Alternatives with Distressed Luxury Homes
Foreclosure on any home is a dramatic and stressful experience, but those on luxury homes are all the more magnified due to the numbers involved.
Cynics may claim that the numbers for these homes are not that large these days, and while the top end of the property market has undergone some major transitions there are a number of alternatives to foreclosure which ought to be investigated in the first instance.
Sale
Of course the luxury homeowner will save themselves a great deal of time and money if they are able to sell the property on the market rather than suffer a foreclosure of the property. With luxury properties in the upper end of the market it is often the case that the capital value will move dramatically based on buyer sentiment rather than fundamental principles. Therefore if the property represents sufficient value to a potential buyer the homeowner may be able to sell the property to satisfy outstanding mortgage obligations in full, and in the process may be able to recoup equity in the property. As an alternative to foreclosure this strategy is most welcoming and ought to be seriously considered in an uncertain property market.
Refinancing
After the Global Financial Crisis, many lenders have tightened their lending criteria and so the alternative of refinancing is not as prevalent as it sued to be. If however a homeowner is able to meet the lending criteria of a rival lender and this presents the opportunity to obtain cheaper financing, the alternative ought to be pursued. Part of the consideration however, are if there are penalty or service fees for refinancing the loan. When these are taken into account, if the finance is more affordable for the homeowner, it is a viable alternative to foreclosure.
Reinstatement
If at any time prior to the court ordering foreclosure of the property the mortgagor is able to satisfy the outstanding debt (which may include penalties and additional fees) and resume the financial responsibilities of the agreement, they ought to simply request the balance owed to date and forward the sum. The mortgagee is compelled to accept the payment and has no case to state in court proceedings.
Forbearance
The mortgagor is always able to approach the mortgagee and negotiate the repayment of back payments with a view to continuing the financial agreement. This of course is at the mortgagee’s discretion as the initial agreement has been breached. Therefore, the mortgagor must provide the mortgagee with conclusive evidence that the additional repayment schedule will be able to be maintained.
Modification
In times such as the present when many lenders are swamped with defaulting loans, mortgagees will often be amenable to an amendment of the agreement to enable the financial relationship to continue into the future without foreclosure. An alteration of the principal is rare, but more likely is the modification of the interest on the loan, or the term of the loan, both of which will make repayments more affordable.
Rent
Rental returns of luxury properties rarely compete with mortgage rates, but in the event that an opportunity is available to generate income from the property, depending on the extent that the mortgagor is unable to make repayments, this will obviously assist.
Suggested revenue streams include rental of all or parts of the property, agistment services on acreages, storage services, wind farms, catchment areas, home office, warehouse space, hospitality & catering functions, luxury retreats. Importantly, if the mortgagor pays for use of another’s property for business, a transfer to home-based premises would necessarily create a positive cash flow.
Deed in Lieu
The mortgage over the property signifies a right over the property in the event of default of a collateral financial agreement to repay money. The fact that default of the financial agreement occurs does not entitle the mortgagee to recovery of the property. The mortgage allows the mortgagee the right to be considered first should the property need to be liquidated, and so will be of interest to subsequent lenders or purchasers. To liquidate the property and recover money owing the mortgagee must approach the court and obtain foreclosure. A deed in lieu of foreclosure is a deed entered into by both parties to transfer the property into the name of the mortgagee without court ordered foreclosure. This consent will save the mortgagee legal fees that may be irrecoverable and time. If the outstanding debt is greater than the value of the property the mortgagee may still enforce the balance owing against the mortgagor.
Bankruptcy
Believe it or not this is a wonderful idea for luxury homeowners who are sinking in debt. Quite frankly, the device of bankruptcy will not only provide time for the homeowner to regroup their affairs and decide the most favorable strategy, but it provides an excellent means of actually maintaining a mortgage on a primary place of residence. Certainly bankruptcy will haunt the individual’s credit rating for 7 years, and the legal process is also expensive and will therefore consume resources that are available. The value in bankruptcy however, lies in its ability to eliminate a significant amount of debt that is demanding the homeowner’s cash flow outside of the mortgage. With these commitments terminated, the mortgagor can resume paying the mortgage agreement and avoid foreclosure of the property.
Short Sale
In order to execute a short sale the luxury homeowner must have negative equity in the property, and meet certain criteria qualifying for hardship. Any substantial shift in the finances of the homeowner after the mortgage was entered into, will usually qualify as hardship. With a firm offer on the property, the homeowner can then approach the lender to accept the offer in full satisfaction of the debt. Short sales usually allow the homeowner to maintain their credit rating, but some lenders may enforce any balance owing. Foreclosure is avoided however, and the homeowner will most likely be able to re-enter the property market in 2 years.
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