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June 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.

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