Zillow's proprietary Automated Valuation Model - AKA 'Zestimate', is often a source of concern and confusion for home buyers and sellers. Sometimes your Zestimate may be fairly accurate, sometimes it's a bit off. Occasionally, you see one like this:

We will take a closer look at some more of these Zestimate anomalies later.

So how does Zillow come up with your Zestimate?

According to Zillow they,

"use proprietary automated valuation models that apply advanced algorithms to analyze our data to identify relationships within a specific geographic area, between this home-related data and actual sales prices."

What does all that mean?

More simply, they use the data they have about a specific property and the local market to estimate what a particular home might be worth. While they aren't sharing specific details on how they actually calculate their estimate, here are some of the factors they consider:

• geographic area
• actual sales prices
• square footage
• Location
• number of bathrooms
• Number of bedrooms
• Lot size
• Property taxes
• "Many other details"

How accurate is all this data and number crunching?

Nationally, Zillow says they have a median error rate of 4.5%. This means that half of all Zestimates nationally will be less than 4.5% off from the selling price. That's great. However, that also means the other half will be off by more than 4.5% - sometimes a lot more.

This other half is where questions begin to arise. There are a multitude of reason this might happen. According to Zillow,

"Our data sources may be incomplete or incorrect; also, we have not physically inspected a specific home. Remember, the Zestimate is a starting point and does not consider all the market intricacies that can determine the actual price a house will sell for."

Zillow has no idea what physical condition the property is in.

This key problem is often magnified in homes below $100,000. These homes are more likely to vary widely in their condition. Consider a neighborhood with 2 nearly identical 3 bedroom, 2 bath homes. One has been recently remodeled and is in like new condition and may sell for $90,000. The other needs to be gutted down to the studs. This home may sell for $20,000 or less.

Zillow's Zestimate algorithm is unaware of these differences and may give a Zestimate of $75,000 to each home based on sales and other data from similar homes in the area.

Zillow's blind spot to property condition becomes less evident as you move into higher priced homes.

In our local area, the condition of homes over $100,000 tends to be more consistent. Of course, you can still have a $200,000 home in need of significant repair but it is less common.

There are other factors that a Zestimate can't account for

Particularly unique or unusual homes may demand a much higher or lower price as do homes with a nice (or poor) view.

Highly localized issues are also off Zillows radar such as this unfortunate situation in Delta Township.

The Zestimate algorithm is nonetheless ambitious though. While not for sale (yet), it has even given the White House its best effort:

How accurate is YOUR Zestimate?

That's hard to say, but Zillow provides accuracy data on a county by county basis. Here's how Eaton, Ingham and Clinton counties fare:

It's nice that Zillow is upfront about their accuracy and provides data to back it up. They even have a put together a few paragraphs on how a real estate agent show off their expertise when they receive a "Zestimate Call" from a client.

Ingham county's median error rate of 4.0% is the best in Michigan

It's only 1 of 2 Michigan counties with a 4 star Zestimate Accuracy rating - the highest Zestimate accuracy rating Zillow has. The other being Ottawa county with a 4.1% median error rate.

What does a 4.0% error actually look like?

If you have a home with a fair market value of $200,000 an error of 4% is $8000. The problem is we don't know if that error is 4% too high or 4% too low. Your Zestimate could range from $192,000 to $208,000.

That may not sound too bad, but if you are one of the 19.6% of people in Ingham county or 27.1% in Eaton County whose typical error is 10%?

The table below shows what the Zestimate range would be for various error rates:

Market Value	4% Median Error	10% Median Error	20% Median Error
$100,000	$96,000 - $104,000	$90,000 - $110,000	$80,000 - $120,000
$200,000	$192,000 - $208,000	$180,000 - $220,000	$160,000 - $240,000
$300,000	$288,000 - $312,000	$270,000 - $330,000	$240,000 - $360,000

Some Astronomical Errors

Now that you know a bit more about how Zestimates work, you might be wondering how, in the county with the most accurate Zestimates in Michigan, we can have homes with market values less than $100,000 but Zestimates approacing $1,000,000? Me too. Unfortunately, I have no idea.

All of these homes have their basic data in Zillow (square footage, number of bedrooms, number of bathrooms, etc.). Even without this information, it would seem reasonable to think that Zillow could extrapolate that homes in the immediate area are not $500,000 - $900,000+ homes.

I suppose an argument could be made for the house near Lake Lansing, but Baker St.?