Can a Neighbor’s Foreclosure Hurt Your Home’s Value?

The short answer is, yes. Obviously, when a home gets foreclosed upon, the biggest loss is for the owners of the house. But, studies done in the wake of the housing crisis found that areas where there have been foreclosures can see a increase in property taxes and a decrease in home values. According to RealtyTrac data, neighboring home values can drop an average of 1% for every 7% the foreclosed home value drops, and the average decline in property value for a foreclosed home is anywhere from 22 to 28%. Factoring in this math, a home near a foreclosure with an initial property value of $250,000 could see an almost 10,000 decline just by being in a close radius to that foreclosed home.

The reason for this foreclosure effect is basically the appraisal procedure. This is because there are so many factors that go into determining a home’s value that appraisers often turn to the values of homes on the same street or in the same area to help them decide. Obviously, a foreclosed home will have a lower value than homes that are not foreclosed, so this can factor into an appraiser’s decision and bring down your home’s value. While some appraiser’s don’t think distressed sales like foreclosures should be a predictor of value because they are not a regular occurrence, others argue that foreclosures have a negative effect on the potential buyer’s perception of the area and therefore decrease the value anyway.

Even if it is for reasons that are not necessarily concrete, foreclosures in your neighborhood can have a slightly negative effect on your home’s value. But, this distinction is also not very set in stone, so it shouldn’t be something that you lose too much sleep over if you are planning on selling your house.