Zestimate = Costly AI Blunder

Zillow is the big behemoth in online real estate. One of the first companies to feature real estate listings, Zillow’s website gets more traffic that the official site for realtors.

One of the huge features on Zillow’s site is the Zestimate. It is a computer driven artificial intelligence (AI) system that allows you to plug in your address, and boom, you’ll get an estimate of that property’s value. This valuation system took the real estate industry by storm. Despite many in the industry scratching their heads as to how these values were conceived, Zillow continued to grow in popularity and website traffic.

The site was generating so much traffic that real estate agents felt compelled to spend huge sums advertising on their site, or risk being made irrelevant missing all the potential business. It got even worse for real estate agents when Zillow legally obtained the rights to tap into the MLS (Multiple Listing Service) system. Zillow could now boast that they had the most listings anywhere on the internet. It was not only the real estate agents that felt compelled to advertise, but mortgage originators also believed that if they weren’t on Zillow, they would lose out to another advertised provider.

It is a real slap in the face to real estate agents who advertise on their site. Zillow lists their property from the feed of the MLS data, then expects agents to pay advertising fees to get listed when someone searches for their property’s characteristics. If they don’t advertise, another agent that does pay to advertise is shown on that page – making you think that property is listed by that advertised agent.

This business model generates huge profits for Zillow. No other site comes close to the traffic and revenue Zillow enjoys. Zillow felt so unstoppable, 2 years ago they ventured into their next business venture:

IBuyer Sales

I wrote extensively about this new form of real estate when it first came out. You see the ads on TV from others that have also jumped into this new business model. In its most simplistic form, IBuying happens when you decide to sell your home. Instead of the traditional practice of enlisting the services of a real estate agent to market your home, these Ibuyer companies make you an all-cash offer and close quickly. This process is very appealing to a wide swath of the “gotta have it now” generation. It’s not good enough to get your Amazon order in 2 days, they gotta have it in 4 hours or less. So why would one have to go through all that BS of listing your home, cleaning it up for showings, make plans to leave your home for lots of Sundays, and despite all your efforts, still walk on eggshells until the appraisal comes in – especially in today’s market where there’s so much demand and pushing prices over asking. With an IBuyer, you can close in 7-10 days, and not have to worry about the appraisal value possibly putting a kink in your buyer’s financing.

The blunder is coming, but there’s something I need to point out.

There’s a gigantic irony in Zillow’s business model. They take all the money they are getting from real estate agent advertising, then use that money to take business away from real estate agents. You would think that once Zillow became a competitor to real estate agents, they would stop giving them advertising revenue, but nope!

Fueled by the desire by sellers to close fast, Zillow quickly became one of the largest real estate companies in the USA.

Zillow was able to utilize their state-of-the-art Zestimate AI system to quickly evaluate a home’s value, which allowed Zillow to make an all-cash offer and close quickly.

A few paragraphs up I mentioned that there was a lot of head scratching from the estimates Zillow’s system was generating for values of homes. When those Zestimates were for other people’s properties, who cared how accurate they were. Well, those crappy estimates finally came home to roost. Zillow announced this week that they are abandoning their entire IBuyer program and laid off 25% of their employees. They cited “imperfected AI” that resulting in Zillow overpaying for homes they are now stuck with. An analyst reviewed the nearly 10,000 homes Zillow currently has listed and found the listing prices were on average 4.5% below market values. It is obvious that they want out and are willing to lose tons in order to get out fast. Zillow is also still in contract to buy 7,800 more homes.

When the dust settles, Zillow will take a loss of about nearly a half-billion dollars.

What does this teach us? Real Estate transactions are best served by local agents that know the areas they serve. You can’t program local knowledge, no matter how sophisticated the artificial intelligence. People, not computers, will always better serve your needs when it comes to buying and selling real estate.

The same holds true for mortgage lending. Do you want a computer to determine what loan amount you qualify for? There’s no computer program out there today that can talk to a mortgage applicant and determine the best financing option to meet their unique goals.

When the time comes to sell and you want to know how much your home is worth, or if you are starting the search to buy a home, you may want to find a highly rated real estate agent to find you the answers you seek, versus basing your decisions on a Zestimate.

Leave a Reply

Your email address will not be published.

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>