A real estate lawyer in Illinois has filed a lawsuit against online real estate firm Zillow Group Inc. (NYSE: Z) claiming that the estimates the site provides are in fact “appraisals” that have undervalued her home’s value on several occasions and established a “tremendous road block” to selling the house.

According to the Washington Post, this lawsuit may be the first of its kind in the United States. At issue is whether Zillow’s “Zestimates” are in fact appraisals that provide market-value estimates for buyers to use when trying to value a property. The lawsuit claims that Zestimates meet the legal definition of an appraisal and that Zillow must be licensed to perform appraisals before providing such estimates. In addition, Zillow should obtain the homeowner’s consent before posting the Zestimate/appraisal online.

A Zillow spokeswoman told the Post that the lawsuit is without merit. The company has provided Zestimates since 2006 and currently has a cache of more than 110 million home Zestimates.

The accuracy of the Zestimates has been disputed for years and Zillow acknowledges the errors. The Post reported the company spokeswoman’s remarks on a Zestimate:

Nationwide, … it has a median error rate of 5 percent. Zestimates are within 5 percent of the sale price 53.9 percent of the time, within 10 percent 75.6 percent of the time and within 20 percent 89.7 percent of the time, Zillow claims.

The Post does its own arithmetic on Zillow’s comments:

Roughly one quarter of the time, the value estimate is off by 10 percent or more of the selling price, and wrong by 20 percent or more 10 percent of the time. The 5 percent median error rate may sound modest, but when computed against median sales prices, the errors can translate into tens of thousands of dollars — hundreds of thousands in high-cost areas. Also, in some counties, error rates zoom beyond the 5 percent median: 33.9 percent, for example, in Ogle County, Ill., and 10 percent to 20 percent in a handful of counties in Ohio, Maryland, Florida, Oklahoma and Illinois.

At its website, this is how Zillow answers the question, “Is a Zestimate an appraisal?”:

No. The Zestimate is not an appraisal and you won’t be able to use it in place of an appraisal, though you can certainly share it with real estate professionals. It is a computer-generated estimate of the worth of a house today, given the available data. Zillow does not offer the Zestimate as the basis of any specific real-estate-related financial transaction. Our data sources may be incomplete or incorrect; also, we have not physically inspected a specific home. Remember, the Zestimate is a starting point and does not consider all the market intricacies that can determine the actual price a house will sell for.

If the listing price were, say, 20% higher than the Zestimate, would that affect the amount of effort you put into getting more information or, perhaps, making an offer on a house? Is a Zestimate really a starting point or a decision point? That appears to be the issue.

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