Home Appraisal vs. Zestimate: What’s the Difference?

When real estate markets heat up, property values become hot topics of widespread discussion. During lunch breaks at work, prospective buyers talk with coworkers about how quickly values are rising. Prospective sellers usually talk about valuation in terms of how much profit they can extract. As market activity increases, home values become a focus of news media attention, and this is when Zestimates usually enter the discussion.

A Zestimate is a real estate analytics product launched by Zillow when the company was an ambitious tech startup in 2006. Essentially, a Zestimate is an approximation of market value. It is calculated using a proprietary algorithmic formula that takes into account public data such as tax assessments, prior sales of comparable properties, and user-submitted data.

The Zestimate is a dollar amount often mentioned in real estate news stories with a consumer focus. You hear it on CNBC, HGTV, and CNN. You read about Zestimates on digital platforms ranging from Forbes to Business Insider and from Instagram to Reddit. What is important for everyone to know about the Zestimate is that it does not represent an appraised value. In press releases and financial statements, Zillow executives have explained that appraisal data is often included in the Zestimate valuation model, but they also emphasize that it should not be conflated with an appraisal or even an automated valuation model (AVM).

Many decades before the Zestimate, AVMs were developed with linear regression algorithms to estimate property values, using limited datasets. By the 1990s, advancements in AVM technology allowed the commercial development of more efficient and accurate AVMs by real estate data giants such as First American, which sold database access to real estate brokerages and mortgage lenders. The sophisticated AVMs used today by Realtors and other real estate professionals share some similarities with the Zestimate, which Zillow's founders continue to develop as a "free AVM tool for the general public."

When the Zestimate launched in 2006, it was not a dollar amount attached to a single property; it was a visualization of home values plotted on a map. Zillow's founders thought about making the Zestimate a range, but extensive testing of the website, particularly through A/B testing methods, revealed that visitors preferred the idea of a single price point for every property. Co-founder Rich Barton launched Expedia when the travel website was still a Microsoft property, and his experience with the pricing of airfare prompted him to develop the Zestimate as a single price point because it is more consumer-friendly.

Professional AVMs are used for mortgage underwriting, portfolio valuation, mortgage lending, and to prepare comparable market analysis (CMA) reports. Zestimates, on the other hand, are positioned as a general estimate of market values for informational purposes. Zillow explicitly states that Zestimates should not be used in place of a professional home appraisal. Realtors may look at Zestimates for quick reference when they cannot access their AVM tools, but they do not convey Zillow information to clients.

Zestimates and AVMs provide market information, but they don't involve inspections, evaluations, or reviews. Home appraisals, on the other hand, involve the opinions of professionals who ascertain data validity, analyze factors, and sometimes conduct physical inspections of the subject property. More importantly, home appraisals feature an opinion from a licensed professional, and they can be put through a field review by another appraiser if there are issues related to disputes or quality control. Depending on the real estate transaction, an appraisal report on a standard form may be a hard requirement or a closing condition; this is often the case with conventional mortgage deals that feature a high loan-to-value (LTV) ratio.

The types of home appraisals in today's real estate market start with desktop valuations, which are sometimes called "pencil appraisals." Desktop appraisals do not involve physical inspections; the appraiser gathers available data such as public records, tax assessments, AVM ranges, and information pulled from the Multiple Listing Service (MLS). This type of appraisal is often used by lenders that offer low LTV mortgages.

There are drive-by appraisals, which are also known as exterior-only inspections, whereby the appraiser only inspects the outside of the house. Then we have the Uniform Residential Appraisal Report, which is completed on a standard Fannie Mae 1004 form, and it is also known as a full appraisal. The appraiser inspects both the interior and exterior of the property to fill out the 1004 form; the inspection is thorough, comprehensive, and supported with digital images of the property. In addition to the inspection, full appraisals also call for the evaluation of market data, recent comparable sales, and property characteristics to determine value.

A full appraisal provides the most accurate valuation, which may or may not be close to what the Zestimate, which follows an AVM methodology suggests. Unless the subject and comparable properties have user-provided data that accounts for unique characteristics such as recent renovations, deferred maintenance, or specific location advantages, Zestimates are incomplete; furthermore, they strongly rely on recent sales data, which is why you get market values based on pricing and transactions. Appraisal inspections, on the other hand, physically inspect the property, taking many nuances into account, and professional opinion goes a long way in terms of selecting truly comparable properties.

In 2016, Zillow executives reported that the nationwide error rate of Zestimates was 7.9%. Seven years later, the rate was 1.9% for MLS properties and 6.9% for off-market listings. Even with their higher accuracy, Zestimates are still impacted by discrepancies ranging from incorrect square footage, inaccurate information about upgrades, or outdated assessments.

The most important aspect of Zestimates to remember is that they reflect market values, meaning the prices that willing buyers would pay and willing sellers would accept. An appraisal also aims to estimate market value, but it's ultimately a professional opinion. The actual sale price of a property is the true reflection of its market value at that specific point in time. A Zestimate or AVM can provide a general idea of a property's worth, but an appraisal offers a much more detailed and reliable assessment based on analysis, inspection, and professional experience.