Zillow modifies valuation formula, homeowners upset by losses

July 07, 2011 09:42AM

When online real estate database Zillow.com modified the formula it uses to estimate the value of some 97.3 million American homes, known as the zestimate, last month, it caused a great deal of distress for homeowners, some of whom saw significant decreases in Zillow’s valuation of their properties.

According to the Wall Street Journal, the company, headed by CEO Spencer Rascoff, added 25 million new zestimates, dropping its margin of error from 12 percent to 8.5 percent. Though most adjustments were of 10 percent or less, some, especially in markets with more volatile housing markets, were more dramatic. Zillow says that slightly more zestimates went down than went up, but declined to provide more specific information.

One miffed Arizona homeowner, who found his net worth to be suddenly $40,000 less, wrote in a letter to the company: “These changes have already affected pending financial decisions, but it’s really hard to predict the effect of adjusting the net worth of millions of Americans, by billions of dollars!… Consider the family that used Zillow when deciding on a home purchase two years ago. After paying their mortgage for two years, thinking they were ahead of the game, today they discover that they paid $50,000 too much for the home and were underwater on day one.”

A spokesperson for the Appraisal Institute, the primary trade group for U.S. property appraisers, said that zestimates are not used by appraisers as a benchmark because they are based on public information. [WSJ]