A stigmatized property is one with psychological or emotionally undesirable factors in its history that lower the value for reasons that have nothing to do with the physical state of the structure. Stigma can occur due to a crime, or because a suicide occurred, or simply because the previous owner had debt collectors at the door. Criminal stigma can encompass anything from a murder to domestic violence to the previous owner dealing drugs. And yes, ghost hunters, houses with rumored paranormal activity also qualify as stigmatized.
Stigmatized properties are super hot right now! At least, they are in the movies, TV, and podcasts. In the Netflix reboot of Haunting of Hill House, millions of viewers treated the famously haunted house like it was a main character with as much backstory as the humans. Other houses, fictional or real, haven’t gotten quite as much attention on TV, but they certainly get their 15 minutes of fame. So you have to assume that, as a buyer or investor, a stigmatized property is a good proposition, right?
Not necessarily. It depends on the intensity of the stigma, how public it was, what kind of neighborhood it took place in, and also in large part on the sensitivities of you/your buyer.
What is the legal definition of stigmatized property?
A stigmatized property is a dwelling where tragedy or misfortune has occurred that affects a home’s value for reasons that have nothing to do with the physical state of the structure. The most common term for this is “psychologically impacted.” However, even the official publication of the National Association of Realtors doesn’t put forth a firm opinion on what occurrences of “psychological impact” need to be disclosed -- the reason being that each state has its own laws, and the definitions of psychological impact vary. “Material facts” of the type that impact the value are of more legal significance, but apart from violent murders, there’s little consensus on which psychological impacts create a material fact.
What types of death stigmatize a property?
Murders and suicides certainly count as deaths that would stigmatize a property, and to a lesser extent, so do deaths from other criminal activity, such as drug-related deaths or child neglect. Deaths from natural causes do not stigmatize a property.
What events other than deaths would stigmatize a property?
There are several types of events that don’t lead to a death and could nonetheless stigmatize a property. If a home was the site of drug activity, cult activity, or something else to make it notorious in the neighborhood -- i.e. the owner was involved in organized crime. If a sex offender lives in a neighborhood, that alone could make the nearby properties stigmatized.
This describes any type of violent crime including murder. Of course, murder is the worst of all, but many lesser crimes can stigmatize a property, including domestic violence, drug activity, prostitution, kidnapping, sexual assault, gang activity, or even “criminal mischief” that got attention.
This stigma doesn’t have psychological impact on much of the population. It encompasses unsavory activities that weren’t necessarily criminal, such as a property being a former flophouse, or a property being on the ghost hunter photo circuit. This could also cover the “registered sex offender is a neighbor” scenario.
As a seller or realtor, if someone does ask, you should be honest and let them know. However, as a buyer, it’s up to you how far you want to dig into all the different kinds of minimal stigma that might have occurred at a property. If you’re getting a great deal on a place where the former occupants were rumored to host sex parties in the basement, you’ve probably got to weight how much equity you get instantly versus the annoyance caused by neighbors smirking when they find out where you live.
Debt stigma occurs in places where the former owner owed so much money that creditors and collectors regularly drop by demanding to be paid. In certain cities, however, it’s so commonplace for people in serious debt, no one would even blink at this. Also, real estate professionals say that debt stigma is the easiest kind to clear up, since all the new homeowner has to do is contact the most aggressive creditors and say “I’ve just moved in, and the person who owes you doesn’t live here anymore.”
Can a house still be stigmatized even if the event did not happen inside it?
Yes, a house that is merely in an area that saw criminal activity could potentially be stigmatized. Again, the impact of it varies according to the neighborhood and the seriousness of the events.
If whatever happened in a property is well-publicized and widely known to the point where a house is an infamous landmark, then no matter what type of stigma it is, it qualifies as “public” and needs to be disclosed. The other rules around disclosing are more complex to interpret...
Disclosing a stigmatized property
The laws for disclosing a stigmatized property vary by state, but most states only say it’s a seller’s responsibility to disclose if there are material facts involved -- i.e. facts that will affect a purchasing decision. There’s a lot of gray area though, because every person has their own threshold of what affects their buying decisions.
What are the rules for disclosing deaths in homes?
Some states require a death to be disclosed, especially if it was caused by something in the house. California requires all deaths that took place within a three-year window to be disclosed. And many states do have requirements that violent deaths be disclosed. But the majority of states do not legally require sellers to disclose crime, rumored paranormal activity, etc.
That being said, if you’re asked a question, as a seller or a Realtor, answer honestly. Most Realtors will not go out of their way to bring up stigma, but misrepresentation or failure to disclose when asked is risky from a legal standpoint.
Who makes the rules around disclosing stigma?
The requirements around disclosure all vary from state to state. California, Alaska, and South Dakota have the most stringent laws around disclosure of deaths. Some other states require up-front disclosure if a problem with the house itself caused the death. But most states do not require up-front disclosure. There are odd exceptions; for example, Indiana requires up-front disclosure of any property that was formerly used to manufacture methamphetamines.
In general, unless the stigma meets the narrow yet hard-to-pinpoint legal definition of having material facts that decrease the property’s value or saleability, then it’s Buyer Beware, i.e. basically the buyer’s responsibility to do due diligence on the property’s past.
Are there any types of deaths that generally don’t need to be disclosed?
Generally, deaths from natural causes such as old age or illness don’t need to be disclosed, though there are a few exceptions, most notably California.
How to handle selling stigmatized property
Because statistics show that stigmatized properties tend to sit on the market and sell for slightly under market value, the obvious impulse for a flipper or investor would be, clean the house up till it looks shiny and new -- and then avoid all discussions about the home’s disturbing history when you’re showing it to new potential residents. However, that is not always the best course of action.
Best practices for the seller
Real estate professionals with integrity will say, don’t go out of your way to bring up a property’s stigma, but be honest if asked. Even if there’s an argument to be made that the stigma was only psychological, not material, there is gray area -- and people’s emotions run high when it comes to the perceived safety of their home, present, and past.
Best practices for a real estate agent
A broker also needs to abide by best practices -- be honest and straightforward if asked.
Things it’s ok to disclose on a case-by-case basis
Typically if someone is just casually looking at a property, asking about violent past activity isn’t a part of their shopping process in the first place. If you get the feeling they’re just throwing out casual questions more related to the neighborhood safety or the building, it’s up to you whether you want to go into the details around minimal stigma, debt stigma, or especially things that were rumored but never proven.
If buyers are more serious about a property and doing a deeper dive into it, this is when they may start asking specific questions about past events, and it is advisable to answer forthrightly. That said, some real estate agents would probably still go with “I am not sure of the details” rather than “This house was rumored to be a drug den, although no residents ever went to prison.”
Non-disclosure decisions that may come back to haunt you
Misrepresentation, intentional omission, and lies -- especially about material facts like violent murders, which have been proven to lower a house’s price -- are dishonest in legal terms. Any of this behavior can lead to the realtor and seller being sued later for fraud.
Also, note that it’s easy for people to find information on a property by using Google -- and even easier if they used specialized tools. Never underestimate people’s resourcefulness when digging up dirt, especially when it comes to a potential future home.
Is it a good deal to buy a stigmatized property?
Yes, it usually is a good deal to buy a stigmatized property from a monetary standpoint, as they generally won’t sell for the market value. By changing the exterior and interior, you can flip a stigmatized house for a profit -- letting the notoriety fade away as you renovate, so that hopefully the value goes back up by the time the house is redone. But you would want to look not just at the price, but also the extenuating factors.
Different types of stigma may wind up being more burdensome and invasive than realized. For example, if a house is infamous to a select group of people, you might have groups gawking and snapping photos while you’re in the midst of showing it. If the house is a former meth lab or brothel, there may be all sorts of unsavory characters dropping in on you where you work and live.
As well as the property itself, you also have to consider the state of the neighborhood around it. It’s common for a home with criminal stigma to be in a violent neighborhood. So the stigma may truly be connected not just to psychological factors, but to the next owners’ safety.
On the other side of the spectrum, if the crime took place in a “nice” neighborhood, an isolated incident only seriously brings down the value if it is a truly sensational/infamous crime. Things that don’t make the news probably won’t make much of a dent in the value. However, these incidents could nonetheless make the property more of an object of attention for a long while to people who know the history. You would need to be prepared to handle questions and implications as a seller, Realtor, or buyer.
Become A Mogul Today
Real estate is one of the most reliable and powerful ways to grow your wealth - but deciding where to start can be paralyzing.
That's why we launched Mogul, a breakthrough service designed to help you take advantage of this critical asset class. Mogul members receive investing alerts, tax optimization strategies, and access to exclusive events and webinars. Past alerts have included investments with projected IRRs (internal rates of return) of 16.1%, 19.4%, even 23.9%.
FREE - Guide To Real Estate Investing