Do you feel the urge to flaunt your success in life? Do you want to please the little wifey with a palatial 18,000 square foot, nine bedroom estate with a mahogany home theater, wine cave, library, and multiple swimming pools? For good measure, I’ll throw in the 21 car heated garage, billiard room, “panic” room, and a spectacular ocean view from every room. I’ll even have an Elvis Presley robot greet you at the ticket booth for the theater. Then have I got a deal for you!
Foreclosures on homes over $1 million in value have soared by 335% since 2007 and are now at an all-time high. Although they account for only 2.3% of all foreclosures, the high profile distress sales are having a depressive impact on the entire market.
Many of these edifices represent fairy tales gone bad. Gatsby wannabes paid in stock options were wiped out by the crash. Great swathes of private businesses were decimated by the Great Recession, especially in the real estate field. Spec builders were caught out in the cold. Apparently, there are just not enough Saudi princes to go around. Many are exercises in hubris in the extreme. I drive by these houses in my neighborhood sometimes and shake my head.
You would think that owners would take advantage of record low interest rates to simply refinance and hold out for better times. But banks are loathe to lend on these properties, as their liquidity is so poor. I have seen some palaces that have been empty for five years, and the local wildlife have started to move in.
Every six months a real estate agent calls and asks if I want to buy back a mansion I sold in back in 2005 at half the price…. but for cash only. The high end home business has essentially turned into a cash and carry market. Quite frankly, there are better things to do with your cash these days, like buy gold and Swiss francs.
Good luck selling these things. Industry data show that foreclosed homes sell for 27% less than non-foreclosed ones. Opening bids often start at half the listed prices. Winning bidders need to present several million dollars in cashier’s checks on the spot to seal the deal. Many sales fall through after the buyers discover a tangled web of liens left by angry suppliers, builders, and local tax authorities. I have been to a few auctions that didn’t attract a single bid. I know because the sellers called me later, offering the property for 10% below the reserve price….again, for cash only.
Before you reach for your checkbook, consider carefully what you are getting yourself into. Taxes on these properties can run to $30,000 a month, and maintenance another $20,000. That is for a cleaning lady that doesn’t do windows, and before a penny is paid on interest.
I happen to know that you can rent these white elephants for 25% of the cost of carry because I am sitting in one right now. I don’t have to worry about the coming 25% decline in home prices. And if the electric gate, the security system, or the talking Elvis breaks down, I simply call the landlord and complain. I just hope I accidently don’t lock myself in the “panic” room with this stock market.