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Selling your home? Beware of Foreclosure in the Neighborhood


We've all heard the old adages about being a nosy neighbor, but in the current real estate market you might actually benefit from taking the time to find out what is going on with your neighbor. There is increasing evidence that there is a distinct ripple effect when it comes to home foreclosures within neighborhoods. Savvy homeowners who are concerned about the value of their own home would definitely be wise to keep an eye on their surrounding neighbors in order to anticipate trouble before it arrives.

It is estimated that there will be almost 70 million homes this year alone that will experience a price decline of at least $7,000. All total, this drop in property values could amount to some $500 billion.

This can certainly spell trouble for homeowners who had planned to use their home equity in order to finance items such as college tuition, retirement, medical expenses or to start a small business. As a result of the decline in property values, using their home equity may no longer be an option for many homeowners.

All total, foreclosures could impact more than 90 million neighboring homes over the next four years. There is no getting around the fact that as the foreclosure crisis grows worse, the effects will spread. Since 2007, the rate of home foreclosures has risen rapidly. Subprime borrowers are not the only homeowners to be affected, either. Even homeowners who had good credit have since been forced to default on their mortgages in light of the failing economy.

The news certainly is not getting any more encouraging either. The Mortgage Bankers Association reported that during the first quarter of the year, 1.4% of all first mortgages went into foreclosure. From the fourth quarter of 2008, that is a 20% increase. It was estimated that between now till 2012, approximately 9 million homes would eventually go into foreclosure.

The spillover effect linking the mortgage crisis to further foreclosures and neighborhood home values certainly cannot be denied. According to the Center for Responsible Lending in a study that examined this very effect, homeowners who live within 300 feet of a residential property that has been foreclosed upon will experience a 1.3% reduction in their own home value. Homeowners that live between 300 feet and 500 feet of a foreclosed property will still be impacted, experiencing a 0.6% drop in value.

Typically, the homes that will be impacted the most by foreclosed properties are those that are closer because they will tend to be more impacted by the effects of a foreclosed property, which typically include general disrepair such as broken windows, peeling paint and overgrown lawns.

If you live near a foreclosed property, be aware that the worst time to consider refinancing your home, cashing out the equity or selling it is right before the bank actually takes the title to the foreclosed property. Generally, this is when most properties experience the greatest period of neglect, a situation which can definitely impact your own situation if you live nearby. Once the bank has actually taken the title to the property, the situation could potentially improve as there are some lenders that will make an effort to improve the appearance of the property in order to attract buyers.

If you are wondering when the best time would be to sell your home or try to refinance it, there is no doubt that the ideal time would be when your neighbors are still doing well financially. Of course, this is a situation that can often be difficult to ascertain. In most cases, the biggest trigger for mortgage default is job loss. As a result, if you discover a neighbor has become unemployed, it is a good idea to begin carefully considering whether you should get out while you can.

For homeowners who do not live immediately near a home that has been foreclosed upon but who are still within the neighborhood, it is important to know that in most cases by the time the bank is able to actually sell the home, values will have bottomed out. Ideally, the best option is to try to ride out the situation and avoid panicking. If you had planned to stay in your home long term and were not planning to sell or refinance your home in the near future, there is a good chance that you will not be adversely affected as experts predict that the market should eventually even out. On the other hand if you have plans for your home within the next two or three years it is definitely a good idea to keep an eye on the neighborhood.


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