How Post Foreclosure Depression Hurts Property Values

What’s your house really worth?  Well, if there have been foreclosures in your neighborhood, your home may be worth a lot less than you think. Real estate expert John Adams breaks down why:

What happens when there’s a foreclosure in the neighborhood ?

  • At best, it’s not good. And at worst, it can signal the beginning of a downward cycle that may last for years to come.
  • When we talk about value, we usually are thinking of what you might be willing to pay and what I might be willing to accept on a particular day.
  • It also presumes that there is no “undue pressure” exerted upon either the seller to sell, or upon the buyer to buy.
  • Many factors enter into the final estimate of value rendered by appraisers (and buyers) on every property so considered.

So, how does an appraiser decide what my home is really worth?

  • Appraisers usually focus on the SALES COMPARISON APPROACH. In this approach, the appraiser gathers data on what similar properties have sold for based on a comparison of physical, location and economic characteristics of the “subject property” (the property being appraised).
  • ​Also called the COMPARABLE SALE ​METHOD. While not perfect, ​it ​does render, in my opinion, a meaningful estimate of value based on the best data available. And precisely because this method of valuation is a valid tool, we must also recognize the devastating and progressive effect foreclosure has on a surrounding neighborhood or community.  

So let's say that there is a foreclosed house in my neighborhood. How does that affect me? 

​There is a​ typical market reaction to ​foreclosures in any neighborhood. I call it ​"​Post-Foreclosure Depression​"​ and it follows a predictable pattern. Once a home is being advertised as a foreclosure, a chain reaction begins that may end only in the years ahead.

1. First, word gets out in the area and bargain hunters begin knocking in doors. Nervous occupants, both owners and residents, fearing a rush of upcoming turnover, accelerate plans to sell or move. For sale signs pop up overnight. Those needing most to sell accept lower listing prices, and ​typically ​draw lower offers than they might have only months before.

2. If the spiral continues, no bidder is willing or able to meet the lenders opening bid of loan amount, and the property goes to the lender, who typically wishes to sell for as much as possible as quickly as possible.

3.  Unfortunately, most lenders are unable to manage real property and unwilling to pay for professional management, so the foreclosed property begins a slide into physical depression and neglect.

4.  As neighbors witness this decline in value at the foreclosed property, they begin to see fewer prospective buyers entering the neighborhood. Thieves routinely steal the A/C compressor, the appliances and cabinets, pull out copper plumbing and electrical cable to sell for recycling, and often build crude fires to warm themselves on cold nights.

5.  Prospective buyers in the area are warned off by real estate agents of a community “in decline” and lower property values ensue. But the worst is yet to come.

6.  Finally, under pressure from regulatory agencies, the lender is ​forced to ​sell the property for much less than was owed on the loan.

7.  That sale, is now considered an “arms-length” transaction, and must be taken into consideration on all future appraisals in that area for at least the next twelve months. It is then not uncommon for the investor to “flip” the property to another investor for a small quick profit, and that transaction adds salt to the wound.

8.  If there are more than one of these transactions in a neighborhood or area, it can have devastating effects on resale values

No traditional buyer hopes to purchase real property in a community plagued by foreclosures and eyesore properties.

9.  And even if the final investor decides to invest large sums of cash in returning the property to its original condition, he finds that the current sales and listings in the area no longer support the previous value.  

10. This phenomenon of rapidly falling property values in a community that experiences even a single foreclosure is not unlike the “blockbusting” activities of the 1960’s.  That unscrupulous practice exploited fears of a racial sea change in a community in order to trigger white residents into selling at reduced prices before their homes became worthless.

We all know that BLOCKBUSTING is illegal today. So why is this happening?

  • The inevitable post-foreclosure depression of neighborhood property values is not only inspired by our current legal process, it is reinforced by bank regulators and federal legislation originally designed to protect lenders and consumers.
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