How Distressed Homes Impact Your Home’s Value (Explained)

When a home goes into foreclosure or is sold under distress, it doesn't just affect the seller. It can send ripples through the entire neighborhood!

These can have a bigger impact on your home's value than you might think.

In this post, I’ll explain how distressed properties will bring down the value of your home. 

How Distressed Sales Affect Home Values

Distressed properties can bring down the value of surrounding homes in two main ways:

Also Read: Other Impacts Of Distressed Properties

Direct Impact On Nearby Homes

One of the biggest ways distressed home sales mess with the values of neighboring houses comes down to appraisals.

When someone needs an official estimate of a home's worth for things like refinancing or getting a new mortgage, they hire an appraiser.

Appraisers have to look at what similar homes in the same area sold for to calculate the value.

But here's the problem - if there are a bunch of foreclosures and short sales mixed into those "comparable" sale prices, it makes the value look way lower than it should be.

The reason is that foreclosed homes sell for a steal, like 10-50% under normal prices, because the bank just wants to get rid of it at auction as fast as possible. This is because houses going into foreclosure are usually in poor condition from neglect. 

And short sale owners approve any halfway decent offer to avoid foreclosure. (The mortgage company approves short sale, not the owner, and they do this based on condition vs desire to get it off their books. They will not sell a house in great condition at discount prices normally, they will have the owner put the house on the market and attempt to get full retail price)

So when those fire sale prices get lumped into the data the appraiser uses, it can make it seem like all the homes in that neighborhood are only worth those bottom-basement prices, even if that's not accurate at all.

Psychological Impact On Buyers

It isn't just about the appraisal figures.

There's also a mental, psychological aspect for buyers when an area has a lot of those distressed, abandoned-looking foreclosure properties.

Driving by all those rundown homes with overgrown yards and "Bank Owned" signs just feels kind of depressing. It creates this perception that the whole neighborhood is going downhill and your home's investment could tank if you buy there.

So even if the actual numbers don't support it, buyers still get spooked by that vibe.

They end up either avoiding the area completely or lowballing any offers because they think it's a riskier purchase.

So sellers have an incredibly tough time getting interest anywhere close to true market value just based on the optics of those distressed homes surrounding it.

Factors Affecting The Degree Of Impact

Here are a few factors that influence just how large the impact is:

Number Of Distressed Sales

The number of distressed properties plays the biggest role here.

One foreclosure in a neighborhood that's generally doing fine might not have any impact.

But if a significant chunk, like 20-30%, of recent sales in the area were distressed, it can really throw off both the appraisals and how buyers see the neighborhood.

Distance

How close a distressed property is to yours can also make a difference.

If it's right next door, it's way harder to ignore. People looking to buy might get worried about things like vandalism and squatters - which will make them unwilling to pay a lot.

The closer you are, the more likely you'll get affected by the mess.

Property Condition

The physical state of the distressed property is also a factor.

A well-maintained foreclosure that doesn't need a ton of work might not hurt property values as much as one that's all run-down, with overgrown lawns and broken windows.

A vacant and unkempt property can make the whole neighborhood seem like it's going downhill.

Neighborhood

Neighborhoods with strong markets, like great locations, top schools, shopping centers, lots of amenities, and strong HOAs, usually don't get hit as hard by distressed sales.

However, the impact of these sales can be a lot worse in less affluent areas.

Overall Market Conditions

The market condition is also a factor.

In a sellers market, a distressed property nearby might not hurt your chances of selling as much.

However, in a buyer’s market it will be a turn-off for potential buyers, making it harder to sell your house for the best price. They have more options and will be more selective.

Also Read: Best Time To Sell A Distressed House

What You Can Do

Sadly, you can't control the housing market or the actions of others.

Here are a couple of tips if you plan on selling your house: 

Maintain Your Home's Curb Appeal

Make a great first impression! A well-maintained house will always attract more attention.

And it will offset the negative impression of nearby distressed properties.

Make sure your house looks awesome from the street with a tidy yard, fresh paint, maybe some potted plants to spruce things up.

Do anything to make it look better compared to those ugly, neglected houses down the block.

Consider Market Conditions Before Selling

Timing can be everything in real estate. If your local market is just saturated with way too many distressed homes for sale, it might not be the best time to sell.

Those rock-bottom prices from motivated sellers will mess with appraisal values.

And the buyers have a lot of options.

So be strategic about listing during more balanced market conditions.

Or Just Sell To A Cash Buyer

Another option to consider is selling your house to a cash buyer.

They'll give you a fair price based on what your house is actually worth, and it’s a good option if you need to sell quickly.

You'll have to trade a little bit on the sales price compared to going the traditional route.

But it's a way to secure a firm offer and close quickly without any appraisal issues or buyer financing headaches if there's a lot of distress happening in your area.