it; Zillow is buying houses where their Zestimate is most accurate. Zillow is focusing on the top 20 high density urban markets with mid-sized homes under around 500k in uniform areas.
Is Zillow competitive with their offers?
When the whole ibuyer trend was beginning, I think the various home purchasers were likely a bit low on their valuations. This has changed; a recent study shows that ibuyers now are within 1% off the true market value:
The new study from Mike DelPrete, a scholar in residence on real-estate technology at the University of Colorado at Boulder, found Opendoor and Zillow typically purchase homes for just over 1%, or around $3,800, less than the value of the home as determined by First American Financial Corp. , a real estate title insurance company.
“This has always been a fundamental question. Are they ripping people off or not?” Mr. DelPrete said. “You can say pretty conclusively iBuyers are making fair offers on the homes they buy.” (The Wall Street Journal)
The instant cash offers changes the real estate game.
With Zestimates now being cash offers and these offers very close to the market value, the instant offer will radically alter the real estate industry in the top 20 markets. There are five primary changes from instant offers.
- Floor Price: The instant offer is a “floor” price; you know now with high confidence what your house is worth today and can get it with the click of a button.
- Puts pressure on realtors: With sellers able to sell their house with the click of the button for very close to the market value of the house without the hassle of inspections, showings, negotiations, etc… this will remove allot of houses from the traditional sales market and put considerable pressure on realtors in the markets Zillow is operating. Along with Zillow multiple other companies are rolling out similar products in the same markets.
- Less houses available for fix/flip: Real estate currently is full of unknowns; you don’t know what your house is worth until you sell it/get an offer. With sellers able to know exactly what their house is worth now, it removes considerable opportunity to find a value.
- Powerful lead generation for Zillow: Regardless of how successful Zillow is in actually buying houses, the leads generated from someone clicking on the instant offer are invaluable. They can sell these leads or use them in house to market to the prospective sellers and encourage them to sell. It also drastically amps Zillow’s dominance of “real estate dating”
- Zillow rules real estate “dating”: Zillow is far and away the most trafficked real estate site. Now that they are buying houses in cash, they can easily become the leader in real estate “matchmaking”. For example, if you save a search of a neighborhood, Zillow can target that neighborhood for cash offers and then when they have one they instantly contact you for the purchase thereby ruling the real estate “dating game”. Furthermore, Zillow will capture 10%+ in transaction fees on the buy side and sell side since they are doing both and they can use in house realtors to keep their costs low and take this to the bottom line.
Zillow radically alters the real estate game with instant offers based on your Zestimate. This will enable Zillow to become the biggest player in the real estate dating game with its trove of data to easily match buyers and sellers at the neighborhood level. Furthermore, Zillow takes the biggest unknown out of the real estate equation, what is a house really worth, which will drastically reduce below market opportunities as buyers and sellers have better information. We are just at the beginning of the changes coming to real estate and Zillow is coming out of the gates far ahead of any competitors with their instant offers.
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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine, The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
Fairview is a hard money lender specializing in private money loans / non-bank real estate loans in Georgia, Colorado, Illinois, and Florida. They are recognized in the industry as the leader in hard money lending with no upfront fees or any other games. Learn more about Hard Money Lending through our free Hard Money Guide. To get started on a loan all we need is our simple one page application (no upfront fees or other games).