Over the past year the Luxury Market has gotten involved with Short Sales. As home sellers in the luxury market have come to realize they are not immune to the market declines, they have turned to Short Sale as the answer to their financial issues. Many homes in the luxury market have fallen by so much it will be years before they recover. The cost of carrying these homes usually does not make sense. This is where the Strategic Defaults step in and make more sense for the home owner. A Strategic Default is basically a Short Sale. However, usually with a Strategic Default the home owner could work hard and ride out the downfall in home prices. However, when they take a business approach Short Sale makes more sense. Like a bank would act with any of their investments, a Strategic Default is a home owner weighing the cost to carry their huge mortgage on a home upside down by a dramatic amount and then comparing that to the cost to their credit, the act of moving, their alternative as a rental and how it affects their family.

Many times a homeowner in this position, they bought in say 2006 with 20%+ down payment and have a huge mortgage, find a Strategic Default as a viable alternative to the struggle to recovery. Many homes are down 50% or more. For that home owner buying a $3,000,000 home  and mortgaging $2,400,000, while the home today is selling around $1,500,000; it does not make financial sense to stay in the home. This market is years from recovery. It is possible they sell their home in a Short Sale, rent for a few years at 30 to 40% of their current payment for a similar home and then re-purchase a similar home for considerably less than what they owe on their current home. WHAT WOULD A BANK DO WITH THIS TYPE OF INVESTMENT? I don’t see that as a question.

Here is a current article form the Republic dealing with Strategic Defaults in the luxury market.

Luxury homes not immune to short sales

by Justin Doom – May. 10, 2010 12:00 AM
Special for The Republic

The short sale has gone upscale.

While sellers at the housing market’s low end initiated the widespread use of short sales as an alternative to foreclosure, Valley real-estate agents said there has been a clear trend toward luxury homes, even those in the multimillion-dollar price range, being sold via short sale.

In a short sale, the sellers negotiate a sale price with their lender that is less than the balance of their mortgage. The remaining portion of the loan is forgiven, although in some cases lenders reserve the right to sue the seller for the unpaid portion of the loan.

Joyce Tawes, an agent with Arizona Realty ONE Group in Scottsdale, currently has nearly 100 short-sale listings for homes priced from $700,000 to more than $3 million.

“Short sales and foreclosure homes are a reality in today’s real-estate market,” Tawes said. “Therefore, you can find many luxury homes in Scottsdale, Paradise Valley, Carefree and Phoenix that fall into the short-sale or foreclosure categories.”

Rosalie Soward, a Valley Realtor also licensed in California who specializes in short sales, said they compose about 80 percent of her current business.

She said she not only expects the volume of short sales to increase over the next two years but also the average price of a short sale.

“In Orange County, you see $800,000 to $1 million homes that have three loans going into short sale now,” Soward said. “And that’s going to increase this summer with more high-end properties.”

Residential short sales in the Valley hit an all-time high of about 2,025 in April and represented 22 percent of the month’s 9,200 home sales, according to data from the Arizona Regional Multiple Listing Service.

Overall, short-sale activity is up more than 150 percent from a year earlier.

Michelle Lind, general counsel and assistant CEO for the Arizona Association of Realtors, said short sales also accounted for more than 20 percent of home sales in February and March.

“That’s the trend we’re seeing,” Lind said, “and the federal government implemented a new incentive program that may increase numbers as well.”

The Home Affordable Foreclosure Alternatives Program took effect April 5. It offers financial incentives, usually a few thousand dollars, to expedite potential short sales and avoid foreclosures.