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