How Do Distressed Properties Impact Home Values?

 I found this interesting article about how foreclosures and short sales affect values of resale homes.

The Impact of Distressed Properties on Neighboring Values
by THE KCM CREW on MAY 6, 2011 · 1 COMMENT
in FOR SELLERS,FORECLOSURES,PRICING

The banks are finally getting their foreclosure paperwork in order. They will start bringing larger numbers of distressed properties to market over the next six months. We must realize that this influx of discounted inventory will have an impact on the values of neighboring homes. How large an impact?

According to RealtyTrac a foreclosure sells for 59% of the value of a similar non-distressed property. Therefore, this foreclosure inventory will affect values in two ways:

1.) As Discounted Competition

Obviously, a segment of purchasers will prefer the discounted property based on price alone. Even if the distressed property is in need of substantial repair, the buyer is getting the property at a 41% discount. Price is determined by supply and demand. Distressed properties will eat up a portion of the demand for housing and that will put downward pressure on all values.

2.) As Comparable Sales on Your Appraisal

Even after you put your house into contract, this distressed inventory can still impact your transaction. Unless your purchaser is paying all cash, there will be an appraisal of your property by the bank who is giving the mortgage to your buyer to complete the purchase. Because of the volume of distressed properties selling in almost every market, banks are instructing appraisers to use these discounted sales in determining values of non-distressed sales. We can argue the logic of this some other time. At this point, we must simply be aware that this is taking place.

Bottom Line

Over the next several months, banks will be moving substantial numbers of foreclosures onto the market. This will impact values of other homes in the region. If you are considering selling, now might be the best time. You want to be sold and closed before these properties come to market and impact your price.

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