Is Zillow Digging Itself a Deep Hole?

With a bit of fanfare earlier this year, real estate information provider Zillow (NASDAQ: Z  ) launched a new service aimed at homeowners who are remodeling their houses. Called Digs, the service purports to give fixer-uppers an idea of what remodeling costs run in their area, which they can use as a basis for comparing bids from contractors. 

Garbage in, garbage out
It's similar to their traditional home pricing business. I get a (dreary) monthly report from Zillow telling me how much my home is worth based on sales and listing activity in my neighborhood. Because the database for such information is so dense, it (sadly) lets me see how far underwater I am on my mortgage.

Trulia (NYSE: TRLA  ) provides similar information to homebuyers, sellers, and owners, but, unlike rival ZipRealty, there are large holes in the information Zillow and Trulia provide, because real estate brokers can withhold information from them at will.

ZipRealty gets its data directly from multiple listing services that are part of its IDX database. A brokerage can only withhold data from ZipRealty if they withdraw from the IDX, which they'd be loathe to do if they want to properly serve their customers. While Zillow and Trulia also get some of their data from MLS brokers, the brokerages can hold back data from them, and ZipRealty suggests that 15% of the homes its rivals show as being for sale actually aren't even on the market. Moreover, as many as 30% of homes that were listed for sale in an MLS database were not identified by the two pricing portals as being on the market.

Dig, dug, done!
Well, there's a similar gaping hole in Zillow's Digs service. In the latest issue of Remodeling magazine, a publication targeted to contractors, it says Zillow admits that the numbers it provides for items like kitchen and bath jobs are based on figures provided by just a few dozen contractors. The magazine further alleges that the numbers those contractors came up with are derived by simply looking at photos of kitchen and bath redos, and then coming up with their estimates.

Seems like a pretty sketchy model to grow on, but there are additional problems that may leave customers facing sticker shock when they price their own projects. Digs offers estimates for just 33 metropolitan areas, and adjusts those figures using data culled from federal wage and hourly rates to come up with a customized option. That may not actually provide a valid, real-world assessment.

Punch list
Certainly a service has to start somewhere, and Zillow's Digs service could be a launching pad to grow the estimates business larger. But if the quality of the numbers is in question, and consumers find they can't rely upon them for their own particular projec,t then it could end up bringing down trust in the company as a whole.

Right now, homebuyers use a Zillow estimate as their starting point for negotiations because, even with the alleged errors, omissions, and limitations, there's still a lot of meat. With the Digs service, however, homeowners may find that when they use an estimate as the basis for their negotiations, they'll find that they've dug themselves into a hole instead.

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