Lee Ovington of Valuation411 takes a crack at dissecting the Zillow valuation process. Also read the comment by David Gibbons of Zillow, where he sheds some additional light on the algorithms used.
Ovington writes, “Quite simply, the Zestimate relies on a calculated relationship of assessed value to sale price. Zillow merely takes selected transactions and calculates the relationship between the Assessed Values and the Sales Prices. It then applies that ratio to the subject’s assessed value (plus or minus some adjustments) and “whala”, you have Zestimate!”
Gibbons explains, “… the reason you measure a strong correlation between tax assessed values and Zestimates is not because our algorithm is simplistic but because the data we have is incomplete in your area… we’re missing the other information we typically get from the assessor, like sq. ft. and # of beds and baths. In cases like this, no other data is considered in the Zestimate – not becasue the algorithm is flawed – but because we don’t yet have the info.”
He continues, “When we do have more information, we use it. The last time I saw a correlation coefficient for all of our data fields, the most correlated field was actually “finished sq. ft.”. Our algorithm mashes up multiple valuation approaches. This allows us to both produce fairly accurate Zestimates with little data but also to significantly tighten up Zestimates when there is more data to be considered.”
One of the interesting parts of the post is where he talks about defending his appraisal to a homeowner who wants to believe the value they found on Zillow and why the appraisal would/could come in lower.
This is something that is starting to happen, and will happen more and more as the public becomes more aware of Zillow and as Zillow improves their valuation processes.