Zillow LogoTo Zillow or not to Zillow
that is, Z question...

According to Zillow a 'Zestimate' is based on  "what statisticians call "a proprietary algorithm" - big words for "secret formula."  How valuable is this information?  Is it accurate, and how does one tell?

So, today I've decided to appraise Zillow, and you can weigh the results. The value of any analysis is only as good as our understanding of how is works.  Like you I'm curious, so let the games begin...
First, and this is interesting I ran a Zillow 'Bay Area' report card (click here) by comparing all sales transacted 09/04/09 vs. Zestimate's on the exact same day.  Zillow states that Santa Clara & San Mateo counties have its highest accuracy score (4 stars) with an average error below 10%.  Results of the random sample error is 16.5% average. 
Secondly, Zillow's nationwide 'accuracy report card' is available on its website click here.  By taking actual sales, comparing it to the Zestimate prior to the system updating a cross check for accuracy is applied.

Thirdly, I ran Zestimate's on 14 identical 'tract homes' in San Jose. Surprisingly, the results ranged from $499,000 to $599,000.  Looking at the different estimates, I realized those which were purchased many years ago (original owners, and those bought 70's through 90's all scored lower around $500K).  Homes purchased more recently were assigned much higher values.  Zillow therefore assumes there are NO upgrades on the homes purchased years ago.  To some degree the program is trying to be 'smart' and or 'smarter' than it actually is, which involves many assumptions.  Results on the identical homes did produce a reasonably reliable 'range' of value.  Instead of a specific number if Zillow gave a range; low, mid, and high range (like the blue book does on cars), it would be more appropriate and non-assumptive.  In this way, one could rank a home for its actual condition which would be less subjective and or potentially deceiving.    
NOTE : There are more sophisticated 'automated valuation method' (AVMs) on the market, they just aren't free.  High tech AVMs also issue a specific value, but along with it they couple it with a reliability score.  Additionally, a low-high range evaluation is included for perspective.  The most accurate AVMs are usually more regional with algorithms tailored for a specific area vs. Zillow which is evaluating the whole country based on one set of standards.
Americans just love a computer generated result, especially if they like the results, not so much if it doesn't!  But who knows about a Zillow value given the reliability factors. The facts indicate that by offering a specific value instead of a range Zillow falsely gives the impression that it is reasonably sure of the results.  While one does have about a 1 in 4 chance the value is within 5%, there is also 3 in 10 chance that the result is over 20% in error.  A computer generated value like an appraisal is an opinion of value, the difference is that the computer generated appraisal does have stated assumptions, while a certified real estate appraisal does not.