Thomas Berger's bestselling novel, Neighbors, was published in 1980. Columbia Pictures acquired the rights to film the novel, and assembled a high-profile cast and crew: Richard D. Zanuck and David Brown had produced Jaws (1975); John G. Avildsen won an Academy Award for directing Rocky (1976); veteran comedy writer Larry Gelbart developed the hit TV series M*A*S*H (1972-1983); and John Belushi and Dan Aykroyd were the stars of TV's Saturday Night Live (on which they appeared from 1975-1979) and the film The Blues Brothers (1980). The film's female leads were played by Cathy Moriarty, who made her film debut in Martin Scorsese's Raging Bull (1980), and Kathryn Walker, who had been the girlfriend of Belushi's National Lampoon colleague Douglas Kenney (1946-1980).

The production of Neighbors was troubled. John Belushi and Dan Aykroyd switched their roles in pre-production, acting against type (usual-wild man Belushi played the meek Earl and usual-straight-arrow Aykroyd played the obnoxious Vic). Belushi and Aykroyd also argued constantly with director John G. Avildsen (as they believed that he had no understanding of comedy), and lobbied to have him removed from the picture. Belushi wanted either Aykroyd himself or John Landis to direct the film. Avildsen also argued with producers Richard D. Zanuck and David Brown, and screenwriter Larry Gelbart objected to the changes made to his screenplay by Dan Aykroyd. John Belushi's drug problems also impaired the film's production, and Neighbors would prove to be Belushi's final film before dying of a drug overdose.

Tom Scott was originally assigned to compose the score for Neighbors but was replaced by Avildsen's frequent collaborator Bill Conti. John Belushi unsuccessfully tried to have the film finish with a song written and performed by the punk rock group Fear (Belushi had discovered the band and brought them to Cherokee Studios to record songs for the film). Music producing partners Steve Cropper and Bruce Robb remember recording the band's music, but nobody knows exactly what happened with the final soundtrack which was ultimately replaced in the film by Conti's more traditional movie score. "How can I describe what it was like recording in the early days of punk?" said music producer and Cherokee owner Bruce Robb. "We had decided to track the song selection in order, and were on track 4 before the band realized they were all using different set lists. The irony is we couldn't tell." Upset with Belushi's antics and believing that Fear's music was inappropriate for Neighbors, the movie studio eventually forced the band off the soundtrack project. To make up for it, Belushi got them a guest spot on Saturday Night Live.

A comprehensive look at the film's troubled production can be found in Bob Woodward's 1984 book, Wired: The Short Life and Fast Times of John Belushi and also in the 2005 book, Belushi: A Biography.