Appraising Zillow

Have you ever checked out the satellite photos and market-value estimates of homes in your neighborhood on Zillow.com, the Internet real estate site that says it offers "free, instant valuations and data for 67 million-plus homes?"

Zillow was launched with major media fanfare in February, backed with a reported $57 million in venture capital. It is one of the most popular real estate sites on the Web, visited millions of times a month by sellers, buyers, agents, lenders and homeowners. It also has begun distributing its free Zestimates through Yahoo.com and real estate brokerage sites.

But now Zillow is coming under harsh scrutiny. In a complaint filed Oct. 26 with the Federal Trade Commission, the National Community Reinvestment Coalition said Zillow knowingly deceives the public by presenting its property estimates as accurate, whereas they are frequently far off the mark.

The nonprofit coalition, made up of housing and economic justice organizations around the country, says its audit of Zillow's accuracy documented that its valuations are within 10 percent of actual market value "less than one-third of the time."

The allegedly erroneous estimates are especially harmful in low- and moderate-income and minority neighborhoods, the complaint said.

"While overvaluations were prevalent in predominantly white areas, undervaluations were more frequent in communities that were predominantly African-American or Latino by census tract," the complaint said.

That alleged disparity, in turn, has opened the door to a variety of deceptive and predatory real estate practices in those neighborhoods.

"NCRC and its members are aware of a growing number of real estate and lending professionals who are using the misinformation on Zillow.com to perpetrate fraud in our nation's markets, often by targeting consumers in violation of federal and state fair housing laws," the complaint said. It added that NCRC was considering filing fair-housing and equal-opportunity complaints against the company with the federal government.

In a statement, Zillow called the coalition's complaint "groundless."

"As we say consistently and prominently on our Web site, Zillow is a free research tool for consumers, and Zestimates are designed to be a starting point for consumers who want to learn about the value of houses. We make every effort to explain on our site the role of Zestimates as a research tool, as well as to clearly display our rates of accuracy for every area we cover."

In an interview, Stan Humphries, Zillow's director of advanced analytics, said his company's internal audits found a median margin of error of 7.2 percent nationwide. Audits also found that, contrary to NCRC's claims, undervaluations were more common in higher-cost areas, whereas overvaluations were more typical in lower-priced neighborhoods. Humphries questioned whether NCRC "has much of an empirical basis for [its] claims."

In the complaint, NCRC cited two other studies -- one by MSN Money, an online service, and a second by R. James Girardot, president of an appraisal firm in Washington state. MSN Money examined Zillow's valuation estimates for a sample of houses in five metropolitan areas and found them within 10 percent accuracy 29 percent of the time. The five metropolitan markets -- Seattle; Minneapolis-St. Paul; Scottsdale, Ariz.; Cincinnati; and Portland, Ore. -- all were ranked by Zillow as among its most accurate areas for valuations, according to the complaint.

Girardot's study covered 200 houses, comparing Zillow valuations with actual closed selling prices, and found inaccuracies ranging from 11 to 50 percent. In one case, Zillow's estimate valued a property at $246,865, but the house sold for $489,950 last July.

Putting aside the specifics of the complaint before the FTC, the Zillow-NCRC dispute throws light on a simmering tension within the residential real estate market: On one hand, mortgage lenders are demanding valuation alternatives that are faster and cheaper than traditional, full-blown appraisals. The proprietary technology Zillow uses to produce its estimates is a form of automated valuation model (AVM.)

Many banks and mortgage companies use commercially marketed AVMs for home equity loan valuations and to help spot fraudulent or grossly inaccurate appraisals. Traditional appraisals generally cost $300 to $500; AVMs can cost a high-volume lender $20 or less.

On the other side of the issue, professional appraisers are threatened by lenders' push for lower costs and high-tech valuations. Though they sometimes use commercial AVMs as data supplements, appraisers insist that their time-tested, hands-on methods produce the most accurate valuations.

Appraiser Vicky Cassens Zillioux says "valuing a property for a financial decision is not a game -- and should not be treated lightly by the consumer, lender or the vendor supplying that value." She notes that appraisers are held to high standards of accuracy and legal liability by lenders and regulators, and "a similar level of accuracy should be expected by the consumer at Zillow.com."

E-mail Kenneth R. Harney atKenHarney@earthlink.net.