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Diddy‘s Holmby Hills neighbors are well aware an appeals court could free him soon, and they are dreading the day.

Sources with direct knowledge tell TMZ … the ritzy neighbors are buzzing … worrying that the same chaos that led to Diddy’s arrest will come back in full blossom if he’s released. And it’s not just cameras and reporters swarming the area that concerns them.

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Our sources say Diddy’s kids were throwing insanely loud parties and cops were frequent visitors as a result.

The L.A.-adjacent area is packed with celebs, who include Ridley Scott, Evan Spiegel and Miranda Kerr, former Google CEO Eric Schmidt, Daren Metropoulos, Sean Parker, and Alexandra Von Furstenberg.

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And get this … we’re told some realtors who are showing nearby houses to prospective buyers are disclosing the fact Diddy owns a house nearby. The realtors are worried that failure to disclose could amount to a material fact that would lead to a lawsuit!

One source close to Diddy tells TMZ that the kids never threw a party where the neighbors complained to them and they always notified neighbors before events. We’re also told Diddy’s 18-year-old twin daughters and his aunt are the only people currently living in the home.

As we reported, Diddy’s lawyers have made several claims to an appeals court, including that his 50-month sentence is out of whack. They say the average sentence for violating the Mann Act is 15 months, and Diddy has already served 19 months.

Stay tuned …