What is Blockbusting in Real Estate?

Panic selling and blockbusting image

Like redlining and steering, blockbusting is an illegal act of discrimination that still happens frequently today in the real estate market. In this article, we’ll cover what blockbusting is, some examples, and of course, what you need to know to pass the real estate exam, so let’s go!

What is Blockbusting?

Blockbusting is the discriminatory practice of encouraging homeowners to sell below market value because the socioeconomics of the neighborhood is declining, specifically by the influx of minorities into that area.

Blockbusting also relates to “white flight” or panic selling – a way for those in the real estate industry to capitalize on the discrimination of minorities. Panic selling is manipulating the values of the property to their advantage, at the cost of both buyer and seller.

Typically blockbusting refers to racial discrimination between Caucasian and African American people; however, it also applies to people of different religious beliefs, sex, age, familial status, etc.

Why is Blockbusting illegal? – A Brief History of Blockbusting

In the 1960s, shortly after the Civil Rights Movement and Martin Luther King Jr’s assassination, President Lyndon B Johnson signed into law the Fair Housing Act of 1968. This law prevented discrimination in the sale, rental, and lending of real estate based on someone’s race, religion, color, sex, familial status, disability, and national origin. Blockbusting, redlining, steering, and any other form of discrimination in real estate became illegal and carried hefty punishments for those involved.

Before 1968, blockbusting was rampant, with real estate agents, brokers, and investors convincing people in neighborhoods to vacate because of a supposed decline in home values. Agents would take advantage of “white flight,” where Caucasians would see African Americans moving into their neighborhoods and fear their property values would decline or not want to live near someone of another race.

Fortunately, blockbusting is now illegal, thanks to the Civil Rights Movement and the implementation of the Fair Housing Act of 1968. Unfortunately, blockbusting still occurs in the real estate industry, and you must be aware of what it is and how it works to ensure you are not guilty of it yourself.

What is an Example of Blockbusting?

Now that we’ve seen what blockbusting is and why it is illegal, let’s look at some examples, beginning with a fairly obvious case that frequently happened before 1960.

Blockbusting Example 1:

Real estate broker A sees a white neighborhood where a minority family has just moved. He then goes to all the neighbor’s houses, knocks on their door, and tells them that a minority family moved in down the street, with more to come, eventually leading to the area’s decline because of such a minority presence.

Because broker A says that property values will be cut in half within a year, seller B is concerned that he will lose money or live in a minority neighborhood. Seller B offers to sell his house with broker A at a reduced cost.

Broker A then turns around and, having bought the property at 70% value, markets and sells the house to a minority family for 100% value, instantly making 30% on his money. He then repeats the process for every home in the neighborhood. As the definition of blockbusting states, convincing majority homeowners to sell below market value stating that minorities are moving into a community.

Now let’s look at a more subtle case and tricky ways investors and brokers can use blockbusting techniques to profit illegally in an area.

Blockbusting Example 2:

Investor Dan sees a white upper-class neighborhood on the edge of a minority area and thinks he can profit by blockbusting.

Investor Dan sends out a flyer with a photo of an African American family on it and a letter stating that they’re so glad to be moving to the area. He also hires an African American couple to walk down the street and wave at everyone.

Investor Dan then goes to homeowner Bob and says, “Hey, it looks like the minority neighborhood is expanding into your area; if you don’t want to lose money in your home, it would be wise to sell now and move somewhere you prefer better.

Homeowner Bob thinks of Investor Dan as a professional, so he believes that property values will decline, and he will lose half the equity in his home, so he sells to investor Dan at a loss.

Hopefully, those are pretty obvious examples, and you can see how discriminatory and illegal they are.

How to Avoid Blockbusting?

As you can see, blockbusting can be an obvious crime. But it can also be as simple as sending a postcard or answering a question wrong, which be construed as convincing a particular group of people that the socioeconomics of an area is changing, and they must sell below market value.

The best way to avoid blockbusting is by treating every class of people equally, no matter their race, religion, color, sex, familial status, disability, or national origin. When buyers or sellers ask you questions regarding any of those protected classes, you must refrain from answering in a discriminatory way to your client or others.

In your career, people will frequently ask you about the socioeconomic makeup of an area or subtly ask if the crime rate is high in that area because of the racial makeup. It would be best to never answer these questions, especially with your opinions. Always guide your clients and others to third-party sources such as demographic websites, crime maps, school rating sites, and others.

Never encourage someone to decide on real estate based on race, sex, familial status, etc. It is your responsibility to represent the best interest of your clients and treat everyone with respect and fairness.

What to Know for the Real Estate Exam?

For the real estate exam, it’s essential to know how blockbusting works in a real-life context. Questions may be introduced in story form, asking you what illegal practice is being presented.

Remember, the definition of blockbusting is the discriminatory practice of encouraging homeowners to sell below market value because the socioeconomics of the neighborhood is declining, specifically by the influx of minorities into that area.

Blockbusting was made illegal by the Fair Housing Act of 1968, which prevents discrimination in selling, renting, and lending real estate based on someone’s race, color, religion, sex, family status, disability, and national origin.

Also, note that blockbusting may appear beside related terms, such as redlining and steering, but do not confuse them! Blockbusting is convincing sellers to sell, redlining is discrimination by the lending industry, and steering is guiding buyers based on their class. An easy way to keep these separate is to think blockbusting = sellers, redlining = lenders, and steering = buyers.

Author:
Zackary Smigel is a real estate professional with a love for teaching, based out of Pittsburgh, PA. He's had the opportunity to work with some of the brightest minds in real estate and has spent years learning how to become a successful agent.

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