The Value Proposition

March 6, 2006
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SEATTLE — On Feb. 9, the media world was abuzz with the name Zillow.com. According to reports, the new Internet home value estimator could spell the end of the real estate industry as we know it. The company’s president and CEO, Richard Barton, suggested that the site could fundamentally change the nature of home-buying, similar to the effect his former project, Expedia.com, had on the travel industry.

Investment strategist and finance columnist David Gardner, apparently giddy with a potential return to the late 1990s heyday of Internet stock explosions, used Seattle-based Zillow.com as an example of “rule-breaker” companies that are capable of “a technological ‘Big Bang’ that will shake the investing world.”

“At some point in the next week, make a point of clicking into that site, and you’ll find a great example of what I’m talking about,” Gardner wrote. “Do you agree with me that Zillow, an upstart Web site, could very well put Sam and Sally Realtor out of business in five years or less?”

A Web site that could take the place of a real estate agent would certainly make for a revolution in the way people buy and sell their homes. However, Zillow.com is not that Web site.

In its current “beta” form, Zillow.com provides one service: It uses information from public records and other sources to determine a home’s estimated value.

“The role we see this taking in the real estate transaction is like a Kelley Blue Book for homes, a first step that consumers would go to for research,” said Amy Bohutinsky, Zillow.com’s director of communications.

But imagine if the Kelley Blue Book could only offer price information on 40 percent of the cars on the road, and that the estimated values could be wildly off from true market values. Zillow.com has data on 60 million of the nation’s roughly 100 million homes. It can offer price estimates, or “Zestimates,” on 42 million of those homes. The accuracy of those estimates, however, is certainly a work in progress.

Pete Bruinsma, an agent with Westdale Co. in Grand Rapids, gave Zillow.com a try shortly after its February debut. He was not impressed, saying that the price estimate for his home was dramatically low. He estimated the market value of his home at around $165,000. The assessed value is $111,000. Zillow.com said it was worth $67,269.

Bohutinsky said that Zestimates are the best guesses the site’s mathematical formula can make, based on the information available. In Michigan, for example, 57 percent of the Zestimates on homes sold since Zillow started tracking data have been within 10 percent of the properties’ actual sale prices. The site offers an accuracy chart, allowing visitors to see how much data exists on a particular state or city, and how accurate the information is.

“For KentCounty, we give it ‘some’ as far as data quantity, which basically means that we’re spotty,” said Bohutinsky. “Some areas of the county we have data (for), and some we don’t. As far as accuracy of our Zestimate, we give it three stars out of four, with a median error rate of 7.5 percent. So I would characterize that as pretty good, but with room for improvement.”

That error rate means that half of the Zestimates assigned to KentCounty homes are off by more than 7.5 percent, and half are within 7.5 percent of the actual value.

“As a beta site, that will improve over time,” Bohutinsky said. “In the grand picture, what we’re trying to do is put a value on top of every home we can find in America. And with that value, we’ll put every bit of information we can find from public records, which in many cases is things like number of bedrooms and bathrooms, square footage, tax information, prior sales information — anything we can find and put it out there for free for consumers buying and selling homes. How they use that is up to them.”

How Zillow uses it, for the time being, is meant to attract advertising revenue from real estate agents. The site does not charge for any of its services, so its only hope of generating revenue is by selling ads. Currently, it uses Google.com’s AdSense customized search-generated advertising program. In the future, Zillow hopes to add more banner ads, Bohutinsky said.

“Real estate professionals are starting to realize that we have millions of people coming to the site who are trying to figure out the value of their homes,” she said. “They’re thinking, ‘Maybe I should advertise on there, in case they need an agent, or a mortgage.’ There’s a large number of agents seeing this as a great place to be.”

However, other real estate professionals have been put off by some of Zillow’s rhetoric, suggesting that agents are overpaid and the current model of commission fees needs to change. At least one of those professionals, national real estate columnist Blanche Evans, finds the irony in the company’s willingness to downplay the importance of Realtors, only to turn around and ask them to advertise.

“They just want the advertising dollars of real estate agents,” Evans wrote on the day of Zillow’s launch. “In fact, their plan is to build a real estate consumer service center that is so robust, consumers will be able to gather information and then hire an agent at a reduced price, because they will have already done most of the work. While agents are still fat, Zillow.com wants their advertising money.”

Bohutinsky said that is not the company’s motivation. Its goal, she said, is to empower consumers with information.

“You can see how having this information would make a much more robust and two-sided conversation when you sit down with an agent,” she said. “Or, if you’re just trying to figure out — with your home that you’ve lived in for 10 years — how your investment is doing, you can see how this is a great tool for that.”

However, putting those tools in consumers’ hands can be seen as a threat.

“Of course, there are agents who say, ‘Well, isn’t that what I do?’ And they’re looking at it like, ‘The Internet can never replace me,’” she said. “And we agree with that. The Internet can never replace a human in what is a really complex transaction and a very personal transaction.

“But we do think that empowering consumers with more information means smarter consumers and probably more efficient transactions when they do work with that agent.”    

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