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National Mortgage Professional
Jun 27, 2007

The 'Zestimate' of ZillowDonovan Dichterappraisals Tell me if this has happened to you: Your client's appraisal has just come in and it's a few thousand dollars higher than you'd expected. You call the borrower, excited to share the good news, but instead of being happy, the client says, "What's wrong with your appraiser? Zillow just told me that my house is worth $50,000 more than that!" Sound familiar? If this hasn't happened to you yet, chances are that it will soon. In just a little more than a year, this Seattle-based Internet company has gone from "Zill-who?" to becoming the first (and sometimes last) stop people make when researching a home's value. While there are other sites advertising similar services (e.g. realestateabc.com and homevaluecma.com), none have gained so much popularity in such a short amount of time as Zillow. It's easy to see why. Not only are Zillow's services free, but the site can appraise almost any home in a matter of seconds. And it's not just homeowners who are using it. Loan officers across the country, such as Steve Shaw, a mortgage broker in Vancouver, Wash., are taking advantage of this free resource. "When I take an application, and my client has no idea what a home is worth, I'll check Zillow before structuring the deal," Shaw confirmed. So what's the problem? Well, not everyone believes that their valuations are worth the few seconds they take to get. In a complaint filed with the Federal Trade Commission, the National Community Reinvestment Coalition (NCRC) said that Zillow was "intentionally misleading consumers and real estate professionals to rely upon the accuracy of its valuation services despite the full knowledge of the company officials that their valuation Automated Valuation Model mechanism is highly inaccurate and misleading to consumers." This non-profit coalition, which is made up of housing and economic justice organizations around the country, said that its audit of Zillow's accuracy found the Web site's estimates were within 10 percent of the actual selling price "less than one third of the time." Marilyn Lewis, a contributor for MSN Money, shares those concerns. In an article published online titled "Putting home-value tools to the test," Lewis examined Zillow's valuation estimates in five metropolitan cities. She found them to be within 10 percent accuracy only 29 percent of the time. Even worse, Zillow ranks those same five cities (Seattle; Minneapolis; Scottsdale, Ariz.; Cincinnati; and Portland, Ore.), as its most accurate areas for valuations. And when it's off, it's really off. In a recent Wall Street Journal story titled, "How good are Zillow's estimates?" James Hagerty reports, "When Zillow is bad, it can be terrible - off the mark by more than 25 percent on one in 10 homes. In one case it was off by $2 million. In 34 of 1,000 transactions, Zillow was off by more than 50 percent." The fact that their valuations are so frequently wrong, and by such large amounts, is probably what prompted the NCRC to state that Zillow's inaccurate estimates were "likely to cause substantial injury to consumers who rely on the inaccurate representations." In fact, that injury now has a term in the industry - it's called "being Zillowed." Across the country, there are stories of people who have been Zillowed, which is defined by Zillowed.com (yes, that's an actual Web site) as "setting unrealistically high (or low) expectations based solely on an online estimated market value, and despite market feedback." It's easy to see how this could have ramifications for you and your clients. A few months ago, a client called me looking for a home equity loan to pay for a remodel. The borrowers had planned to sell their home last summer and upgrade to something larger and in a better school district. However, after their valuation from Zillow (also called a "Zestimate") returned a lower than expected value, they decided to stay put and remodel instead. Once we received the appraisal, my clients learned their house was actually worth more than what Zillow had told them. I put them in touch with a real estate agent who confirmed this, but by then they were already halfway into a remodel and are now staying put. David Gibbons of Zillow recently told me that Zestimates are intended only to be "a starting point when researching house values and aren't intended to replace the opinion of a local expert." While that may be true, people tend to quickly forget this when they suddenly hear their homes are now worth tens of thousands of dollars more than they had expected. At times, Zillow has represented itself as the Kelly Blue Book of homes. But if you go to www.kbb.com to find the value of your car, you have to enter up to 40 different fields to get an estimate. Zillow asks you to enter one: the address. Gibbons explained that homeowners can provide additional information regarding the home to recalculate a more accurate estimate. However, to do so requires registering with the Web site by submitting an e-mail address - something that many spam-weary Internet users usually try to avoid. As a loan originator, you should be prepared to deal with the Zillow effect. The key is to remind your clients that while it may be convenient, and even fun, to look up property values online, it is not intended to be the final word on the home's worth. They (or you) might like what Zillow has to say, but for now, most underwriters and appraisers could not care less. And if you're using the Zestimates to see what your clients' homes are worth, make sure you back up that information with a complete search before ordering an appraisal. You should also check with the real estate agents you work with to find out how they deal with clients who have been Zillowed. "We teach our brokers to talk with clients about the differences between a free online estimate and an actual comparative market analysis," said Ben Andrews, owner of Willamette Realty Group in Portland, Ore. "You really need a human set of eyes to factor in the quality of the neighborhood, schools, parks, etc. Those are things that a computer program can't put a value on." In fact, most real estate offices around the country have already begun counseling their agents on how to deal with client objections caused by Zillow. Find out what they're already telling their clients and make sure your messages are consistent. In the end, you get what you pay for, and there's still no substitute for the real thing. Donavan Dichter is a senior mortgage broker with Summit Mortgage Corporation in Portland, Ore., and has been in the lending business for 10 years. He may be reached at (800) 400-4211 or you can visit his Web site at www.expertinlending.com.
Published
Jun 27, 2007
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