Does Your Neighbor’s Foreclosure Affect the Value of Your Home?

September 3, 2008

You hear through the grapevine that your neighbors two houses down are losing their house to a foreclosure. You say a silent prayer of thanks that you’re not the one dealing with financial troubles and then you wonder why in the world they allowed themselves to get so far behind on mortgage payments.

After that, you don’t give it much thought.

Affects of Foreclosure
What you may not realize is that the foreclosure is indeed going to affect you in one way or another. Whenever a house sells in a neighborhood, the amount is sells for is noted and has an effect on the general housing prices within the area. The market value of your home depends largely on the price the homes around you sell for. In other words, if people look around your neighborhood to buy a house they’ll want to know how much comparable houses have sold for recently within the area.

Enter: Your neighbor’s foreclosure.

The house sells for much less than it would have if it hadn’t slipped into foreclosure, and if his house is similar to yours in square footage and features then this can pull your market value down. The same goes for instances when people sell their homes for less than the homes are actually worth because they just want to get out from under the mortgage loan. Every real estate transaction in your neighborhood has the potential to raise or lower the market value of your home.

So now you’re probably thinking, “…and here I thought the ‘Foreclosure Sale’ sign in his yard was annoying.”

What can you do about neighboring foreclosures?
There isn’t really much you can do unless you want to run through the neighborhood giving people money to catch up on their mortgages. What you should do, however, is to realize that this is a real concern for you, especially in a couple of instances:

1. You plan on putting your home on the market soon.
2. You maxed out your home equity with loans back when your home was worth more.

Selling Your Home
If your plan is to attempt to sell your home soon, pay attention to the sales going on around you. Are your neighbors getting their full asking price? Are some of them falling into foreclosure? If this is the type of thing going on with your neighborhood then you should brace yourself. In other words, selling isn’t going to be pretty. Why should someone pay full the full asking price for your home when they can walk across the street and buy your neighbor’s similar home at a much lower price?

Home Equity
If you have quite a bit of second mortgage debt – such as home equity loans or home equity lines of credit – the foreclosures happening around you might bring your home’s market value down and you might suddenly owe more than your home is worth. Why should you know this? It may be the reality check you need in order to stop using that ELOC and instead make an aggressive effort to pay these loans down. The sooner you build up some equity, the better.

Thanks to Johnathon from Master Your Card for this guest post on home values and foreclosures.  If you enjoyed the post you can read more about the site or subscribe to the feed.

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Ben
Ben Edwards, the founder of Money Smart Life, saved up enough to buy a Nintendo back when he was 12 years old. When he used the money to buy shares of Wal-Mart stock instead, he knew he wasn't like the other kids... His addiction to personal finance has paid off for his family and now he's helping you to afford the life that you want. Check him out on the web at Google Plus, Twitter and Facebook.

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2 Responses to Does Your Neighbor’s Foreclosure Affect the Value of Your Home?

  • marci

    Conversely, if you own your home, no mortgage, and don’t need to worry about any loan being over the value of the house, then if your property taxes keep rising, you will have a legitimate complaint for your property tax department.

    Use that info on the foreclosure sales values to appeal your own property tax, and hopefully get your own home’s value lowered, and thereby pay less in property taxes. Going into retirement here, I’d just as soon the value on my house (where I intend to live til I don’t wake up one morning) was lower so that my property taxes were lower…. I don’t like having to pay more than I have to in property taxes :)

    If every cloud (foreclosures) has a silver lining, then the silver lining in foreclosures should be lower property taxes for the neighborhood.

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