How Your Neighbor’s Foreclosure Hurts You

Foreclosures hit a record high in late 2010, a detriment of risky lending behavior among some of the nation’s biggest banks. Almost three years later, a report from the Alliance for a Just Society, a grassroots coalition focused on economic, racial and social inequalities, shows a mortgage crisis that is still far from over. In 2012 alone, the U.S. suffered a total loss of wealth of $192.6 billion, the result of a hefty amount of foreclosures.

Veterans foreclosure

Owners of foreclosed homes are the only ones who suffer financial loss in the process. Nearby homeowners can see their own property values drop significantly as well.

Who Pays

Though the majority of this loss is incurred by the owners of foreclosed homes themselves, they aren’t the only ones affected. The Alliance for a Just Society findings also show increased 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.

This RealtyTrac data accounts for an average decline in property value of the foreclosed home 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.

Small Logic

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,” said Jessi Hall, real estate writer. “A bank-owned home is less likely to be properly maintained. As the grass turns crunchy and weeds take over the lawn, the entire neighborhood’s curb appeal slips a notch,” said Hall.

Big Effect

A declining property value can be especially unfavorable if homeowners in neighborhoods surrounding the foreclosure are either looking to sell in the near future, or are still paying on 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.

What You Can Do

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 realtor about their best options, while those still paying mortgages can talk to a lender to do the same.

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,” said Hall.

Photo courtesy of BasicGov