Foreclosures Affect Property Values

How do foreclosures affect property values

If you are looking at real estate as an investor or are looking for a value price on a new home for yourself and your family, you may be wondering, “How do foreclosures affect property values?” The simple answer is that each foreclosure has a unique influence on property values, depending on the circumstances, specifically on the bank’s ability to sell the home at a price at or close to fair market value.

Foreclosures and Property Values

In some cases, foreclosure happens quietly and quickly, and the bank can sell the house fairly close to (or at) market value. The occupant moves out, and the new owners move in, with the only sign of the transition being a realtor’s “For Sale” sign. In other cases, the bank has to board up the foreclosed home because of damage that the occupants inflicted on the property. The signage in the yard might read “Bank-Owned” or “REO” (real estate owned), making it clear that a foreclosure has taken place. The yard goes into disrepair, and the home is abandoned for months, or even longer. Over time, the property becomes an eyesore for the neighborhood. It is almost impossible to sell that house at or close to market value for the size and location.

So it’s clear that a foreclosure’s value is influenced by the circumstances surrounding the transaction. But how about the other homes in the neighborhood? When property appraisals take place, three different approaches can come into play. One is the cost approach. This uses the cost of erecting the property as well as the land’s value. The market value approach looks at three comparable transactions in the neighborhood. Square footage and proximity are used to determine whether a sale is comparable or not, and foreclosures are eligible to be used for comparable sales.

This means that foreclosures can harm property values in the rest of the neighborhood in a couple of ways. The first is that if a foreclosure is clearly visible through signage, potential buyers for other homes in the area will make reduced offers, if they make offers at all, because of the perception that the neighborhood has negligible value. Also, when appraisals take place from the buyer’s end, including foreclosure prices in the comparable transactions will justify lower offers. So either way, foreclosures can influence the value of properties.

Are you shopping for an investment property, or do you just want a great deal on a home? Give one of the investment specialists at Amansad Financial a call. We can connect you with lists of foreclosures in your area and with agents who will walk you through the purchase process.

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