Luxury Real Estate and the F-word

My parents raised me up right, and I must say that I take pride in being respectable. But increasingly here on the Westside, you’ll hear me, and many of my associates, using the F-word when talking about the high end luxury market. That’s right, the dreaded FORECLOSURE.  In Beverly Hills, Bel Air, Holmby Hills, Malibu, and Santa Monica, to name just a very few.  No community is immune.

More and more luxury properties are taking drastic reductions, and making their way from short sale along the path to foreclosure. Not only here, but every major metropolitan area, from New York to Chicago to San Francisco, is suffering in the luxury market. Who would have thought that the uber-exclusive properties would fall victim to the blight of foreclosure?

The signs were all there. No financing (jumbo loans) available in the luxury market. None of the normal buy-up clientele as the market slowed down in 07-08. Not to mention decreased value of stock portfolios, and that pesky sub prime meltdown.  Neighborhoods that used to have constant activity at $5,000,000 and above, not even having a single sale.

We, as a nation, watched and groaned as home owner after home owner went the way of foreclosure. Lenders have become more adept at working with borrowers to retain their homes through loan modifications.  But the largely untouched luxury market has begun to see its own wave of price reductions, short sales, shadow inventory, and foreclosures.

The premium, or luxury, market has gotten hit from two sides:

This group of people, the typical buyer of a premium home, has lost the most amount of money and/or net worth during the recent market reversal.  It was almost impossible to avoid either the stock market or real estate market devastation.  Not only has it hurt their bottom lines but it really has really affected their financial confidence.
Added to this, the ability to finance luxury homes has become very difficult; many of the former lenders are out of business.  “Stated income” loans have become a thing of the past.  Appraisals are increasingly conservative.  Now the luxury home buyer has to be an absolutely perfect applicant and pay a premium for financing than their conforming loan counterparts.

Is there an upside to any of this?  First of all, remember that homes are a commodity that we live in.  The real estate market is cyclical, and over time, historically, has always recovered.  In this cycle, the pain is being felt more broadly than any other cycle I have experienced.  No home or market has survived unscathed, including luxury homes.  But what has been true of every other market is true of the luxury market:  There are tremendous opportunities for purchasing a real value right now.

Should a buyer consider purchasing a home that is a short sale or foreclosure in the luxury market? Certainly.

There are definite opportunities for buyers to get below market pricing in the luxury home market. Interest rates are at historic lows, and there is an available supply of jumbo loans for luxury homes.  If you have the patience to wait for the lender’s approval, (which could take weeks and even months) you can get a fabulous property at well below market. The main consideration is whether you have the temperament for waiting, not knowing if your offer has been accepted. Do you have to move on a certain date and need to know today that the price the seller accepted is going to be the final sale price? Look for pre-approved (already negotiated) short sales where the outcome is certain.

Can a seller get out from under water by selling short in the luxury market? This is the preferable choice.

Sellers who find themselves owing more than their home is worth and who cannot negotiate with the mortgage holder to lower payments may want to consider selling short. If you can hold onto your home for five to ten years and wait for a real upturn in value, you could do so.  But what if you must sell, or want to take advantage of the bargain down the street?  If your home has been on the market a long time with no showings and the list price is not supported by the current market, it may be time to consider selling short. When my sellers have to sell, I do the appropriate research and sometimes recommend selling short. In most cases, it has been preferable to letting the home go into foreclosure.