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February 18, 2007 Free Yes, But Reliable?
Whenever I get something that carries significant value for free, my first inclination is skepticism. As such, I was not surprised to read a recent Wall Street Journal article investigating free real estate valuation services provided by Zillow.com (among others). The general conclusion of the article was that Zillow did provide reasonably accurate real estate valuations... most of the time. However, there were significant stumbling blocks when it came to correctly interpreting data for certain markets and accounting for statistical outliers.
Of course as a financial analyst, working for a business valuation firm I can't help but think of the parallels between a website providing free real estate valuations and a similar animal for business valuation. However, in determining an accurate valuation of a business enterprise, often the most crucial information is provided in the outlying details. Does the company have a key man with responsibilities across the organization? Does the top management have a succession plan? Do new market innovators threaten to drive the company's product or service into obsolescence? The list is long and the relevant questions will differ for many companies.
So, while I have no doubt that many will try to develop accurate business valuation services based on user input and behind the scenes computer algorithms, I am equally confident that they all will carry significant fine print.
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Comments
The WSJ is not the only one to give Zillow some attention of late. Fortune, CNN-Money, 60 minutes have also entered the fray. Further, as it turns out, Zillow is but one of many company's "webyifying real estate" as Fortune puts it. Many real estate agents are rightly scared of what Zillow might further do to erode their reson d'etre.
Zillow creates transparency, like a public stock market, where once there was obfuscation. The reality is that information about every property is readily available. Technology serves to enhance access and flow of that information. At least in terms of price. However, what's not known are the specifics, such as how well a property was maintained, whether crime has hit the area, barking dogs, and the like. And that's where the agent comes in. Further, a true real estate professional is an expert not only in real estate prices and neighborhoods, but also has a strong grasp of relevant contract law and is a good negotiator to boot.
So, technology appears at least for the moment to be a threat only to those lacking in skill (i.e., the role of a skilled agent, like skilled financial analyst, who brings value to customers, remains in tact).
Posted by: Marty Wisott | February 19, 2007 06:37 PM
Interesting analysis, James, I would argue however that Zillow is often too inaccurate with it's data in many markets as the prices listed for the homes are often far higher or lower due to Zillow using the local county tax information for its information source on the home prices. Where I live, the county tends to inflate prices well beyond market value to increase property taxes. But its a great service and I expect to see it and similar services continue to improve it.
Posted by: Karthik Hariharan | March 3, 2007 03:40 PM
Karthik, your point is well taken. I agree that this is an additional flaw to many Zillow appraisals. While Zillow and sites like it do privde a good service as estimates, the fact remains that the value added by professionals can be quite substantial in many cases.
Posted by: James | March 6, 2007 04:46 PM