Bad Link Neighbourhoods
There are good neighbourhoods and bad neighbourhoods in every comunity. Being associated with a particular neighbourhood can give you a bad reputation and its no different in the world of SEO.
What is a bad Link Neighbourhood?
I'm glad you asked! A bad link neighbourhood is a site, or selection of sites that practice bad SEO techniques and violate the search engine's terms of service. This is often refered to as Black Hat SEO.
How do you know if its good or bad?
Well there is a very good web site called Domain Tools which will help you identify if the site is any good.
Search Domain Tools and look for the black list status. If it is clear this is a good sign! You can doa reverse IP lookup and see all of the other sites that are hosted on the same server. It makes sense to pay attention to this and look at all of the other sites hosted on the server. If you link to one bad IP it can tarnish your site's reputation.
Check a site's back links
Search for a site's back links in Yahoo by typing in the site URL and then looking at the inlinks on Yahoo Site Explorer.
If a site has a lot of unrelated links and links from sites that look spammy then it is best advised you don't link to them. You don't want to link to a link farm either. This is a site that is full of unrelevant links. These sites are often black lsited.
The SEO Files Recomends
Being linked to by a bad domain can't hurt you but linking to a bad domain can! Be careful, only link to good quality highly relevant sites.
Don't use a reciprocal link unless it is highly relevant and beneficial for your users.