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What a Difference a Foreclosure Makes

By Claudette Millette

Real Estate Agent with The Buyers' Counsel

July 21, 2010 10:45 AM

What a Difference a Foreclosure Makes

A recent study by MIT and Harvard researchers revealed that a foreclosure reduces the value of a house by an average of 27 percent.

MIT economist Parag Pathak and Harvard researchers, John Y. Campbell and Stefano Giglio examined 1.8 million home sales in Massachusetts from 1987 to 2009. They came up with some revealing numbers on how dramatically a foreclosure can affect the value of a home as well as the value of all the properties surrounding it.

They also contrasted the impact on value of foreclosures as compared to other events like the death of an owner or a bankruptcy.

Specifically, when a home has a forced sale due to a bankruptcy the value drops by 3 percent. And, in a sale that is a result of an owner's death the decrease in value is 5 to 7 percent.

One of the reasons for the huge gap in value declines between these three types of ownership changes is attributed to the fact that foreclosure properties tend to fall into disrepair. The home itself deteriorates much more so than it does in other forced-sale situations.

The researchers also found that the mere presence of a foreclosed house in any given neighborhood reduces the value of the homes around it. They have estimated that the value drops by 1 percent if it is within 250 feet of a foreclosed property.

We already know that a quick sale of a foreclosed home at a reduced price will affect the appraisal values of homes in the neighborhood since that home will then be used as a comparable in all future appraisals. This additional data is just more of a warning of how devastating to our economy these distressed sales can be.

It would be nice if the administration's efforts to curtail foreclosures actually worked since the study went on to imply that foreclosures can actually lead to other foreclosures. This is a process they refer to as "contagion."

And there is currently no known vaccine for this condition.

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Dawnita Griffith

Meadow Lake Real Estate, LLC - Pinedale, WY

It does matter who you hire.

I really appreciate you posting this information. I have been wondering what numbers to quote sellers and buyers when asked these questions. It is also good to be knowledgeable when dealing with foreclosure companies and REO's when making out their estimated nets. Vaccine..Hope some brainiac figures it out soon!

Jul 21, 2010 11:04 AM

Steve Loynd

Alpine Lakes Real Estate Inc., - Lincoln, NH

800-926-5653, White Mountains NH

Claudette, one foreclosure in a neighborhood is no doubt the root of declining values (close by). It can seriously hamper an abutting properties ability to refinance and lower their rates...handcuffing a neighbor unfairly and certainly could cause others to be hurt. Or worse give up, due the the loss of equity by proximity.

Jul 21, 2010 11:16 AM

Claudette Millette

The Buyers' Counsel - Ashland, MA

Buyer, Broker - Metrowest Mass

Dawnita:

Yes, I will be keeping my fingers crossed in hopes for the vaccine.

Steve:

Absolutely, you can see how it all has a domino effect.

Jul 21, 2010 11:44 AM

Craig Rutman

Helping people in transition - Cary, NC

Raleigh, Cary, Apex area Realtor

There was a time not too long ago when appraisers wouldn't use foreclosures or other distressed properties when calculating the value of a home under contract. Now they all do. It's a sad state of affairs how one foreclosure can effect the value of an entire neighborhood.

Jul 21, 2010 12:53 PM

Craig:

Unfortunately, foreclosures have become too much a part of the landscape to ignore anymore. And, yes one foreclosed home can certainly have a negative impact on an area.

Jul 21, 2010 02:28 PM

Nick T Pappas

Assoc. Broker ABR, CRS, SFR, e-Pro, @Homes Realty Group, Broker/Providence Property Mgmnt, LLC Huntsville AL - Huntsville, AL

Madison & Huntsville Alabama Real Estate Resource

Claudette, I've been away from appraisal for a while now, but certainly can relate to what Craig said about there being a time when foreclosures weren't used. I still don't think they are good comps and don't use them when doing a CMA. Of course you have to recognized their presence and deal with them as competition because of the lower price, but many do suffer condition issues and see that as helping a nearby listing. I'm not saying there isn't a negative impact, I just don't see them as that big of a factor around here.

Jul 21, 2010 02:53 PM

Hi, Nick:

So, I take it that you were once an appraiser? That is a great background to have for this business. I was interested at one time to add it to my skills but the amount of classes one has to take to be certified is more than I wanted to do.

Fortunately, foreclosures have not been a huge issue in my area but there has been some impact. My concern is whether or not there is a shadow inventory waiting out there to happen.

Jul 21, 2010 04:21 PM

What a Difference a Foreclosure Makes

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