The distressed property has acquired a reputation akin to the bogeyman in recent years, but a sobering paper from the Atlanta Fed takes a different take on the matter.

By Peter Ricci

It’s a narrative that many real estate professionals are all too aware of – a distressed property appears in a certain market, where it sits for months and negatively impacts the selling prices of the surrounding well-maintained, non-distresses homes.

A widely-accepted notion, to be sure, but not an entirely accurate one, according to new research from the Federal Reserve Bank of Atlanta, which surveyed distressed properties in the nation’s 15 largest metropolitan areas and found, on average, that properties within 0.10 miles of distressed properties only result in a 0.5 to 1 percent price decline for non-distressed homes.

The Distressed Property – Big Bad Wolf in Real Estate?

Indeed, that finding may come as a certain surprise for some, considering how horrifying the coverage often is on distressed property sales, especially in how they are used as comps in appraisals. Other details in the study included:

• The researchers also looked at seriously delinquent mortgages for their findings, something many studies of distressed property often exclude (according to the paper, the norm is to only look at completed foreclosures).
• Seriously delinquent properties, the study found, can negatively impact prices of homes within 0.10 miles by 1.2 percent, but when the home is 0.10 to 0.25 miles away, that number falls to 0.8 percent.
• The reason for the price declines, the paper concluded, was “reduced investment” in the property by both the borrowers during the distressed property’s delinquency phase and the financial institution after it acquires the property – so in layman’s terms, less upkeep on the home, a finding that definitely gives credence to Chicago and California’s vacant property ordinance.

The Importance of a Distressed Property’s Condition

The researchers also stated that their estimates were “very sensitive” to the condition of a distressed property, meaning that properties in worse condition will have a more negative impact on prices. Thus, the conclusions of the paper were simple – moratoriums on foreclosures and any other policies that slow the transition from delinquency to foreclosure heighten the potential for that “reduced investment” (from upkeep to paying the mortgage), and increase the distressed property’s negative impact on prices.

Do these findings match your experiences? Do we overplay the impact of distressed property, or have the researchers got it all wrong?