Luxury Home Market Requires Careful Examination by Physicians

November 8, 2011

Sure, there are bargains to be had in the luxury home market, but the phrase “buyer beware” has never been more apt.

Over the last 12 months we have had many calls and meetings with clients, including physicians, about the luxury home market from both from an asset protection perspective on strategic mortgage default and about the opportunity the current market presents. In some cases, clients have been examining both of these issues simultaneously as they examine the rationality of keeping a home that is far underwater when they can buy the one down the street, perhaps even an upgrade, for less money.

The buyer’s market for luxury homes, from $1 to $10 million for purposes of this discussion, is fraught with perils. Many home buyers are encountering issues on bank approval, “as-is,” and bank-owned properties for the first time and finding the process frustrating and expensive. Sure, there are bargains to be had, but the phrase “buyer beware” has never been more apt.

Do your homework: The “comps” are just the beginning. As you know it is the listing agent’s job to sell the property for the highest price the market will bear. In some markets like Paradise Valley, Ariz., that have been especially hard hit by the economy the difference between the listing prices ($250 to $600 per sq. ft) and the actual average sale price ($370 per square foot) can be significant in terms of resale value and investment potential. Know what the range is and what kinds of homes bring premiums for lot size, view, nearby amenities, and other factors. Buy what you actually need and use; if you don’t golf or drink wine the putting green and wine cellar are not a value for your money in many cases.

Understand the differences between comparable homes at the same price and walk as many as possible. Be aware of construction standards in the market in which you are buying: too high and you won’t recover it; too low and your property will be outdated even faster. Compare two homes with same features and specs on paper in the same neighborhood and you’ll often be surprised at how the drywall and wood frame home is priced compared to the one with block construction, hand carved wood details, and stone floors.

We are seeing large numbers of poorly built luxury “spec” homes in many markets and in many cases the people who built them are no longer in business or in the worst cases where the seller was the owner/general contractor and not a full time builder. If they are bank owned they are often sold “as-is” and no seller disclosure is required. The upside of a well-built spec home, as compared to a bank owned or “REO” property is that the first purchaser may enjoy a full home warranty and even a roof warranty. On a large custom home full of expensive finishes and appliances this can be a significant risk hedge. In many cases the luxury home has more potential issues due to the unique construction, electronics, water features and other attractive details.

Get a home inspection. This is absolutely vital on any home purchase and has saved many of those I work with from financial ruin. Issues like mold and other damage to structures often occur when homes have been empty for long periods of time. We also see similar issues arising from high maintenance properties held by distressed sellers. In many cases they cut back on required regular maintenance, irrigation of expensive landscaping, and in extreme climates we have seen damage to structures and expensive interior finishes due to not having areas of the homes or guest houses adequately heated or cooled.

Be patient. Banks are taking long amounts of time to approve deals. Be ready to walk away if they change the deal at the last minute or act in bad faith in dealing with subsequent offers. Remember that everything is negotiable including prices and repairs. Even as-is properties may be subject to certain repairs if the seller is motivated and financially capable of doing so.

Get creative. Seller-owned and -financed homes are an increasingly popular and practical solution for some as reasonable bank financing has become a “unicorn” and as many have bad experiences with banks or slight credit issues. Also consider bank owned, foreclosure, and short properties and understand the high and low points of each.

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