While the number of celebrities, athletes and other individuals who are foreclosing on their luxury homes does continue to grow, it is important to note that this is not necessarily a sign that these individuals are in financial trouble. In fact, according to some experts, putting a luxury home into foreclosure can potentially be nothing more than a business decision that makes perfect sense to the owner.
“Here’s the assumption everybody makes when you’re getting your loan modified – you’re destitute and you’re bankrupt,” said Jim Belliono, who is a real estate investor, in a recent ABC News article. “That’s not the case. It can strictly be a business decision, especially when you’re talking about several million dollars.”
In Los Angeles County alone, ForeclosureRadar.com reports that the number of bank owned luxury homes has tripped during the second quarter when compared to 2007 rates. The delay in high-end foreclosures is likely due to the fact that affluent homeowners were better capable of making it through the first years of the economic downturn.
While the fact that luxury foreclosures are on the rise may seem surprising to some people, the reality is that it is not as unusual as it might seem.
“Higher income people are more likely to go into default than lower income people,” said Richard Green, who is the director of the Lusk Center for Real Estate at the University of Southern California. “They’re more ruthless about their finances than maybe middle-class and low-income people because perhaps they have other resources available to them. They could afford to take the hit on their credit record that others don’t.”
This is not to say that luxury homeowners are completely off the hook when they foreclose on their home. In fact, depending upon the state and the type of mortgage the homeowner has, the lender can come after the owner to pay the difference between what is owed and how much the home sells for. Nonetheless, for some owners, walking away from a multi-million dollar home just might seem like the right financial decision to make.
“It doesn’t have anything to do with being financially ruined, which people assume when you’re not making payments,” said Bellino. “It has to do with a decision to not throw good money after bad.”
