The Skinny on How Foreclosures May or May Not Affect Your Values

 A question that I get a lot is “How is my property affected by the recent foreclosure on our street?”   The answer that I always give is “it depends”.    Not helpful, huh?  The truth is that the affect on value depends on many factors: 

• How many foreclosures have occurred on your street?  How many houses are there on your street?  How many houses have been foreclosed on in your subdivision?  How many houses are in your subdivision?  For example, if you have 25 properties on your street and 1 foreclosure, that would represent about 4% of the properties on your street that are in foreclosure.  I sincerely don’t think that anyone can draw conclusions about the market on your street based on 4% of the street.  Conversely, if you have 10 properties on your street and 4 have been foreclosed on, that would represent 40% of the properties on your street.  An argument could then be made and supported that the foreclosures do have an affect on the value as they are prominent in your subdivision.
• How many active listings of foreclosures, or short sales, are located in your subdivision?  Typically, these homes sell for less than market value and in some cases could be directly competing with your own house that is for sale.  If it is a foreclosure and has been maintained comparable to the other homes in the subdivision, it would be considered a competing property.  These properties are typically listed for less than market value in order for the bank, or lender, to sell the property quickly.  In this instance, a foreclosure could have an impact on your homes value.
• What type of value are you referring to?  Believe it or not, there isn’t just one value.  There is market value, liquidation value, distressed value, etc…  If one is calculating market value for their property, it would not be typical to utilize a distressed sale or foreclosure as a comparison.  The foreclosure sales are not arm’s length transactions and typically do NOT represent sales for fair market value.  There are exceptions to this, when foreclosure sales completely predominate the market.  In that case, the foreclosure sales have then become the market value.

As appraisers, we analyze the market that the property is located in and determine if the foreclosures do have an affect on values.  I typically would mention the fact that there was one foreclosure on a particular street and then state why it would not be a reliable indicator of value.  In other areas, I might mention that there is a high rate of foreclosure and it appears that the distressed sales predominate and have become the market value for the area.

Any valuation questions or actual orders for appraisals can be sent through our website at www.knoxvilleappraisal.com. 

By, Chris Skalet, Certified Residential Appraiser, CR-2399

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