The Difference Between an Online Estimate and a Pricing Guide

Sellers bring online estimates to almost every listing appointment now. For a while I treated that as something to beat. These days I think it's more useful to explain what the estimate is actually answering. It's a different question from the one we're there to settle, and the seller usually doesn't know that.

An online estimate (the industry calls it an AVM, short for automated valuation model) answers this: what do homes with these public facts tend to sell for around here? It runs for every house in the country, several times a week, and nobody ever steps inside. That's why it can only know what's in the records: square footage, bedrooms, baths, lot size, year built, past sales, and whatever the owner has typed in. If something isn't in a database, the estimate doesn't know about it.

A pricing guide answers a narrower question: what will this house sell for, to the buyers who are looking right now, given everything I saw when I walked through it? It covers one house, and the person who built it has stood in the kitchen.

The gap between those two questions is where most pricing arguments start.

What Zillow says about its own number

Zillow is careful about how it describes the Zestimate. It calls it an estimate of market value built from public, MLS and user-submitted data. It says the Zestimate isn't an appraisal and can't be used in place of one, and that lenders won't use it for loans. It also says remodels and additions that haven't been reported to the county aren't reflected. Zillow itself tells homeowners to visit the home, get an appraisal, or talk to an agent. In other words, the company that builds the number tells people not to rely on it alone.

Zillow also publishes its own accuracy figures. As of this writing, its nationwide median error is 1.83% for homes that are listed for sale and 7.01% for homes that aren't.

Two things in those numbers matter more than they first appear to.

First, a house that hasn't been listed yet is an off-market home. When a seller shows you their Zestimate before you've listed, it's the off-market number, the one with the wider error. That's the number in front of you at almost every listing appointment.

Second, a median error means half of the estimates miss by more than that.

The on-market figure is much tighter, but that's partly because once a house is listed, the estimate can use the list price. By then an agent has already done the pricing, and the estimate is borrowing that work.

Why the estimate and the guide land apart

When a pricing guide and an online estimate land far apart, the cause is almost always one of these:

• Condition and finish. The records say three baths. They don't say one was gutted last year and one hasn't been touched since 1996. The estimate prices them the same.

• Location inside the neighborhood. A backyard on the greenbelt and a backyard on the arterial road look identical in a database.

• Unusual houses. A big lot, a walkout on a slope, an addition that never made it into the county records. The more a house differs from its neighbors, the less an average can say about it.

• Thin sales. Zillow says it draws on sales from an area as large as a county when nearby sales are scarce. In a small market or a high price band, that means your seller's home may be priced against houses miles away.

These aren't edge cases. They're the things that decide what a house sells for, and they're exactly what the estimate can't see.

What to do with it

Don't argue the estimate down. Put it on the table next to your guide and walk through the difference, line by line. If the seller's house has the remodeled kitchen and the comps don't, show the adjustment. If the estimate is higher because it can't see the roof, say so, kindly.

That's what a pricing guide is built for. Every comp you chose and every value you moved is in front of them, with your reason beside it. A seller can't argue with a number they can't see into, but they can follow one they can.