Does A Foreclosure On A House Lower The Value Of Other Houses?

Many people have questions about foreclosures these days. One of the many questions being tossed about is if a home is foreclosed on in my neighborhood does it lower the value of the surrounding homes.

The answer here is a resounding yes.

Property values are based upon a numerous factors. One of the most important factors in determining a property's value is recent sales statistics. Appraisers, to determine an average price for a home in a neighborhood, use recent sales statistics as a yardstick to measure all the remaining factors. To determine a home’s present worth appraisers find three comparable homes that have recently been sold in a neighborhood. They must use this average price as a gauge to determine the value of all other comparable properties in the same neighborhood. After the average price is determined the appraiser looks at other factors to determine the property’s exact value. A home's value usually cannot exceed the average value determined by the last 3 comparable sales in the neighborhood.

For example, house A, a 3-bedroom home in a neighborhood recently sold for $100,000. A comparable home across the street, house B, sold for $115,000. A third home, house C, comparable to A and B, sold for $107,000. The median price for a comparable home in this neighborhood would be roughly $107,000.

When a home in the neighborhood is foreclosed upon the recent sales statistics will reflect the price paid for the home at the foreclosure auction. This, sometimes drastically, lower price effects the average home price in the neighborhood and as with valuation system based on averages, drives the average home price in the neighborhood lower. The result of a lower average median price is that all the remaining homes in the neighborhood lose value.

For example, house A, a 3-bedroom home in a neighborhood recently sold for $100,000. A comparable home across the street, house B, sold for $115,000. A third home, house C, comparable to A, B, was foreclosed upon, and the price at the auction sale was $75,000. The median price for a comparable home in this neighborhood would be roughly $96,000.

Every home in the neighborhood with the foreclosed property would be worth $17,000 less than if there was not a foreclosure in the neighborhood. This decrease in value for the entire neighborhood will not change until the sales prices for comparable properties increases.