By Adam M. Law
With today’s digital marketplace and ever-expanding social networks, most individuals’ first step when looking to buy or sell a home is to grab their phone. Inevitably, one of the first links one finds is Zillow, the online real estate database founded in 2006 by two former Microsoft executives and founders of Microsoft spin-off Expedia. One of their most recognizable tools, the “Zestimate,” has recently faced some questions as to how it fits within the traditional real estate world of appraisals, home inspections and Realtors.
In what looks to be a definitive end to a consumer fraud class action that has stretched on for nearly three years, the 7th Circuit Court of Appeals recently ruled in Patel v. Zillow, Inc., 18-2130, 2019 WL 491797 (7th Cir. Feb. 8, 2019) that Zillow’s Zestimate valuation tools are just that — estimates repackaged under a snazzier name.
In Patel, et al. v. Zillow, Vipul and Jyotsna Patel sued Zillow, claiming its Zestimate property valuation tool had fraudulently created an artificially low estimated value for their home. The Patels reached out to Zillow and requested Zillow either modify the site’s Zestimate to be more in line with their asking price or take down the listing altogether. When Zillow refused, the Patels brought a putative class action lawsuit against Zillow, asserting claims under the Illinois Uniform Deceptive Trade Practices Act and the Illinois Consumer Fraud and Deceptive Business Practices Act. The district court granted Zillow’s motion to dismiss, and on appeal, the Seventh Circuit affirmed the lower court’s ruling.
In writing for the court, Judge Frank Easterbrook explained that Zillow creates their property value estimates, or Zestimates, based upon a proprietary algorithm that uses publically available data, such as the property’s location, tax assessment value, number of rooms and the selling prices for nearby comparable properties. Importantly, however, Zillow does not actually visit the properties or conduct inspections of any type. As a result, while Zillow claims their median error in pricing is less than 6 percent, they acknowledge that their Zestimate is actually off by more than 20 percent in about 15 percent of reported sales.
When the Patels listed their home in an affluent Chicago suburb for almost $1.5 million, they contended that the Zestimate of just over $1.33 million for the property scared away many potential buyers and ultimately made it more difficult for them to sell their home. Hoping to resolve the issue, the Patels contacted Zillow in an attempt to get their Zestimate increased or have the property removed from the database altogether. When Zillow declined, they filed suit claiming the website was conducting real estate appraisals without a license and participating in unfair or misleading trade practices. On the first point, the district court found that an “automated valuation model” such as what Zillow employs is fundamentally different than an “appraisal” as a matter of law, and moreover, the Patels lack a private right of action to enforce the relevant statute. As for the claim of unfair or misleading trade practices, both the district and circuit courts noted that Zillow’s Zestimates are unquestionably presented as mere opinions, and as such are canonically not actually misleading or deceptive statements of fact.
While the Seventh Circuit’s decision in Patel v. Zillow likely reinforces what many homeowners and potential homebuyers likely believed about the accuracy of Zillow’s Zestimates or the comparable estimate tools provided by websites such as Trulia and Realtor.com, what it shows about the changing technological market for information on residential homes is equally telling. As little as 15 years ago, these websites did not exist, or were merely in their infancy. Potential buyers and sellers had no choice but to hire a Realtor to advise them on what to list their home for, on the one hand, and for guidance on finding homes for sale within their price range or target area on the other hand. Today, it isn’t uncommon for homebuyers to reach out to Realtors with a list of properties they have already identified online with the hope that their Realtor can merely guide them through the homebuying process, rather than doing much of the legwork in identifying home listings.
Patel v. Zillow helps highlight the folly of relying too much on these online tools. As much as we have tried, society has not yet replaced Realtors, professional appraisers or agents with free-to-use digital versions. While sites such as Zillow and Trulia can be helpful resources in assessing the market or developing a rough estimate of a property’s value, they need to be viewed objectively for what they are.
As the weather begins to heat up, so, too, will the local open house market. Hopefully, pricing for the new listings coming on the market will be determined with something more than just an “automated valuation model,” though certainly they can help individuals do their own research before spending the weekend going from open house to open house sampling cheese platters and gawking at how the Joneses next door are living.•
• Adam M. Law — [email protected] — is an attorney with Taft Stettinius & Hollister LLP and a member of the firm’s real estate and business and finance practice groups. Opinions expressed are those of the author.