How much does a foreclosure of a $1M plus plus house affect home values on the same street?

Asked by Curious, Saratoga, CA Mon Jul 20, 2009

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Norman Aless…, Agent, San Jose, CA
Mon Jul 20, 2009
Hi Curious,
That depends on what it sold for, the shape it was in, it's square footage , lot size and location on the street.
All things being equal, then it would affect the value of homes on that street, because the listing agent and more importanly the BUYING agent will use this in either pricing or bidding on a property on the same street. So you can expect a bid close to what the Foreclosed home sold for. There are NO percentages I can give you because there ARE quite a few variables in pricing a home.
Hope this helps, if you have more specific questions you would like help with feel free to contact me.
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Sam Shueh, , San Jose, CA
Wed Aug 19, 2009
That depends. The simplest argument is:
L1: 1.2 mil L2: 1.8 L3: 1.6
S1: 1.6 mil S2: 1.8 and S3(foreclosed) for 0.85 mil only (worth 1.3 mil)
assuming they are all equal arm length transaction, the subject of interest
loses (1.55-1.475)/1.55=4.8% quantitatively
0 votes
Diane Drewke, Agent, Saratoga, CA
Fri Jul 24, 2009
Hi Curious,

It depends on what the house sold for in comparison to what the current market value is of the surrounding homes. Banks are getting much better at assessing property values and determining what the market is. There was a foreclosed home that 2 years ago that sold for just about 2 million on Allendale Avenue. It was a tear down and it increased the property values not decreased them.

One of the problems with foreclosures is that often they are not in good condition and right now in this market the homes that are upgraded are selling better. But some banks have started figuring this out and are putting homes on the market in better condition.

The problem is when real estate agents and banks look at values of homes they do a market analysis based on previous home sales. Depending on how many homes have sold, the price and their condition all should affect this competitive market analysis. One other large factor is the knowledge of the appraiser which has currently been a factor with some appraisals being done out of state. So, if you have a foreclosed home in bad condition that the bank just wants to get rid of in can drop property values.

I just checked in Saratoga to date there are only 3 foreclosures for sale. They really do not have much of an impact. The larger impact is that higher end homes are not selling as well as the under 1 million because it is harder to get funding and a lot of people are no longer able to fund homes with stock options. The lowest single family home I see forsale with Saratoga Schools is 1.188 mil dropped from 1.298m on for 35 days.

It really comes down to supply and demand. If homes are not moving and you get some really motivated sellers then home prices will decline. If you have a lot of banks who own properties and they want to get rid of them prices will decline. But some of the larger price declines I have also seen have been in locations where people just need to get out quickly or an older parent dies or needs the money for assisted living.

Diane Drewke
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Grace Hanamo…, Agent, Cupertino, CA
Tue Jul 21, 2009
Hello Curious and thanks for your question.

To be frank, a lower priced short sale or foreclosure in ANY neighborhood (be it in San Francisco's Nob Hill, San Jose's downtown, or Saratoga) will negatively impact the housing prices in the area. There are three reasons for this:

1. The below market priced property affects the comparable prices in the neighborhood on websites commonly used by buyers seeking property information, such as Zillow and Trulia. Their mathematical algorithms will take the lower price into account, and, while one foreclosure does not "sink" the neighborhood, there will be noticeable reduction in prices as a result of the foreclosure home and list or sales price.

2. The short sale or foreclosure property creates an "expectation level" for homeowners seeking entry into the community. Although the foreclosure property may have been in poorer condition, which was the main reason for the lower value, every buyer will gravitate toward the lower cost and expect that homes in the same area will be worth the same lower fee.

3. The new rules of the HVCC (Home Valuation Code of Conduct)--which although it does not apply to jumbo loans is often used in appraisals for homes even in this range--will take the foreclosure or short sale comparable into account in the preparation of the appraisal, and because the new HVCC appraisals also now add a "trend" prediction in the appraisal, the lower priced short sale or foreclosure will further decrease values in the area.

Unfortunately, without knowing exactly how much loss is sustained on the home in question (market price versus actual sales price), it's difficult to say how the values will be affected along the street especially since the values are affected by so many unpredictable factors such as demand, interest rates, location of home, proliferation of comparables, amenities, current demography of and number of available buyers, etc. All we can say with some certainty is that a short sale or foreclosure often does negatively impact housing prices in any given area.

For more information, feel free to contact me with specifics and I'll see what I can do to help.

Grace Morioka, SRES, e-Pro
Area Pro Realty
See my blog on "21st Century Selling - Affordable, Fixed and Flat"
0 votes
Erica Glessi…, Agent, San Jose, CA
Mon Jul 20, 2009
Every relative sale influences the value of the nearby homes. A buyer looks at closed sales to determine the price he or she wishes to offer.

Think about it like a car. Your neighbor comes home "I just bought a BMW convertible for X. What a great price!"

Now you want to go and buy the same car, or a very similar car. How much do you want to pay for it? 2X what your neighbor just paid? 1.5X? Or just a little less because, well, the economy is what it is?

I had an experience in a listing meeting recently. The seller wanted $3.5 million for his 4,000 SF estate on 13.5 acres. Just next door, a foreclosed home that sold a few years ago for $1.3 million was sold (it is still pending) in the $750K range. Now, it is 4 acres and 2200 SF home. But I predict it will severely rein in the price that the 13-acre home will sell for, even though they are somewhat apples and oranges. Most buyers won't pay 5X price for 2X house.

Buyers today have access to closed sale data on and other places, and they are watching carefully. They want to make sure their purchase makes sense six months from now.

Now, if all of each and every other sale in your neighborhood is 20 percent higher, then people will think it was a fluke. If all the other sales follow and the prices all shift down a bit, then it will have made a big impact. You may not know right off.

Erica M Nelson
0 votes
Nina Daruwal…, Agent, Cupertino, CA
Mon Jul 20, 2009
Dear Curious,
A forclosure does affect the values of a neighborhood. In areas of San Jose where there are so many forclosures, when a client wants to Sell as a Regular Sale and wants more for their home, which it is worth, but cannot get the price as there are others available at lower prices!
But in areas like Saratoga, yes a Forclosure would affect the local comps, but because there are so few around and most Sales are Regular Sales, each home should be priced for its individual nighborhood comparables and what features one can take into consideration pricing THAT partiular home.
If you are thinking of Selling, do get in touch with me, let me do a full Listing Presentation and go over my Marketing Plan with you, then you can make a choice! All the Best, be well and safe, regards,
Nina Daruwalla
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