Both Zillow and Redfin use algorithms to estimate home values. However, the estimates can vary widely. Which algorithm is better?
According to Zillow, my house is worth $61,000 more than Redfin says it's worth.
Which is correct?
In reality, these digital estimates can be very accurate – but they can also be quite inaccurate.
Today, I’m going to reveal the secret algorithms Zillow and Redfin use to estimate the selling price of a home. First, I’ll show you what they do right, and then I’ll show you four limitations of their algorithms that prevent them from being accurate in most cases.
Then you'll learn how to estimate the price of your own home as you watch me estimate the price of my own home, see what it's actually worth, and whether Redfin or Zillow is closer to it.
Which is right: Zillow, Redfin… or neither?
How the algorithm works
Zillow states the following about the Zestimate:
In the nation's major metropolitan areas, from Austin to Atlanta, Cincinnati to San Diego, Zestimates for homes on the market are within 20 percent of the actual selling price more than 99 percent of the time.
In my town, the average price of homes that sold in the last 30 days is $629,000.
If the Zestimate is within 20% of the value, that's a difference of $125,000 — no small amount, but that applies to 99% of properties.
A significant number of homes were within 5% of the Zillow Zestimate at the time of sale, although accuracy varies by city.
In my metro area, Raleigh, 85% of the listings sold within 5% of the Zestimate. The average home in Raleigh sold for $415,000, so the Zestimate was about $21,000 lower. In my suburb of Raleigh, it was about $31,000 lower.
Now, let's look at Redfin: are they getting any closer?
Redfin’s Algorithm
Redfin claims its estimates are much more accurate than Zillow's.
Half of the homes that sold were within 2.1% of Redfin's estimate. The remaining 50% were much further away. Similar to Zillow, 97% of homes that sold were within 20% of the estimate.
How do you know if a Redfin estimate or Zillow Zestimate is accurate for your home?
There are four reasons why these price estimates are rarely accurate, but you can adjust them yourself if you know what to look out for. So let's look at the limitations of these estimates.
For reference, looking at all the properties I have personally sold as a real estate agent, the initial selling price has varied by less than 1%. This is true for every property I have closed. For the time being, humans can estimate property values much more accurately than AI models can. Here's what to look out for:
What they're doing right
Let’s take a look at the Zestimate and Redfin Estimate for my private property to see what the algorithm does exactly.
My personal home is worth $637,000 according to Zillow and $576,000 according to Redfin.
First, let's look at the comparisons we used to arrive at these numbers.
Limitation 1 – Knowing which composition to use
You've probably heard the word “comp” before, but if you haven't, just remember it's a slang term used by real estate agents to refer to similar properties.
Knowing which comparables to use and which to leave out is a very important step in getting a fair price.
Truly comparable homes are the types of homes that people considering your home would likely consider.
So if the houses are really small or really large, they're not really comparable. You can't just take a 1,000 square foot house and adjust it for a 3,000 square foot house. This is true even if they're in the same neighborhood, because someone looking at a 1,000 square foot house probably isn't looking at a 3,000 square foot house either.
There is some flexibility, but this also applies to the style of home. I don't really like comparing a one-story home to a two-story home because a lot of people looking for a one-story home wouldn't even consider a two-story home. Now, if there's no other option, especially if it's in the same neighborhood, I'll go with the two-story home.
But the less similar the comparable properties are to your home, the less reliable the pricing will be.
Why Zillow and Redfin used different comparators
So let's take a look at why Zillow and Redfin presented almost completely different comparison homes, and also which homes I would eliminate.
Both Redfin and Zillow used these two homes as comparisons, and one was a good comparison, the other wasn't.
The house on the left is a great companion, but there are some differences that need to be adjusted.
But it's very close. The exterior finishes are similar. The interior finishes are inferior, but I still think that people who are looking at my house will definitely be looking at this house, so I think this is a perfect comparison.
Redfin and Zillow also both used the house on the right.
I don't like this house as a comparison. The reason I don't like it is because the lot size in this part of the neighborhood is about half that of my neighborhood and other good comparisons. It's a single family home, but it doesn't have a yard, so it's more like living in a townhouse.
It does not have a garden compared to the subject property, so is a poor comparison.
Depending on what your home life is like, it could be a bad comparison.
Some people consider this their home, but many others don't.
If you have children or dogs, this yard can be problematic.
That being said, if I had nothing else available, I would use it, but I wouldn't rely on it too much when figuring out how much my house is likely to sell for, because I think a home on a ¼ acre lot has more competition than this type of home on a zero lot line, at least in my area. Remember, the key to choosing a comparable is whether or not buyers will consider this home along with yours when they are shopping.
Now, looking at each company's own comparison, I think some key ideas about the algorithm become clear.
Redfin favors recently sold homes, while Zillow favors much older homes.
Redfin's comparison listing has three properties that closed within the last month. Zillow did not use those properties, but they did use two that closed almost a year ago. It makes sense why Redfin would choose 30-day-old listings, since they are newer and most likely to be good comparisons. But why would Zillow use year-old comparisons?
These two choices point to two further limitations of AI-driven home pricing: Let’s start by looking at Redfin.
Restriction 2 – No access to surrounding areas
One of the comparable properties used by Redfin that sold within the last month looks like a great comparable property on the surface.
It sold within a month, it's a similar size and it's in my neighborhood.
There is one in my neighborhood too, but it's not really a good comparison.
What Redfin didn't know is that this house is right next to a massive construction project. They're putting a roundabout on the top main street of my neighborhood. They've removed the entire frontage of our neighborhood. The entire street is a construction zone and the project won't be completed until 2025.
This made the house difficult to sell.
In fact, the previous owners sold to Opendoor because they knew it would be a hard sell due to construction. After Opendoor purchased the property, it stayed on the market for 123 days. The average time it takes to sell in this area is 5 days.
This is an unusual situation, so it's not a comparison. I would have removed it from the list and not used it. This is another limitation of using AI for home pricing. AI can't see down the street and know what's causing a property to sell slower or lower in price. At least not yet.
Limitation 3 – Zillow’s Marketing Strategy
Now, let’s look at the old Zillow comparison properties.
Why would Zillow use two comparable properties that are about a year old?
One in particular was sold 10 months ago, and I'll tell you why it was used.
Zillow is a marketing company, that's who they are.
You'd think they're a technology company. You'd think they're a real estate company. No. They build tools that get people to click, and then they sell those people (buyers and sellers) to real estate agents. That's it.
They want you to think your property is very valuable because they will get you to make phone calls, give your information to real estate agents, who will pay them.
That's their job.
It's funny, sometimes buyers call me and say, “I saw this property on Zillow,” but when I search for it, it's already sold. They do that with really popular properties, because popular properties get more calls.
Now, most of their listings, probably 70-80%, accurately reflect whether the property is still available, but the properties that look really great, are in a great location, and are a great price, will remain active even after they sell because those properties will bring in more inquiries.
And being a marketing company is a limitation in getting an accurate Zestimate because getting an accurate Zestimate would mean fewer inquiries. One of the older comparables they used sold for $745,000. It seems they only used it to inflate the price of my house.
Limitation 4 – Cheap Construction
There was another terrible comparison property in Redfin’s comparison listings, which shows another limitation of the AI pricing model.
The quality of construction determines whether a home is a good property or not.
The house that the hand is pointing at is what we call a production home.
It was built with cheap materials: vinyl siding, much cheaper finishes, and a textured ceiling that was put over a rushed drywall job.
It was probably built by KB Homes or some other low cost builder. There is nothing wrong with these builders. My first home was one of these. They offer a good product for buyers at a variety of price ranges. But it is not the product you will find in other competing properties.
All of the homes in and around my neighborhood are custom or semi-custom homes with high-end finishes and more intricate architecture, which means they cost more to build. If mass-produced homes are used to price a custom home, the quote for the custom home will be lower than it should be.
Conclusion
I think that at least in this case, both AI prices are wrong.
I think the Zillow Zestimate is too high and the Redfin estimate is too low.
Here's what I did to determine the expected selling price.
I'll use comparisons 1, 3, and 5 from the Redfin listing. Then I'll add comparison 1 from the Zillow listing. I'll then make some adjustments for how these properties are better than my home. One had a completely new kitchen and bathroom, so I adjusted for that since my home doesn't have those. Two of them had really large yards, so I adjusted for that as well. Other than that, they were pretty similar.
Redfin's price was $40,000 too low, while Zillow's price was $20,000 too high.
If you liked this article, you might also like this one where we crunch the numbers to determine the best month to buy a home in the Triangle.