Foreclosures hit a record high in late 2010, a detriment of the risky lending behavior among some of the nation's biggest banks known as "Foreclosuregate." The fallout was lasting. In 2012 alone, the U.S. suffered a total loss of wealth of $192.6 billion, the result of a hefty amount of foreclosures.
Though the market is recovering, foreclosure rates are still a concern. According to a 2017 Realty Trac report, rates dropped 19 percent in the first quarter of 2017, but more than 230,000 homes were subject to foreclosures in those three months. In March alone, more than 36,000 properties started the foreclosure process. Foreclosures still plague the real estate market, but how does your neighbor's foreclosure affect your neighborhood?
Though the majority of this loss is incurred by the owners of foreclosed homes themselves, they aren't the only ones affected. A 2013 report by The Alliance for a Just Society, a grassroots coalition focused on economic, racial and social equality, found an increase in property tax rates in areas with foreclosures, as well as a significant decline in the value of the surrounding properties. Neighboring home values are proven to drop an average of one percent for every seven percent the foreclosed home value drops, according to 2012 RealtyTrac data.
The average decline in property value of a foreclosed home is anywhere from 22 to 28 percent, conservatively. With a 28 percent decline on a foreclosed home comes a 4 percent decline on neighboring homes - meaning a nearby home with an initial property value of $250,000 could see almost a $10,000 decline, just by being in a quarter-mile radius of a foreclosed home.
This decline in surrounding property values is, in large part, due to appraisal procedure. An appraiser is responsible for evaluating a property's value and considers everything from the architectural structure to the school district. However, there is often such a wide array of factors that go into determining a home's value that appraisers turn to similar nearby houses, known as "comparables," for base values.
Bob Hunt, former director of the National Association of Realtors, suggests using a foreclosure as a comparable may not be ideal, but may be necessary. "In a normal market, it is widely thought that using distress sales as comparables is inappropriate because such sales are atypical," said Hunt. "That can hardly be said of the market today or of the past few years. In many areas distress sales comprise 30 to 40 percent of total activity."
Foreclosures also tend to have an effect on a potential buyer's perception of the area.
A neighboring house in foreclosure can certainly sap value from your own property. But that's not the only damage done. A bank-owned home is less likely to be properly maintained. In fact, there are a number of factors that can sink property values. As the grass turns crunchy and weeds take over the lawn, the entire neighborhood's curb appeal slips a notch.
A declining property value can be especially unfavorable if neighboring homeowners are either looking to sell in the near future, or are still paying their mortgages.
If a neighboring homeowner is looking to sell shortly after the foreclosure, this drop in property value equates to a lower selling price. That's a frustration largely out of the homeowner's control.
If neighboring homeowners are still paying on their mortgages, the danger lies in negative equity. If a property value falls drastically, the homeowner may then owe more than the home is worth, which can make it difficult to sell or pay off the mortgage without suffering significant financial loss.
Unfortunately, there isn't much homeowners can do to protect their properties from these negative effects. Many may not even be aware of foreclosures nearby, which is why the U.S. Department of Housing and Urban Development provides a full list of foreclosed homes by area. Homeowners looking to sell can talk to a real estate agent about their best options, while those still paying mortgages can talk to a lender. If you'd like to speak with a professional about foreclosure and your VA loan, you can comment below, speak with a Veterans United loan specialist anytime at 855-870-8845 or get connected with a VA savvy real estate agent.
Though your hands may be tied, there is one exception. If the property's condition falls short of homeowner's association (HOA) standards or city code, concerned neighbors should speak up. Get a homeowner's association representative to contact the lender and/or the city. All homes — whether in foreclosure or not — must be maintained within applicable city or HOA guidelines.