Foreclosed home in neighborhood

How the Foreclosure Crisis Costs You Money

Foreclosure may seem like someone else’s problem, but when it happens in your neighborhood, it’s going to cost you money, too.

Foreclosures affect entire neighborhoods--the closer a foreclosed home is to your house, the greater impact it will have on your property value. Image: Dreampictures/Photodisc/Getty Images

If you need one single reason to be glad Uncle Sam is helping your neighbors avoid losing their houses to foreclosure, look no further than the value of your own home. You are personally going to pay the price of your neighbors’ misfortune if the bank takes back their house.

Each foreclosure within 660 feet (1/8th mile) of your house can drop your home’s value by a factor of almost 0.75%, according to the Center for Responsible Lending, a consumer watchdog group.

The closer a foreclosure is to your house, the bigger the impact. “The Journal of Urban Economics” says your home price can drop as much as 1% the closer it is to a foreclosed property.

If you live in a neighborhood with few vacant homes and a foreclosure occurs within 250 feet, a University of California, Berkeley study suggests you could lose 2.2% of your home value.

Foreclosures become comparable sales

Some people think the homeowners facing foreclosure got themselves into trouble because they bought more house than they could afford with toxic mortgages for which they never should have been approved.

Even if you don’t feel compassion for those facing foreclosure, you might feel sorry for yourself. Homebuyers and mortgage lenders use foreclosures as comparable properties to value your home when you sell or refinance. And the discount at which foreclosures sell is a hefty 27% on average.

Although most appraisers adjust the value of your home upward compared with a foreclosure, a homebuyer may consider the foreclosure equally valuable to your home and base his offer on that instead of your property’s real worth. If that happens, your real estate agent can argue that non-distressed sale comparables and better condition make your property worth more.

Foreclosures lower tax revenues

Drops in property values brought on by foreclosures don’t just hurt your property value; they also cut away at the whole property tax base, the source of revenue for local government. Elected officials then have to either charge you higher taxes or cut services to make up for the shortfall.

What you can do about foreclosures

To limit foreclosure damage in your community, ask local officials to pass laws forcing lenders to maintain the properties they now own and to pay the taxes and homeowners association dues on them.

If the town isn’t forcing lenders to maintain a foreclosure in your neighborhood, organize a volunteer effort to cut and trim the shrubs at vacant houses on a round-robin basis, and report vandals or squatters to the police. A well-kept foreclosed home will attract more buyers than one with a weed-filled yard. Take trespassing laws into account as you organize your effort.

If you’re selling or refinancing and the appraiser uses foreclosures as comparable sales to determine the value of your property, ask your real estate agent to make sure the appraiser accounts for the distressed nature of those sales and the condition of the properties as they compare to yours. Ask your agent to seek out other comparable sales the appraiser might have missed, which show your home in a much better light.