Lawsuit dismissed against Zillow’s Zestimates

Miami /
May.May 18, 2018 08:45 AM

A Federal district court has dismissed a closely followed class-action lawsuit that charged Zillow — creator of the controversial Zestimate online home-valuation tool — with deceptive business practices designed to mislead consumers.

The suit, filed last year by Chicago-area home sellers, alleged that Zillow systematically engages in a confusing, unfair and deceptive marketing scheme that impairs homeowners and sellers in the sale of their houses. Plaintiffs charged that Zillow hides its multiple financial arrangements with realty agents and lenders, and that it ignores or refuses to correct “Zestimates that homeowners challenge as inaccurate or unfounded.” Plaintiffs also alleged that the company lowballs value estimates on so-called “FSBOs” — for sale by owner homes on its website — then increases them if a realty agent who pays money to Zillow subsequently lists them. An earlier version of the suit alleged that Zestimates undervalued plaintiffs’ homes and violated Illinois appraisal rules by serving as the functional equivalent of appraisals. That suit was dismissed, but the court allowed the plaintiffs to file an amended version.

If you’re not familiar with Zestimates, just tap any home address in the country into your search engine; you’ll likely see a value estimate pop up along with descriptions of the property’s features, photos and square footage. Zillow says it has Zestimates on more than 100 million homes, whether they are actively for sale or off the market. The estimates are based on “millions of public and user-submitted data points” on homes, which get fed through its proprietary algorithms to generate value estimates, one-year forecasts of future value and rent estimates.

The company insists that its Zestimates are relatively accurate, with a “median [national] error rate” of 4.6 percent. But for years, consumers, appraisers and realty agents have criticized the company for having much higher error rates on individual properties — sometimes 10 percent or more in areas where housing types vary widely or property data is difficult to obtain. Some major metropolitan areas have error rates well in excess of Zillow’s national median — Dallas-Ft Worth’s rate is 8.2 percent — and some states have exceptionally high rates. Delaware’s statewide median error rate is 11.9 percent; certain counties in some states have error rates of 20 percent or higher. In Illinois, at least five counties have error rates of 20 percent or higher and one, Perry County, has a 26.7 percent rate.

In her decision, Judge Amy J. St. Eve of the U.S. District Court in Chicago, concluded that “Zestimates are not false or misleading representations of fact” that are likely “to confuse consumers” because they are “merely” an estimate of the market value of a home. Nor do they constitute a “bait and switch” scheme as alleged by the plaintiffs or constitute “self-dealing” because they “funnel” FSBO sellers to Zillow’s “premier” realty agents — those who pay the company for special advertising placement and leads on who is shopping for a home.

Asked for comment on the decision, Zillow said that “we are pleased that the court has dismissed the claims in this lawsuit not once, but now twice — finding the allegations in the lawsuit without merit.”

Barbara Andersen, an attorney whose frustrations with an allegedly lowball estimate on her home prompted her to file the original suit, said in an email that the court “is disregarding” the reality that consumers give credibility to Zestimates and use them for their own purposes.

“If you can give … buyer(s) a tool to manipulate a seller, they will use it and vice versa,” she said, “depending on whether the Zestimate is too high or too low.”

Andersen said she finds it “disappointing” that “the buying public does not realize Zillow’s income is from brokers who pay” money for leads and advertising tied to Zestimate pages. “So basically Zillow is financially motivated to keep the Zestimate inaccurate so it can ‘funnel’ disgruntled sellers to brokers” who then “cure an issue [inaccurate valuations] that Zillow created,” she said.

In response, Zillow said “the Zestimate is incredibly accurate, and Zillow is constantly working to improve its accuracy even more.”

What to make of the Zestimate decision? Best advice is to take Zillow’s own suggestion and see Zestimates as starting points, not end conclusions as to true value. Plus, be aware of how the Zillow model works: The company makes most of its money — $213.7 million, 71 percent of total revenues in the first quarter of 2018, according to its latest securities filing — from realty agents and brokers who pay it for advertising on its websites.


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