Zillow and 'Zona Duel over Zestimates

The real estate Web site is wrangling with Arizona regulators about the blurry line between official appraisals and online evaluations

by Peter Coy

Zillow.com is one of the most popular real estate sites on the Web, but it's not well-liked at the Phoenix headquarters of the Arizona Board of Appraisal. The board is ordering it not to provide "Zestimates" on the value of homes in 'Zona on the grounds that it isn't a licensed appraiser in the state.

If Arizona gets its way—and other states follow suit—it could be a big problem for Zillow, since those Zestimates are one of the site's big draws. According to Zillow, its "automated valuation model provides Zestimates on more than 50 million homes nationwide and is used tens of millions of times each month."

The state board issued a cease-and-desist order to Zillow.com in July and another in November, then turned the matter over to the criminal division of the state attorney general's office, which has sent Zillow a letter, according to Deborah Pearson, the executive director of the board. Says Pearson: "The board does feel that based on what the product is, that it is an appraisal under the Arizona statute definition of an appraisal." The dispute was brought to light by an article in The Arizona Republic on Apr. 14.

Taking It Too Zeriously?

Zillow says its computer-generated Zestimates aren't formal appraisals and therefore don't require a license. The company is still doing Zestimates in Arizona, but says it hopes to "engage in a productive dialogue" with the state board. While unlikely, in the worst-case scenario, the state could file criminal charges against the company for defying its cease-and-desist order.

The stakes for Seattle-based Zillow are high because there are 25 other states whose laws on appraiser licensing resemble Arizona's, among them Texas, Pennsylvania, Michigan, and New Jersey. The real estate community is divided over whether Zillow is a good guy or a bad guy. Some agents feel that potential buyers and sellers take the Zestimate too seriously.

"I've had occasions where sellers said, 'My house is worth $50,000 more than you want to sell it for,'" based on the Zestimate, says Lanette Branch of Re/Max 1st Advantage Realty in Bel Air, Md. "I'm your go-to girl here," says Branch. "I know this market. Zillow is not privy to the information I have."

The Barking Dog Factor

Branch welcomes Arizona's action because she says Zillow doesn't make it obvious enough that the Zestimate is something other than an official appraisal. You need to click on a little blue question mark next to the Zestimate to bring up a pop-up text balloon that says it "is not an appraisal. Use it as a starting point to determine a home's value."

But other agents say Arizona regulators shouldn't be so worried about a Web site. Phoenix Realtor Jay Thompson calls the state's effort "just plain idiotic and asinine." When a client thrusts a Zestimate into his hands, says Thompson, "I explain, 'Zillow is a piece of software. It doesn't know that the dog barks in your neighbor's yard all night long.'"

Coy is BusinessWeek's Economics Editor.