How Your Home Values Are Affected By Foreclosure Sales

Susan Kelly

Oct 07, 2022

Neighbors may wonder how much their own homes are worth when they see signs of a foreclosure sale. The nearby people are afraid that foreclosure will make their homes less valuable. They are worried that the lower price of this property will make people in the area think less of the value of their own homes. How much your home's value goes up or down depends on what kind of property appraisal method is used to compare two homes. Changes in the area or neighborhood can also affect how much your home is worth. More than 36,000 homes went into foreclosure just in March. But foreclosure sales are still a problem in the housing market. How does your neighborhood change when a neighbor goes bankrupt?

How a Foreclosure Affects a Neighborhood

Even though the people who lose their homes to foreclosure lose most of this money, they are not the only ones who suffer. A report from 2013 by The AJS (Alliance for a Just Society), a group of people who work for social equality, economic, and racial found that areas with foreclosures have higher property taxes and a significant drop in the value of the properties around them. Every 7% that the value of a foreclosed home goes down, the value of the house next door goes down by an average of 1%.

Why Do Listings Of Foreclosures Affect Value?

A big reason why property values in the area are going down is the appraisal process. An appraiser's job is to determine how much a piece of property is worth by looking at everything from the building to the schools in the area. But there are often so many things that affect a home's value that appraisers look at similar nearby houses, which they call "comparables," to get a base value. Also, foreclosures change how a possible buyer thinks about the area.

If the house next door goes into foreclosure, it can make your home less valuable. But that's not all that's been broken. A bank is less likely to take good care of its own house. There are a lot of things that can make a home less valuable. As the grass turns brown and weeds grow, the neighborhood's curb appeal goes down.

Effect on the Home Equity of Nearby Homes

If other nearby homeowners are planning to sell soon or are still making payments on their mortgages, a falling property value can be terrible. If a neighboring homeowner wants to sell soon after the foreclosure, this drop in property value means they will get less for their home. That's frustrating, but there's not much the homeowner can do about it. Negative equity is a risk if other people in the neighborhood are still making mortgage payments. If a home's value drops a lot, the owner may owe more on the mortgage than the home is worth. This can make it hard to sell the house or pay off the mortgage without losing a lot of money.

Foreclosures Bring Down Prices in the Area

Even though some studies show that the value of homes in neighborhoods with many foreclosures drops by 1%, this is not always because of the number of foreclosures. Most of the time, prices go down because buyers don't like the neighborhood and the previous owner didn't take good care of the property. Some sales of homes in foreclosure seem to happen over and over again. As soon as one person stops paying their mortgage, other people in the area do the same. The house falls into disrepair if the owner behind on payments is kicked out or leaves the property. Homes that don't look good from the outside and need a lot of work don't sell for market value.

How Can You Help?

A homeowner can't do much to stop bad things like these from happening to their property. The U.S. Department of Housing and Urban Development gives a complete list of foreclosed homes by area because many people may not know there are foreclosures nearby. If you want to sell your home, you can talk to a real estate agent about what your best options are. You can speak to a lender if you still have a mortgage. You might not have many options, but there is one thing you can do. Concerned neighbors should say something if the property doesn't meet the standards of the HOA (Homeowner's Association) or the city code. Get someone from the homeowners association to talk to the lender or the city. HOA or City rules say that all homes, whether in foreclosure or not, must be kept up.

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