What happens to real estate values when short sales are placed on the market for sale in the neighborhood you live in?

What happens when the short sale sells, and sells at a price much below the market value range of surrounding homes in the neighborhood?

Whether your home is in Iselin, New Jersey, in Colonia, in Edison, in Middlesex County or any other County or State, distressed property real estate sales such as short sales, bank owned properties(REO) or foreclosures will have an affect on home values in neighborhoods and towns. The questions is, how much of an impact on market values will these type real estate sales transactions have?

Commonly referred to as “distressed properties”, these type property sales currently exist in all type neighborhoods. They are not isolated to lower price range neighborhoods. All neighborhoods and price ranges have been affected, some Towns, Counties and States more than others due to economic conditions in those areas.  Short sales can be found in rural areas, suburban locations, urban locations, community developments, resort locations and in estate locations of most every City, Town, County and State.

Very simply stated, a short sale is a home on the market for sale where the owner is behind in their mortgage payments, is unable to obtain a mortgage loan modification, is unable to make their mortgage current, the mortgage balance exceeds the market value of the home and foreclosure is imminent. When placed on the market for sale, agreement must be obtained from the mortgage holder(s) that they will accept less in the sale price than what is owed on the mortgage. Mortgage holders have realized that a short sale is financially more preferred than foreclosure.

The first impact of short sales in neighborhoods is visual.

Unlike foreclosed properties and REO homes, not all short properties are visual eye sores. Many are currently occupied by the owner, and are generally considered well kept requiring little or no exterior repairs or maintenance. These listings may be competitively priced and in direct competition with other properties on the market for sale. The eventual sale price may be less than other sales in the area, but a sale which may not cause future market value deterioration in a neighborhood.

But what about those sales where the property is in need of exterior repair, the “eye sore” in the neighborhood? What about the vacant home short sales, where both the exterior and interior of the home is in immediate need of repair?Properties like these will be aggressively priced, and priced below current values in the neighborhood.

When sold and closed, at a price much below the value of surrounding homes, what affect do “short sales” have on surrounding property market values?

Some Facts:
The real estate sale is public information on tax records.
The sale price is posted in the Multiple Listing System upon closing.
Appraisers use the MLS when appraising similar properties.
Real estate agents use the MLS when researching sales to provide Market Analysis Reports to homeowners considering selling.
Buyers obtain sales information when considering making an offer on a home they like in the same area.

The important question is how this that short sale interpreted?

What are your thoughts?