The Rich Are Defaulting at a Higher Rate - Is This an Opportunity? What Else Should We Consider

1 in 6 homes with mortgages over $1,000,000 are in default. This compares to 1 in 12 under $500,000. The fact is the rich are much more likely to walk away from their loan. Their view of a home as an investment and these homes as just a bad purchase is significantly different than their less affluent mortgage holding counterparts. Also, among the rich there seems to be far less stigma attached to giving up a bad investment even if it is a home. As the New York Times article discussing this subject outlines, The rich are much more ruthless when it comes to unloading poor investments.

When the sheriff appears at the door of these homes the former owners are always gone - just barely. These owners are not only very savy about the strategic default, but they are equally savy about getting the most value out of the situation. When checking into the plans of homeowners faced with this situation, they tend to be very closed to providing the details. At the same time, they are clearly very well informed of the process and understand the intricacies much more thorough than less affluent owners. These owners are not concerned that they may not be eligible for Fannie Mae of Freddie Mac loan. They are not concerned about the damage to their credit. They are quite confident of their ability to rebuild their lives and their wealth.

So, with a much larger portion of foreclosures occurring in the very high end housing area, does this create an opportunity for investors? If so, how can this opportunity be grasped and turned into cash. What exactly is the opportunity?

First, very large homes in very high end neighborhoods can offer a substantial challenge if you are seeking to convert these houses into multifamily or alternate uses because these same neighborhoods tend to be much more difficult to manage from a zoning and permitting perspective. 1 in 6 may be in default, but the other 5 will have something to say about what happens to the 18% that are a loss. The question is perhaps more accurately are there neighborhoods where these homes are available and the regulatory situation offers flexibility.

For now, the situation is probably a case of wait and see. Investors need to know a lot more about how this end of the crisis will fall out and begin developing strategies to capture the value this end must inevitably offer.