If you have bought or sold real estate in the past decade, then you are probably familiar with Zillow and its famous Zestimates®. In today’s video, I want to share about Zestimates® and how Zillow comes to its valuation. Then compare them to another valuation tool – CMAs or a Comparable Market Analysis.

How does Zillow calculate its Zestimate®?

Zillow uses information from public records and user-submitted data. Zillow takes this data, inputs it into a computer algorithm, and comes to your valuation.The algorithm takes into account: location, square footage, year built, lot size, number of bedrooms and bathrooms, etc. It analyzes objective, number-data.

The limiting factor in this valuation is there is no human taking tours of the properties or analyzing photos.  Condition, home layout, and other intangibles cannot be taken into consideration. That is the biggest shortcoming of a Zestimate®. That is why a Zestimate® is a good starting point, but you don’t want to base your entire valuation on it. You want to get other valuations as well.  Zillow encourages users on its website to supplement their Zestimate® with an appraisal, CMA, or a live tour.

How Accurate is a Zestimate®?

Luckily, because Zillow is a data company, they actually have a lot of information on the accuracy between what they say a property will sell for and at what price the property actually sells.  You can look up the accuracy for your county here.

According to Zillow, their national median error rate is 4.3%. Half of the homes will sell within 4.3% of the Zestimate® price. The other half will sell outside of that range. For example, if you have 10 homes with a Zestimate® of $200,000 each. Five of those homes will sell within the 4.3% range, or between $190,000 to $208,000. Then the other 5 homes could sell outside the median error rate, or anywhere between $160,000 to $240,000. That is a large margin. You want to get multiple valuations in case your property is in that larger range.

What Other Valuation Tools are There?

Another valuation tool you can use is an appraisal.  Click here to watch the video I did discussing appraisals to learn more.  Another valuation tool is a CMA, or Comparable Market Analysis. When you work with a Realtor®, this is the valuation tool they will likely use.

What is a CMA?

A CMA is home valuation where a Realtor® will take a subject property, or the property you wish to buy or sell, and find similar properties in the area, or “comparables”, to compare to the subject. Typically, agents will pick properties similar in size, condition, location, etc. to yours. They will usually take 3 properties that recently sold in the past 3-6 months and then 3 properties on the market. And then they will compare the properties and manually adjust for differences.

For example, if you have two homes – the subject property and one that just sold – and they are almost the same, except the comparable has an updated kitchen, then the Realtor® will find the value of the kitchen (maybe $20,000) and deduct that value from the subject’s valuation to account for the difference.  That is where the human discernment factors into the CMA but not a computer algorithm.

How Accurate is a CMA?

A CMA is severely limited by two major factors: the agent’s experience and the recently sold homes in the area.

If you have an inexperienced agent, or one not familiar with your area or price point, then the CMA will show that knowledge gap.  The way you can catch this is by asking questions when the agent presents the CMA. Ask the agent to explain his or her reasoning.  Did they consider other properties? Why is this considered a comparable and this other property not? You should be able to follow the agent’s reasoning and come to the same conclusion.  If you can’t, then they may be telling you what they think you want to hear.  Be wary of this! Inaccurate pricing hurts your profit and the length of time to sell.

Secondly, the recently sold in the area limits the accuracy of a CMA.  This is actually a limiting factor in a Zillow Zestimate® as well. If there are not a lot of recently sold properties, then there is not a lot of data that the agent can use.  If you live in a neighborhood that is constantly having properties sell, then the agent has a lot of data to use.  If you live in an area without a lot of recent sales, then it makes your property harder to value.  For example, you may live in a rural area where only 2 similar properties have sold in the last year.  That will hurt the accuracy of the agent’s CMA.

If you need any help valuing your property, please email at [email protected]. If you are in Northeast Florida, I can do a CMA for you.  If you are in another area of the world, I can direct you to a reliable Realtor® in your area.