If you ever needed evidence that the rich are different from you and me, here's something to know: When they pay cash for luxury homes they don't even need to have the cash to do it.
Let me explain: Known in the financial world as securities based lending
, margin lending -- or any other number of ways brokers and lenders choose to name the products -- the practice is used by high-net-worth individuals to finance anything from college tuition to private jets. It's also one way to snap up luxury real estate in distressed markets.
Using stocks and bonds as collateral, buyers are able to borrow against a percentage of the value of the securities.
There are many reasons to finance a home this way. And a few reasons not to.
"While these types of loans have been available to high-net-worth individuals for a while, they weren't necessarily financing this way in the past because of easy credit for jumbo mortgages," says Robin Speronis, owner of Luxury Lifestyle Homes
in Southwest Florida. To obtain this type of loan, there is no need to disclose what the money is being used for, so it is difficult to quantify how many people are choosing this type of financing now.
What Speronis does see, however, is a lot more people paying cash for luxury properties. There are deals to be had in the luxury market, says Speronis, whose territory includes Naples, Fla. "Home prices are below reproduction cost," she says. "Homes in the Old Naples area, within walking distance of downtown, are especially hot."
Some of the properties have very motivated sellers, whether it is a bank or a private seller, says Speronis. "And that seller is going to take a cash offer over a financed offer." There is no waiting for bank approval, no waiting for the assessor or home inspector. A closing can happen in as little as 10 days.
To obtain this type of loan, a borrower decides how much money he or she needs to borrow, then selects stock or securities that are traditionally worth about 20 percent more than what he or she would like to borrow. The stock is then transferred to the lender in exchange for the loan. The terms average 3 to 5 years, with some loans going as long as 10 years, and with interest rates currently ranging from 2.5 percent to 4.5 percent.
The borrower continues to receive all interest and dividends from the stock as they repay the loan. At the end of the loan, the shares are returned to the borrower.
Anita Rodal, director of business development for SBPI Services
, which facilitates these loans for clients worldwide, has seen a rise in these types of loans as people learn how and when to take advantage of them.
The upsides to this type of loan, Rodal told HousingWatch, are many. "It's advantageous to stockholders who don't want to liquidate in order to purchase something," she said. "This type of loan does not trigger a tax event."
There is one big downside: The possibility that the value of their stock will decline.
For Rodal's clients, that means that if, for instance, the average value of a $1 million portfolio drops below $640,000 over a three-day period, the loan is in default and clients need to make a decision. "Either someone puts up more collateral to make up the difference, or they walk away." And most people walk away, says Rodal.
"Over the past few years we haven't had to call many loans," she says. "But when we do, people say, 'Well, I already have more cash than the stock is worth,' and the stock becomes a permanent transfer. They keep the cash, they keep whatever they purchased with it. But the stock is no longer theirs."
"This isn't the type of loan for day-traders, or someone who is living off the income from their shares," says Rodal. "But as people are learning more about them, they realize it can make sense."
And they can snap up deals in luxury markets where distressed properties are just waiting for the person with the right amount of cash.
"In the luxury market, cash is king, and there are good deals out there," Rodal says. "This is a way to get in on it."