Zillow Offers $1 Million Bounty to Revamp Its "Zestimates"

In this segment from Market Foolery, Chris Hill welcomes Motley Fool analysts Jason Moser and Taylor Muckerman to the show as they discuss Zillow (Z -2.86%) (ZG -2.97%), the popular online platform for home buyers. The company is looking to crowdsource an improvement to the accuracy of its "Zestimates" just weeks after a class action lawsuit was filed over the flaws in its proprietary algorithms. Tune in to learn more.

A full transcript follows the video.

This video was recorded on May 30, 2017.

Chris Hill: Zillow is offering $1 million, as Dr. Evil would say, to anyone who can improve the Zestimate algorithm. This announcement was made just one week after Zillow was hit with a class action lawsuit over the Zestimate proprietary home-price tool. What do we think about this?

Jason Moser: [laughs]

Hill: I think the move to acknowledge that Zestimate is not perfect, and to say, "We're going to give you or a team of you a chance. People out there, we want to improve this, we want your help, we're going to reward you for helping us." I think that's a good move. The class action lawsuit, I don't know. The timing does seem curious.

Moser: Taylor, do you have any thoughts on that?

Taylor Muckerman: If I knew anything about coding algorithms, I would give it a shot. [laughs]

Moser: See, I think the answer is even simpler than that. Just take off the Z.

Hill: Just make it the estimate?

Moser: Just make it the estimate.

Hill: We've made fun of the Zestimate. I've made fun of just the word, and certainly it's improved over time, and Zillow has come out and said, "Look, it's gotten better over time. It's within 5% of whatever the actual sale price is of a home, so it's getting closer." And I get all that. This strikes me as something they came up with very early on in their tenure as a company, and someone said, "Instead of offering an estimate, we'll call it the Zestimate, and that'll help differentiate our company and our brand." And somewhere along the line, they couldn't let go of it.

Moser: Yeah. I think the biggest question in regard to the Zestimate today is, what is ze point? I would never fault a company for wanting to get better. And I mean, that's what I think this is, honestly. I do think they are doing this in order to improve, to get better. Zillow is a company that we still own in Million Dollar Portfolio, and we've kept it under the microscope because we want to continue questioning its market opportunity and the role it plays in the housing market. So I think from that perspective, yeah, that timing is interesting, but regardless, they're trying to improve it, and I think that's great. I think in regard to the Zestimate, it's more trouble than it's worth, financially and otherwise. The point you made, I think, is spot-on. I think in the very early days, it was a great brand builder, because it was difficult to take seriously, but by the same token it was new and different, it shed a new light on the housing market and how we could deliberate prices and the value of things that are out there.

The problem is now, the Zestimate holds no bearing whatsoever in the actual transaction. Having gone through just selling two houses and buying one, the Zestimate never came into play, at any point, in anything we did. If you have an appraisal, an appraiser comes to your house and gives you an appraisal, and then you look at him and say, "Well, yeah, but the Zestimate says ... " they're going to laugh you out of your own house. They're going to tell you, "That has nothing to do with anything." And I understand, the point they make, they always say that the Zestimate is a starting point to determine the home's value; it's not an official appraisal. That's the point. It's not an official appraisal, and that is what matters.

The two things that matter the most are what the house is listed for and what the appraisal is going to say. The Zestimate doesn't mean anything. And I think in a lot of cases, probably most cases, because a lot of people don't know as much about the process of buying a home, because it's not like you're just going to a store, there's a lot involved with it, a lot of figures and parties involved, it's not something where it offers any value. It can create some misguided expectations. I think some people might look at the Zestimate and think, "That house is listed for $500,000, but the Zestimate says $560,000. Let's go buy that thing right now and make $60,000!" And obviously we know it doesn't work that way. I think the class action lawsuit ... I think they're probably is some merit there to it. I think, personally, that Zillow could probably do just as well to eliminate the Zestimate altogether. I don't think it's something that would hurt their business. I think it's probably something that, in the long run, would help it, if, instead of the Zestimate, maybe they just focused on the actual facts, look at tax records, what homes in the area are selling for. Leave the appraisals to the appraisers. Unless they have a road to actually become a part of the transaction, then I feel like the Zestimate is more trouble than it's worth.

Hill: I think they need to bump up the timeline on this contest.

Muckerman: When are they due?

Moser: I feel like I just won the contest, Chris. Send wiring instructions after we finish.

Hill: There are actually two rounds to the contest. You have until Oct. 16 of this year to compete in the qualifying round, and then the top 100 entries are going to be invited to participate in the final round, which is slated to begin Feb. 1, 2018, and will end Jan. 15, 2019.

Moser: So you're saying it's going to be a while.

Hill: I'm saying they might want to bump up their timeline a little bit.

Muckerman: A year and a half to figure this out?

Hill: Yeah. A little more urgency, I think, would benefit our friends at Zillow.