Zillow’s new Rent Zestimates could bring headaches to rental markets

Zillow launches Rent Zestimates under a cloud of secrecy, avoids scrutiny, and gets a fairy tale send off from those it sponsors, but is less likely to get a pass from those in the property management arena.

Rent Zestimates are essentially designed to insert Zillow between the property and the consumer by providing a rent range or “starting point” from which rents should begin based on Zillow’s market data.

According to Zillow: Rent Zestimates. Computed using a proprietary algorithm that takes public record information, as well as information from hundreds of thousands of rental listings on Zillow, they are starting points in determining a home or apartment’s fair rent price. Combine this with information on comparable homes and apartments for rent on Zillow, and a prospective renter will have many more data points to figure out how much they should pay for a rental.

It’s an interesting concept, however, we wonder if it takes into account existing systems like Rent Roll for example which is based on that second’s market demand. Rent Roll takes into account a property’s current vacancy versus upcoming vacancy, upgrades within the unit, foot traffic and lease conversion ratios, as well as current market conditions where prices can change virtually from second to second.  On site property management typically has no control over this pricing without corporate approval and usually applies only to extenuating circumstances.

Other problems will stem from appraisals versus Rent Zestimates where investors are purchasing rental property and are expected to show positive cash flow, however, they have an unwavering Rent Zestimate sticking out like a sore thumb that cannot tell the different between a brand new unit and a two year old non-upgraded unit that is fully remodeled and fully upgraded.

Is it good for consumers? Sure it is- if it does not create a false sense of a given market high or low, however, there is a margin for error. Most of our questions deal with Rent Zestimates being too low, however, there is even more havoc to be discovered when a Rent Zestimate is too high. Market rates are always higher than actual rents. Rent specials, or prorated discounts for immediate move-ins may not be taken into account in this reporting, and a Rent Zestimate that is too high could in fact exclude fantastic neighborhoods from the reach of those who might find a “market rate” far out of their means.

We are always on the side of consumers and love the idea of challenging property managers, Realtors, and property owners on rental pricing, however, there are real systems in place to gauge market conditions where rentals are concerned for apartment communities where the real test of this product will take place. New properties come on line all the time where “lease up” conditions can drive down prices for months until vacancies come back in line in that area, however, market rates will still be set at their proper rates despite rent specials. Will Rent Zestimates report actual lease rates or market rates? And does it even matter since they’ve created a third rate where two already exist?

In the neighborhoods where single family homes are concerned, renters will quickly learn that there may be a fractional margin to bargain with, but chances are, that’s all there is as prices of rentals in neighborhoods are often pretty steady and consistent.

With leasing being the new black, and rent being the new chic, this move ranks up there as a power move by Zillow but probably not for the reasons they’re hoping for. It will definitely drive app traffic as well as traffic to rent search and Rent Zestimates, however, unlike what it saw with Realtors and Zestimates, it faces a very well organized multifamily industry with many checks and balances that rely less on guessing and more on specifics that will more than likely challenge Rent Zestimates. While multifamily properties can train staff to answer questions or explain Zestimates, we see a potential for independent investors to be clouded with confusion and frustration when they are caught off guard.