The Wall Street Journal published a great piece yesterday titled “How Good Are Zillow’s Estimates?” (subscription required). The Journal analyzed 1,000 recent home sales and compared the price paid with Zillow’s “Zestimates.”

Summary of The Wall Street Journal’s findings:

• Median difference was 7.8% (Zillow reports 7.2% margin of error)
• Estimates were both too high and too low
• 30% of transaction prices within 5% of estimate
• 11% of transaction prices within 25% of estimate
• 3% of transaction prices more than 50% different from estimate

The Journal cited two egregious discrepancies: a Fall City, Washington home that sold for $2.7 million (Zillow estimate $661,756) and an El Cerrito, California home estimated at $544,361 that sold for $80,000.

Zillow uses an algorithm to estimate home values based on the sales of nearby homes and tax assessment data. The site allows home owners the opportunity to modify estimates based on remodeling or other factors.

$3,000,000 in Kiawah Island

A year ago, Helium Report started using Zillow to see if destination clubs were quoting reasonable estimates for the value of their luxury vacation homes (see Feb 2006 post here). We found two homes in Kiawah Island, South Carolina with Zestimates in the mid-$3,000,000 range (see Google satellite map, below).

At the time, the homes were owned by Leading Residences of the World and Dream Catcher Retreats. Both residences are now portfolio homes of Quintess after the luxury destination club’s partnership with Leading Hotels of the World and acquisition of competitor Dream Catcher Retreats.

The Zillow estimates were in the range of the $3 to $4 million average asset value cited by the respective destination clubs at the time. Every destination club uses a broad average to indicate the approximate home value (see our directory for details).

In general, portfolios include expensive beach-front or slopeslide residences (often higher than average) as well as less expensive urban condos and penthouses (typically lower than average). Using an average of $3 million for leader Exclusive Resorts’ 300+ homes, Helium Report estimates a total real estate portfolio worth over $1 billion.

Destination Clubs: Owned or Leased Homes?

Zillow is a reasonable proxy for luxury vacation home values, but the more important question to ask when evaluating destination clubs is whether the firm actually owns most of the homes, rather than leases the majority. Helium Report recommends destination clubs own at least 70% of their portfolio. Indeed, a key factor in the demise of Tanner and Haley was the club’s use of the opposite strategy: leasing more than 70%.

Increasingly, destination clubs are submitting themselves to a third-party independent audit of real estate values. A “Big 4” accounting firm verifies the club has sufficient net assets to refund member deposit obligations. To request our 50-page Decision Guide to Destination Clubs, including 175 key due diligence questions to ask, click here.