We study the external impact of foreclosures, exploring how foreclosed properties affect the liquidity of nearby homes. Empirically, we find a foreclosure increases a nearby home's time‐on‐market by approximately 30% on average, which is primarily driven by a disamenity effect. There is evidence that this delay comes from surprises or information shocks to nearby sellers, as foreclosures that come on and/or leave the market after a nearby home's listing date have the largest adverse liquidity effects. However, when there is no surprise and a nearby foreclosure remains through the entire marketing period, sellers discount list prices more steeply, effectively counteracting these liquidity effects. The results suggest that information, pricing and expectations play key roles in how this externality is absorbed by the real estate market.