Is Zillow wrong?

Should you use Zillow to value a property?   I’m commonly asked how do I value a residential or commercial property and further do I use Zillow in my analysis.  Zillow like many other valuation methods is questionable on its accuracy (see my blog to read about other valuation methods, assessed value, replacement cost, etc…. I was curious to do a little experiment in Colorado to see how closely Zillow matched the true market value.

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 to similar properties in a close radius to the subject property.  On paper, this sounds very plausible and theoretically should give an accurate assessment on value but….

First, I have seen Zillow recently begin to provide values on commercial properties.  Unfortunately this information is not worth the paper it is written on.  The lack of accuracy is due to the intricacies of a commercial property.  For example on the same street there could be a retail building with a long term lease to home depot and another with a long term lease to Barnes and Noble (the bookseller).  Which property is more valuable?  On paper if you look at the dollar/ft that the home depot sold for and apply this to the barnes and noble building the value would be incorrect.  Why would it be incorrect?  Both the properties are retail, but the buildout for Barnes and noble is more extensive than the “warehouse” retail space of Home depot.  On the flip side, Home Depot is a much stronger tenant than Barnes and Noble so there is substantial value in the long term lease.  Unfortunately Zillow or any other automated valuation will inevitably be wrong in their valuation. So for this article I will focus on the residential valuation of Zillow.

To evaluate the accuracy of Zillow I pulled a Zillow report (along with other comparable data from a program we subscribe to) for each residential property I inspected.  I have driven almost 50k miles in Colorado the last 18 months personally inspecting each property before we make a loan on it.  I was curious to see how accurate Zillow was.  I quickly noticed some very stark trends

The good news is that Zillow is closer to accurate in certain circumstances.  If a property is located in a very uniform area developed with similar houses on similar lots all of a similar age, Zillow is closer on its valuation.  An example would be certain subdivisions in Highlands ranch that were developed in the 90s and the houses look very similar to each other.  The valuation isn’t 100%, but it is typically in the range of the correct value (within 15% typically, this could be high or low).

The reality check: Zillow should not be relied on in many instances. I’ve seen Zillow off on their value by over 50% (higher or lower than market value). I’ll 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 a number of 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.  I was curious why a house of similar construction that looked about the same size as the subject would have a Zillow value of 50% more.  From the interior pictures I saw online they both looked very comparable.  When I looked at the square footage on Zillow the house down the street (315k house) showed almost 1500 more square feet in Zillow.  I was intrigued since the two houses looked almost identical.  I checked with the county to confirm the square footage.  The houses were within 100 square feet of each other, but Zillow had counted the entire basement (both houses had finished basements) as above grade square footage.  What does this mean?  According to Zillow the 315k house was 30% larger than the house down the street selling for 200k.  In reality the houses were almost identical and Zillow was considerably over valuing the 315k home.

The second example was in a nice area of Colorado Springs.  The Zillow value of the subject was $160,000 and the borrowers only needed $90,000.  On paper, everything added up and so I setup an inspection.  I hopped in my trusty Subaru and headed down to Colorado Springs for the morning.  Unfortunately when I got there I discovered the house was not worth even close to the Zillow value.  The house had an odd corner lot surrounded by houses that were not very nice; one block up the neighborhood was totally different and considerably nicer.  After looking at the comparables (ones that I found that were similar location, build quality, etc… as the subject), the property was worth only $100,000 (I had found 5 comparables that had sold in the last 120 days very close to the subject).  In this case Zillow was off by almost 60%

As you can see from these two examples, Zillow (or any other automated valuation methodology) should not be relied on too heavily to determine market value.  Stay tuned for future e-mails on how a private lender (like myself) actually values a residential and commercial property.

Please keep me in mind for any transactions that for whatever reason fall out of traditional bank guidelines.  We are still actively closing loans throughout Colorado and I can close your transaction typically in 5-10 days (or sooner depending on the need).  I don’t need an appraisal since I go out and look at each property (no fee for the inspection).  All I need is our one page loan application: https://www.fairviewlending.com/loan_app.htm or shoot me a quick e-mail with details on the transaction.

written by: Glen Weinberg COO Fairview Commercial Lending

Learn more about Private / Hard Money Lending: fairviewlending.com

Learn more about our Colorado Hard Money Lending Programs: www.Coloradohardmoney.com