Zillow is the most popular real estate site on the Internet but sometimes its main function seems to be to misinform its millions of visitors. For unsuspecting home buyers and home sellers, Zillow can lead them astray about as often as it leads them to knowledge.
The Zestimate, Zillow’s famed automated home value estimation tool, has come in for a great deal of criticism. A lot of that criticism is warranted, because Zestimates just aren’t very accurate compared to a comparative market analysis by a qualified real estate agent.
Zillow has tried to improve them. It even claims to analyze photos of homes posted online to try to determine whether and how well the home has been upgraded. These days, according to Zillow, its Zestimates have a median error of only 2.3 percent. Sounds pretty good, right? But that figure varies by region, and Zillow’s own figures don’t paint Zestimates for this market in a very flattering light.
For instance, for the Miami-Fort Lauderdale metropolitan area Zillow says its Zestimates are within 5 percent of the sale price 82.4 percent of the time. Zestimates hit within 10 percent of ultimate selling prices 95.1 percent of the time, and within 20 percent of sale price 98.9 percent of the time.
That may sound acceptable, but it means for a typical Miami-Dade County home selling for $382,000, about one out of six times the Zestimate could be off by $76,400. Zestimates are hamstrung by lack of information. Zillow just doesn’t have as much data on home prices that an experienced agent with access to the MLS has. Whatever the explanation, to risk leaving that kind of money on the table is neither entertaining nor informative. Treat Zestimates with caution.
While most homes that change hands appeared on the Multiple Listing Service, Zillow or some other online site, some homes never get listed. Pocket listings are properties that agents never post for sale publicly. Instead, they privately inform a select list investors or other buyers they work with that the properties are available and the transaction closes without anyone knowing the property was even for sale.
Buyers like pocket listings they reduce bidding wars. This can speed up transactions and result in lower ultimate costs. Sellers may not want to engage in the hassle that comes with listing and showing to the public. They may not want everybody to know they are selling.
Agents like pocket listings because they let them provide a valuable service to investors and high-end buyers. An agent with a pocket listing is someone every buyer wants to know.
A Zillow listing has, in addition the price, location, photos and other features of the home, a section of describing the monthly cost of owning the home. It includes loan payments for principal and interest, mortgage insurance, property taxes, home insurance and homeowner’s association fees. Not every home has every fee, of course, since for instance many aren’t part of homeowner’s associations.
The problem is not that Zillow’s monthly cost estimate leaves out costs. It’s that its estimates are, like the Zestimate, poorly informed and potentially highly inaccurate. For instance, when calculating mortgage payments, it uses an average market interest rate. In reality, many borrowers don’t pay the average interest rate. They may pay significantly more or less due to their own credit history, debt-to-income ratio or loan to value on this particular property.
Small interest rate differences have major effects on monthly costs. And they can go on for decades or as long as the term of the loan. With that at stake, there’s no substitute for an actual rate quote from a lender.
Although Zillow does include a line item for mortgage insurance in its basic monthly costs estimator, by default this line is blank. That’s because Zillow assumes that a buyer will put down 20 percent of the purchase price. Ordinarily, a buyer who puts down 20 percent won’t be required to pay for mortgage insurance. A buyer who doesn’t ordinarily will pay for mortgage insurance. The difference could easily be hundreds of dollars a month, so this is important.
However, the 20 percent down benchmark for paying or not paying mortgage insurance is not set in stone. Sometimes lenders don’t require mortgage insurance for lower down payments. Sometimes even a 20 percent-plus down payment isn’t enough to avoid paying mortgage insurance. Creditworthiness, occupancy and other factors can come into play. The only way to be sure is to get a quote from a lender.
Let’s say Zillow’s monthly cost estimator is right about a borrower having to pay mortgage insurance. The monthly cost estimator could still be off by a sizable amount. That’s because Zillow assumes that the mortgage insurance premium will add 0.5 percent of the loan amount to the monthly payment. This could be right, but it won’t always be right.
Mortgage insurance may be significantly more costly. The actual rate could be, for instance, 0.7 percent of the loan amount. On that $382,000 home, with 10 percent down for a loan value of $343,800, a difference of 0.2 percent in the cost of mortgage insurance comes to $68.76 per month. Over the life of a 30-year mortgage that can add up to a big surprise. And it’s a surprise due to Zillow’s failings as a mortgage cost calculator.
None of this is to say Zillow is bad or worthless. It’s a business like any other and it has its uses. Those uses don’t include having the final say. Zillow is mostly good as a starting point leading to discussions with knowledgeable professionals who can provide accurate, up-to-date and complete information about borrowing costs and other key factors. Treat it that way and you’ll have more successful real estate transactions.