Million Dollar Home Foreclosures

CNN Money has a piece on a $2 million home that's going into foreclosure, something they say will be more common in the future (high-priced homes being defaulted on.) A summary:

For years, homeowners at the high end of the housing market were able to postpone the foreclosure process, but now multi-million dollar homes are becoming more commonplace in America's foreclosure pipeline. In fact, America's wealthiest families are now losing their homes to foreclosure at a faster rate than the rest of the country, according to RealtyTrac.

Out of all foreclosure activity, the share of foreclosures on multi-million dollar properties -- or homes valued at more than $2 million -- jumped by 273% since 2007.

In the story above, the reason for the foreclosure was a bad business decision. They put all their money in two high-end restaurants (I'm not sure why they needed two -- what about testing one first?) just as the market toppled and people stopped eating at expensive places. Worst of all, they had taken a buy-out (which I assume was lucrative) from a tech firm to even be able to get to where they were financially, and I'm guessing they lost all of that as well. Now they are back to ground zero financially.

I've seen a bit of this happen personally. Not a foreclosure, but the combination of a bad business situation and an expensive home -- and the financial mess it can make.

I have a friend who lives in a very nice home on a lake (I'm guessing the house is worth $600k -- Zillow lists it as $400k but doesn't even show the right house -- it's off by blocks!). Their neighbor built a huge (6,100 square feet) and expensive log cabin home in 2004. Then the neighbor's company became troubled and there was family in-fighting (much of which was documented in the local press.) In the end, the neighbor's either had to sell or decided to sell the house (no one is sure of the reason.)

They listed the home for $1.8 million in 2008, just as everything went south. It sat there. In September 2009, they dropped the price to just under $1 million. It sat there. They removed it from the market soon thereafter and relisted it a couple months later for $949k. It sat there. In March 2010 they dropped the price to $779k. It sat there. They removed the listing from the market in September 2010, then relisted it for $899k last March. It's still for sale.

I'm not sure why they listed it for $899k when it wouldn't sell at $779k, but that's what has happened. And BTW, all this happened with three different real estate companies acting as the sellers.

These people aren't facing foreclosure (or so it seems), but they are experiencing the problems associated with a hurting/failed business and an expensive home that was probably near the limit of what they could afford. On top of that, they had an economic downturn and a style of home that makes it hard to sell (how many buyers like the log cabin look?) It has "bad situation" written all over it.

What can the rest of us learn from this? A few of my thoughts:

• Don't stretch to buy a huge house if you really can't afford it. Both my friend's neighbors and the couple in the story above would have been much better off buying a home that "only" cost $500k (or some number well below where they purchased.)


• Don't have a huge amount of your net worth in one investment. And it's especially difficult if that large percentage is in your home -- since it's illiquid, you need it to live in, etc.


• Debt kills. Obviously the equation changes (at least a bit) if you own the home free and clear. But if you have a big mortgage (bigger than the home's value at least and/or bigger than your ability to keep making payments), you're playing with fire.


• It pays to have multiple sources of income -- or at least sources that are relatively steady. If one income takes a hit, then you have at least something to help you develop "plan B."


• The riskier your finances (like the ones above), the more you need a big emergency fund to protect you in case things get rough.


• We all need a cushion. Where's the financial cushion in the situations above? It doesn't exist. And hence when things get bad in one area, the whole house of cards comes tumbling down.

In the end, I feel bad when anyone loses their home and I wish all these people well. And I hope the rest of us can learn a lesson from their problems.

Comments

[jim]

"America's wealthiest families are now losing their homes to foreclosure at a faster rate than the rest of the country"

I think they got that bit wrong or at least just stated it wrong. What they're saying there makes it sound as if a higher % of expensive homes go to foreclosure but that is not the case.

Elsewhere the same article says that 36,000 million dollar homes went to foreclosure over the past year. Over 2 million total homes are impacted by foreclosure. As of 2009 there were about 76.4 million owner occupied homes and about 2.8 million homes over $750k in value (therefore fewer than 2.8M are >$1M). Roughly speaking about 2.6% of all homes went into foreclosure and less than 1.3% of the million dollar homes.

I think what they probably meant to say that the wealthy are seeing foreclosures increase faster. e.g. they might mean that the foreclosure rate has increased 273% for $1m homes since 2007 but is only up 200% for homes overall in the same period. But that doesn't mean that a higher % of expensive homes go to foreclosure cause it could have gone from 0.3% to 1.3% while the general market went from 0.9% to 2.6%.

[Hard money lender]

"And it's especially difficult if that large percentage is in your home -- since it's illiquid, you need it to live in, etc."

You should not consider your home to be an investment for precisely this reason. And the fact that it is really a liability, not an asset.

[Bridge]

I'm worried about my dad. He's a builder and is nearing retirement. He decided to build two last homes before retiring, and made them big ones (over $1 million each). This was just before real estate took a nose dive.

One sold, one hasn't. He's been holding onto this property for over four years. Every month he loses money to the tune of $1200 (his retirement money) to pay for condo fees, as the house he built is located on a condo-style street, with maintenance fees, etc.

I can't imagine the stress he's going through. What was supposed to be a boost to his retirement income will likely be his swan song. He's put his own house on the market now in the hope of selling at least one to help pay for bills.

What kills me is that this is a man who has been working since he was six years old -- yes, six. First on a farm, then at twelve he was put to work in construction. He's now sixty-seven. When will it end?

[Steve]

I didn't plan to be, but I am currently the perfect example of how much easier you can make life on yourself if you don't stretch it on your home.

10 years ago we bought a large home that wasn't exactly a beauty but was one in the location we wanted to raise our kids (backs to a state forest, so I feel like I own 10K acres and not just the couple it sits on, and great schools). Was a great price, largely b/c of just being very ugly ($150K, this is not near any metro areas, i work from home and travel). I put about $10K into necessary repairs.

My salary grew quickly, we threw a bunch at the home and paid it off in 5 years. We later did what to us was a huge once in a lifetime remodel ($110k) using savings and the realization we will probably never move again. So we now have a paid for home that we consider our dream home where we love to live. So I've put $270K into it now, really have no idea what its really 'worth', and don't really care.

With a paid for house and money in the bank and investments, I felt confident enough to start a business. Have great profits when I have the work, but sometimes is extremely slow. Back when I was making my best salaries, the home affordability calculators said I could 'afford' a $900K home, which almost makes me sick thinking about it. If I owned a $900K home today I would be in a tough spot, would probably have to consider moving to somewhere I don't want to live to take a job I would not like. Good chance that home would be underwater and getting rid of it would be difficult/costly.

But my business down times now are like vacation, almost a semi-retirement due to the lack of financial stress.

[Nashville]

@ Steve

I think you're wrong on "I didn't plan to be...". Sounds to me like you planned everything perfectly. Congratulations and enjoy your life!

[jim]

I noticed a mistake in my comment above.

I said there should be fewer than 1.3% forecloses in the >$1m home segment. It should actually be more than 1.3% foreclosures.

Theres fewer than 2.8M homes and 36k foreclosures. SO that should equate to more than 1.3% rate.