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White Paper Finds Nationally Foreclosures Sell At 72% Of Market Price

I often get asked, does Zillow account for Foreclosures when calculating a Zestimate? Short answer: no.

However the long answer is very interesting. Recently Zillow released a white paper where we looked at the question of if Foreclosures constituted a distinctly separate market from non-Foreclosures. This paper was born from this debate where some thought there were so many Foreclosures that they were the market; while other argued that Foreclosures have characteristics that caused them to sell lower than at market value.

The white paper itself goes into a high level of detail about methodology and data points used, but I'll skip to the results here. Our data found that the answer to this question is YES, they are distinct markets.

Of course, real estate is local so the numbers vary across local metros, but the trends held relatively the same.

Nationally the average ratio of Foreclosure prices to market value is 72%. This is against the assumption that non-Foreclosures sell at market value, or 100%.
It appears that more Foreclosures in an area do lead to a smaller gap between Foreclosures and non-Foreclosures. However, there is rarely less than a 20% discount for Foreclosures.

Based on the data, it indeed did find that Foreclosures sell for substantially less than non-Foreclosures, meaning that you can't compare two like houses when one is in Foreclosure and the other is not. Two conclusions were drawn at the end of the study.

1) The difference in these two markets is the reason why we can't include Foreclosures in our Zestimate calculations. We also don't use them in factoring our Zillow Home Value Index (ZHVI), or the trend information you find on the Local Info tab of the site. Interestingly, this is a key reason why our ZHVI is currently down 21% from its peak compared to Case-Shiller Home Price Index (which does include Foreclosures) which is down more than 30% from its peak.

2) These findings show that it is inappropriate to include Foreclosure sales data when appraising non-Foreclosure homes. Adjusting for the condition of recent Foreclosures, as well as the Seller's motivation in the Foreclosure situation, sounds great in theory but is ultimately complex in practice. Especially given the Appraiser has likely not been inside the homes being used as comparables for the subject home.

Download the full report - Price Differences Between Foreclosures and non-Foreclosures

Video recap with Dr Stan Humphries, Zillow's Chief Economist

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Posted by Sara Bonert {Real Estate Internet Marketing} on 02/03/2010 11:33 AM

Comments (53)

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53 Comments on White Paper Finds Nationally Foreclosures Sell At 72% Of Market Price

FEB

2010

Knowing this information, you would think that Lenders would be anxious to approve Short Sale transactions to avoid further losses in the event that their borrower"s homes go into full-blown foreclosure. The Short Sale process must be streamlined so that more of these sales can get to the Closing table.

Sara, thanks for sharing that is good information and I will go read the report.

Now, why are appraisers in Michigan using foreclosures in their appraisals?

We see it all the time, the data does not surprise me, the foreclosure's are definately lower, good to know the %.

Hey Missy - Your question is exactly what I was hoping would this report would help agents prove why this is not a fair practice! Now you have statistical proof why this isn't a fair practice.

I'm not sure that the Zillow data can be the best source, given that not every RE company and mls makes their data avaiable to them.

Hi Sara -- Does the foreclosure lp/sp ratio use the "current" list price, or the "original" list price. Since many foreclosed properties have a regular price reduction before they eventually sell (at least in our market here in Cleveland), the olp vs. clp difference would really skew the #s.

Anthony - This report didn't rely on data from when homes were actively for sale. We more relied more on the data we get on public records for the 100M properties and Zestimates we have on the site.

If you read the methodology section of the report, it spells this out a lot clearer and more in depth.

Sara,

Thanks so much for that excellent information. I have done some research on prices here in Lexington and find similar results on REO homes.

I find it most interesting that so often the listing prices are very similar to other homes but then they sell for about 50 percent of the listing price.

Sara:

Thanks for such great information. I taught a class on HUD properties today and gave a similar figure based on experience. It's good to know that I was close, now I will go read the article.

Tom: What most lenders will never tell you is that short sales don't save them any money, except in very rare circumstances, and they would just as well let the home foreclose so they can control everything.

Sara, great information. I am going to read that white paper! Thank you!

Im actually shocked at that 72% is way low here in Central Florida. Properties are maybe priced 15% below market value with most priced at market value and going for over asking price. I really dont like national data since everything in Real Estate is so local.

Hi Sara,

Sorry, but I question the data myself.

This is funny. Your confirming what all of us already know about the Zillow data. It's value is VERY questionable. Zillow should be used for entertainment purposes only and the zestimates are not correct. I could pull a number out of my *** and be closer to reality. There's a 200K spread on my personal residence on Zillow. That's really usefull.

Hi Andrew,

Usually when Zestimates are off by as much as $200K it's because the data we have from the county doesn't match the reality of the home's physical attributes. Owners can claim their home and update their home facts, and then we recalculate the Zestimate. (Here's a video on the Zestimate and its strengths and weaknesses if you want more info.)

The analysis that Sara blogged about here though isn't directly related to the Zestimate. It was a very thorough analysis by our Chief Economist (Dr Stan Humphries), comparing the sale prices of foreclosure homes versus the sale prices of similar homes that were sold through conventional means. The Zestimate isn't at issue here. To give you a sense of the rigor of the analysis, I should point out that the Chief Economist of Deutsche Bank (Dr Torsten Stok) just sent out this analysis to all of Deutsche Bank's institutional investor clients worldwide. It's the real deal.

Say what you will about Zestimates (and believe me, I've heard it all before!), but this analysis isn't about that. Here is the study itself.

There is only one real estate market. Why would a buyer care whether a property is a foreclosure or not. If they find two similar homes and one is a foreclosure for 100k and the other is a regular sale for 139k why would they buy the one for 139k? Makes no sense. I agree that it sucks that foreclosures bring the market value of other homes down. And it would be nice if banks listed their properties close to market value. But there's only one market.

Sara,

That's a noteworthy paper. It reaches some interesting conclusions. Based on our high foreclosure rate the numbers here in Vegas might be even lower.

Nathan - I can totally understand why you would say that, and actually an online debate where a number of people said the same thing is the reason that we a deep dive into the data to if this was true or not. But after seeing the data, it is clear that there two seperate markets. Click on the 'this debate' if you want to see the orginal back and forth.

I just read the paper and think it's a valuable contribution to the study of our markets. One point I wondered about was whether these were all MLS sales or if the foreclosure properties were valued at their auction prices. Our local foreclosure auction is very active with dozens of homes listed every day, but almost all of them going back to the lender. The group of investors who make up the third party purchasers almost always will pay between 70-75% of market value, but no higher. That's due to unknown interior conditions, possible eviction issues, etc.

On the other hand, properties the banks take back that turn up as REO listings are priced competitively with traditional open market sales of simiilar, non-foreclosed homes. Given the prevalence of refinancing in the last decade it's hard to find homeowners who aren't underwater and want to sell into this market, but death, divorce, and job transfers still make the market turn over. Neighborhood for neighborhood, cookie cutter subdivision for cookie cutter subdivision, once a home is in our local MLS it doesn't have as big a pricing differential as your study found.

The question I have is: how can people distinguish between a foreclosure and non foreclosure when performing CMA's if that info isn't readily available in th MLS?

Thanks for sharing that. I am sure we all thought that buy didn't know the real numbers

This is interesting, and I can see why foreclosures shouldn't be included, but when they are a large percentage of the market, doesn't that kind of make them the market?

This makes total sense. Most foreclosure properties have some issues with them as opposed to one where someone has been living in it and want to sell it for the most possible. On the other hand the bank want to move the property, get it off it's book and will do the minimum to get it sold. Glad we have this data to substantiate.

Very interesting Sara. Thank you for posting this information for us.

FEB

2010

Zillow's accuracy is questionable. Zillow comes close sometimes, but is off seemingly most of the time. Way too much to be considered accurate. A home we just sold was valued $20,000 less than our lowest offer. Not only that, but it also had a Zillow price range that spanned $100,000 (on a $300,000 condo). Yes, foreclosures typically sell under market value, but in theory, wouldn't that become the new market value for a home that is similar in traits to the foreclosure? Also, wouldn't it depend on how many foreclosures are available in your market as to whether they will affect the value of other non-foreclosure homes in the market? The very fact that Zillow relies on county data, which has plenty of errors on things like square footage and is not necessarily up to date, is sketchy. What happens when someone remodels their kitchen, has an upgraded landscape, or new roof, when the majority of the market may not have those upgrades? What about cities with newer construction, like Valencia,CA, where county records will show 0 beds, 0 baths, and 0 square feet? I still see this stuff all the time. You can't rely on homeowners to update their info to make the system accurate. The problem is, as market professionals, we have to proove to sellers why their Zestimate is NOT accurate, which really pisses them off if market value is less (or MUCH less). I would like to see a report that features the Zestimate and the actual sold price of all homes in my market.

Zillow! Coming to a theater near you!

(For Entertainment Purposes Only)

Scott Miller, Realty Associates, Boca Raton, FL

That's interesting about the 72% stat. Just reblogged this article. Thanks!

Thanks for sharing the 72% figure - the sharks can sense blood in the water !

This is interesting... but for the purpose of getting an appraisal that an Underwriter will accept - I would take them into consideration!

A few comments to the Zillow bashing crowd. Zillow is a good resource for a basic starting point for your due diligence. Also, as professionals everyone should understand there is due diligence on everyones part, broker, agent, buyer, seller, investor. You can't base a national trend on every situation and if you do- "we'll you get what you get"! You can't push buttons all day to get true results without having your finger on the pulse of your area. That's why it's called collecting data.

As an investor in NJ I can tell you exactly what we do in our business. We do all the "normal" due diligence i.e. check tax records, mortgage docs. talk with associates, etc. And, then we really get to work and realize that the only numbers that matter is what homes in that area actually sold for, and what people were willing to spend-- and how much time it took to sell(DOM). And, throw a little bit of "Gut instinct" in there for good measure.

The reality is anyone can sque the numbers to make sense. Ask yourself this- is the house a true comparable and if it is, what did it sell for and for how much? Obviously, you would calculate into the equation homes that sold in the area-should have sold in 6 months or less to give you a pretty clear analysis. "Do I hear market correction?", "I think I do".

Now that you've done some work for accurate data and you know your area, you can make your case to your investor, banker, seller or buyer. Now take action and get results! Good luck. "Sorry, for the pep talk, I thought I was in an investors meeting there for a minute".

Just some thoughts to share. Sincerely, thanks for the opportunity.

Jeremy (#24) - "I would like to see a report that features the Zestimate and the actual sold price of all homes in my market." Here you go, Zestimate Accuracy link. We report the number you specifically requested for almost every county in the county. We compare our Zestimate to the actual sold price.

I have not read the whole white paper yet but I am working in it... I am curious about the same thing that Dave Roberts asked:

"One point I wondered about was whether these were all MLS sales or if the foreclosure properties were valued at their auction prices."

It's like saying that photos don't lie. Statistics can be skewed to say anything you want. I will attest after having shown hundreds of foreclosures in Minneapolis and St. Paul. Numbers are only part of the picture. If a particular area is heavily laden with foreclosures, those properties will sell way below the previous value and for less than the list price. However, almost every foreclosed home that I have written offers on was in multiple offers that drove the price $5-$30K over list price. The is no way to track those numbers.

Our mls data shows that for the last two quarters of 2009 over 50% of sales were bank mitigated. Both categories of foreclosed and short sale have lower list price than competing traditional sales because they aren't distressed properties. We had huge inventory of very cheap foreclosed properties in inner city areas. Some of the properties were totally trashed, others in good condition. I've shown properties that were listed for 30% of their previous price. Banks are pricing very aggressively to move properties, and have been making repairs to make them habitable. Only on rare occassion when there is freeze damage or mold have I seen prices deeply discouted from the list price.

Sara, this post is totally separate from the whole Zestimate debate. You are talking about actual sales, right? Appraisers do use foreclosures, like it or not, if there are enough of them and many are lowballing appraisals even if they don't have to. Thanks for clarifying that you do not use them. I like that. It would be great if a law were passed to exclude them from appraisals and short sales as well - or at least bring them up to market value through adjustments. There is no attempt to do that in the appraisals I have seen that use them and this is wrong, in my opinion. They are distressed sales.

Sara, thanks for sharing this information. I'll have to read the entire article. Thanks again.

Robert,

The problem with what you said is that many clients somehow got the impression that Zillow was accurate and they look to it for what a house is "worth". Then they call us as agents and we have to spend the first hour explaining how Zillow is not accurate and it is just non-productive time. Zillow is great for entertainment purposes.

In my market, foreclosures are selling at market value, or very nearly at market value. Sure, overall foreclosures sell at a discount, because a much higher percentage are physically distressed, out dated and have mold and termite issues that a traditional sale most likely do not have. If a foreclosure is turn key, and it happens now and again, it will absolutely be competition for a similar property. There is no way that it will sell for a 20% or more discount. If a property needs $50k in repiars or upgrades, it will be reduced comenserate to the cost of remodel. CNBC and the media in general perpetuate this "bargain" myth constantly. Every time I hear, "Foreclosures are selling at discount prices", I chuckle. Not in my market they aren't. Try to find a physically distressed property to remodel and resell in the DC area. It will get 10-20 cash offers. Every guy with a pick up truck, a skill saw and a line of credit are bidding these things up, and I can't find anything for my investors. Even at the courthouse sales, it is tough to find any "deals".

Andrew,

Clients in general will listen to the news and believe the sky is falling, based on what they've heard. I don't see much difference in clients that are looking to by a home. They will absorb only the information that they are presented. All of us have a job to do, whether we're agents, investors a buyer or seller of property.

Trust me I can understand your frustration when dealing with a client who only believes what they read or heard. But, again Zillow or any other site or information source has to be substantiated to be made valid. If you find yourself debating with clients over what information is accurate, it's time to take a deep breath, offer a solid presentation based on factual data and let the chips fall where they may.

You and I both know, most people in general are good people that are probably misinformed to one extent or another when it comes to understanding information in an area outside of their expertise. All we can do is help them understand the information presented and hopefully they feel comfortable enough to trust it and who it came from.

In my original comments I stated that Zillow was a good basic starting point and it does have some useful information. As long as it's back up with solid data from other sources like town tax and assessment info, appraisal data and actual sales and market analysis data. Remember, if an individual isn't going to take the time to research a large purchase like buying or selling a home or rely on a trusted company or individual to give them the best information available, maybe they don't deserve your time. Thank you. We'll be talkin'.

Robert

I pay no attention to Zillow! Their sales information in Texas is highly suspect because Texas does not require sales prices to be recorded in public records. It appears to me that a great deal of the sales they claim are actually loan amounts that they get from the Deed of Trust which is filed for record.

They also seem to pickup amounts listed in the Substitute Trustee's Deeds that are filed after a property is foreclosed on as sales.

An example of this occurring is a comp sale they listed when I looked up my home on Zillow. Zillow listed a property that is actually in my neighborhood (the rest of the comps were not) as selling for $129,000 on 2/12/2009. A quick check of the records found that this was the amount on the Substitute Trustee's Deed filed by Wells Fargo on that date. Wells Fargo repaired the foundation, painted the house and installed new floor coverings. Then they sold the house on 7/29/2009 for $153,000 but Zillow did not have that sale.

This is only one example of why Zillow can not be trusted in Texas.

To several of the comments: Our analysis looked at sale prices, not list prices. Foreclosure prices are sold prices for REO sales (defined as the resale of a home that has previously had a Trustee's Deed Upon Sale or equivalent transaction) regardless of whether they were marketed via the local MLS or not.

@ David Roberts #18: Note, it is quite possible that listing prices between foreclosure resales and non-foreclosures are more similar even while it is also true that actual sale prices are quite different (as found in this analysis).

@ Christine #21: Yes, the more foreclosure re-sales, the lower the discount was but it never got much below 20% discount even in areas with lots of foreclosures (e.g., more than 50% of monthly transactions made up by foreclosure re-sales).

@ Jeremy #24: "...wouldn't that become the new market value for a home that is similar in traits to the foreclosure?" Apparently not, unless you believe sale prices lie. Controlling for physical attributes and location, a non-foreclosure home will sell for more than an REO home. Why? Condition, motivation of seller, more disclosure from previous owner, etc. Note, if you don't control for attributes and location, then the difference between REO and traditional sale prices is even greater.

"...wouldn't it depend on how many foreclosures are available in your market…?" Yes, a bit. Discount varied from 18% to 59% and there was a moderate relationship between increasing proportion of foreclosures in the market and decreasing discount.

@ Mary Jo #32: You're making some good points between foreclosure prices and prior sale prices for the same home or the listing price for the home. This analysis looked at the differences between foreclosure and non-foreclosure sale prices.

@ Sharon #33: "...or at least bring them up to market value through adjustments." This is the key. Current appraisal practices do allow for the use of distressed sales in the valuation process and this is, frankly, unavoidable in many markets currently. Guidelines do, however, stipulate that distressed sales need to be adjusted to reflect fair market value. See http://matrix.millersamuel.com/?p=4853 for an interesting discussion of how appraisers wrestle with this guidance.

@ Marie #39: Yes, non-disclosure laws in Texas make the market quite a bit less than transparent. We'd love to work with you to open up the data there if you have some ideas about how to do so. Also, please send me the address of the home you're referencing where a trustee's deed is showing up as a sale so that we can fix the issue.

Thanks for everybody's thoughtful engagement here.

Yes but when there are multiple offers, all best are off

This is something the buyers with ideas of buying at 50% of market value should see!

Sara. 72% is pitiful!! About 85% of the sales in my market are distressed sales so there really is no "normal" to compare to.

When you say there are two markets the question I have is how many normal sales are there?If normal sales are selling for 28% more but only make up 15% of the sales then they really are not the norm.

In a market like mine appraisers have no option but to use distressed properties for comps because that is basically all there are.

Right now I am selling some "normal" properties for quite a bit more but only because we are offering no qualifying owner financing. That's starting to be a trend in my market. So these deals would actually mess up the stats because they are not "normal" sales either. We are selling financing. Is Zillow considering these types of deals in their analysis?

I stopped being disgusted with Zillow once they acknowledged that Zillow was just a good "starting" point for consumers. The entertainment value of it is pretty transparent. With or without full disclosure Y'ALLS numbers wouldn't be valued any differently. The initial entertaiment value, real estate foreplay at most.

I just wanted to point out that commenter #40, Dr. Stan Humphries, is Zillow's Chief Economist and the person who actually wrote the study. So thank you to Stan for commenting and if you missed that comment, it is worth reading through.

Bryant (#43) - Thanks for the comment, I know you are in the thick of things. After reading Stan's comment, REO is defined as "resale of a home that has previously had a Trustee's Deed Upon Sale or equivalent transaction" - so 'normal' would be one without this criteria. Interesting to hear that trend, and pretty crazy. So you're saying that the owner will finance, without a high level of qualifiers? Would the deal be considered a non-arm's length transaction and reported to the county?

I am with Andrew, Jeremy & Scott, and would truly prefer a few more featured posts from the wide variety of good authors that are here, not free advertising for corporations whose actions make my job harder. Apparently all some have to do is attach their name or organization to a blog and it gets featured. That' s one of the main reasons I blog mostly for the public and not here. Points matter little to me. But seeing people with good ideas relegated to the back of the line so the companies and favorites get the top spots does not seem fair. But ActiveRain sets its own rules.

Sorry, customers do not see it as a starting point and use it against our good judgment. To say otherwise is to live in another world, not the one most of us live in. But PT Barnum had the right idea.

Many of the foreclosures in my area are in very bad condition compared to regular or short sales. Many of them are missing ovens, sinks, whole bathrooms, windows, and even crown molding. This effects the financing possibilities and eliminates certain buyers.

The foreclosures that are in great condition that have easy financing (such as Homepath or FHA) easily go for market value. In fact it could be argued that they go for more than they are worth because of the perceived value of an REO.

By the way, the other thing Zillow has no clue about is when a credit is given back to a client for closing costs etc.. Many times a client may get up to 3% for closing costs, and on a 900K home that is 27K. Something Zillow would have no clue about when they use "sold" data.

The only accurate data is the MLS with an agent helping to interpret.

FEB

2010

Sara, These are mostly international buyers who pay cash for a property and then turn around and "hold paper". It is just like a regular sale and would be recorded at the clerk of courts. Usually we are getting 30% to 40% down and are not doing credit checks at all. It works out better for the investor than renting the property out. And the buyers get to own a property. They have 5 years to clean up their credit and get a new mortgage.

FEB

2010

Now, can you convince lenders and appraisers that foreclosures are different from non-foreclosures?

I wish!

I recently got embroiled in a discussion on Trulia about the "discount" a buyer should expect on a foreclosure. My response was that there isn't any such thing as a discount - every single home has a market value; and every single home that sells, sells at market value.

You cannot expect a discount. An underpriced home - REO, short, or regular sale - will attract competition and the price will rise to its market value. That is the definition of "market value." When you are able to find a home you can buy at less than the value of "similar" homes in the same area, you can be sure that there is something about it that makes it worth less - either it is trashed, missing key features, or generally run down. You will pay for those missing features somewhere.

FEB

2010

I agree with Kim, homes will sell at their market value. The foreclosures are generally in need of a lot of work and they are priced accordingly. When foreclosures are priced to high they don't sell. When priced lower than market value, foreclosures bring multiple offers and price escalations.

FEB

2010

Quite interesting - especially the comments generated. Dan's comment #53 seems to be a reasonable assesment. I am thinking that short sales and foreclosures are being considered the same in many minds.

SEP

2010

In Calif at least it is 2 different markets - foreclosures are all cash. However, I find it intersting that Zillow doesn't list foreclosure sales in its property sales history. One recent example - 411 Stonecrest Ct, santa Rosa sold at auction for 475K in May 2010 and then was flipped by investers for 575K in July. Zillow shows the July sale - but the May sale is no where to be found.

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