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.