Luxury properties can command big bucks, which is good news for investors. But when a property doesn't attract enough buyers and a price reduction is in order, it's usually to the tune of hundreds of thousands of dollars -- or perhaps even millions. That's a far cry from what goes on in the more modestly priced real estate market, and it could turn the selling process into a wild ride for investors.
Of course, when price tags are that high, sellers are often willing to wait until a good offer comes along -- even if it means those mansions and villas will linger on the market for years. It's more than just sticker shock for homebuyers, though, who have deep pockets of their own.
Let's take a look at eight reasons these dream homes can become nightmares for sellers.
The design is over the top
Luxury homes are not cookie-cutter McMansions. They are built or renovated by world-renowned architects and designers, with every square foot just the way the homeowner wants it. Suffice it to say, not everyone has the same taste. A new homeowner will likely want to place their own mark on their home, and it might cost way too much for them to undo the custom design already in place.
The features and amenities are too unique
There is the usual list of amenities and features a luxury property is expected to have: resort-like pool (often more than one), a wet bar, outdoor kitchen, home theater, fitness center, etc. But then there are homes with full basketball courts, state-of-the art recording studios, and helicopter pads or airplane hangars. What happens when buyers have the money to spend on these luxurious amenities but don't want or need them? They might move on to another home more suited to their lifestyle.
There are too many rooms
Not to sound like Captain Obvious, but a big house is going to have a lot of rooms. Is the buyer's goal to create a family home with room to entertain guests -- or to open a small hotel? When square footage goes into the tens of thousands, a housekeeping staff is in order. How many people will the owner be willing to add to their payroll?
The asking price is much higher than the comps
Sometimes it's not the home that drives the price up, but the homeowners themselves. For example, an A-list celebrity will list their home at an A-list price, even though the rest of the comps in the neighborhood pale in comparison.
Case in point: Rapper 50 Cent bought his 50,000-square-foot mansion in Farmington, Connecticut, from Mike Tyson for $4.1 million back in 2003, setting a record for the highest sale there. In 2007, Fiddy listed the property for sale at a whopping $18.5 million. No property in the area had even come close to that price, so it lingered on the market for over a decade. It finally sold in 2019 for $2.9 million -- that's an 84% price cut and about a 30% loss from what he originally paid for it.
The tax bill is too high
Taxes are inevitable for any homeowner. But depending on the size of the property or the state property tax rate, luxury homeowners are saddled with a huge tax burden every year. Buyers might not be willing to fork over that amount to Uncle Sam, so they'll look toward smaller homes or properties in states where the taxes aren't too staggering.
There's too much land to maintain
When luxury homes have multimillion-dollar price tags, we usually ditch the word "yard" and replace it with "estate." Just like with needing a staff for the interior, there will likely need to be a landscaping staff in place to take care of all those acres. This is not just about mowing and watering the lawn, of course. This might involve park-like grounds, large gardens, and a koi pond or two thrown in for good measure.
The location is too remote
While some of these homes are so luxurious that you'd never want to leave anyway, many people do enjoy having local options for entertainment and nightlife. And if the home is in the middle of nowhere with nothing to do for entertainment except, say, a bowling alley in the basement, it might not sit well with buyers who still want to be near some sort of action in town.
There's a scandal
Scandals are great fodder for newspaper headlines, but they can be the downfall of real estate listings. Sometimes it's the current owner who's in hot water, and buyers don't want any dealings with them, even through a real estate agent. Other times, it's the property itself that's been the scene of a crime or otherwise unsavory dealings. Will there be buyers willing to get past a home's bad history? Yes, but it could come at a steep price discount.
Options for investors awaiting a sale
Investors willing to wait for the right offer need not let the home remain vacant for the interim. Some might be willing to rent out the property, be it for a year-long lease or for short-term rentals. Airbnb (NASDAQ: ABNB) has been the site of many famous homes, so commanding top dollar as a weekend retreat for star-struck renters could be the way to go.
Another option is to remove the listing from the market and wait it out. Timing is everything with real estate, and rather than continuing to drop the price, it might be better to hold off until the market looks more promising.
The bottom line
Not everyone is willing to pay the full asking price for living the dream. An investor needs patience and a strong stomach to withstand any steep price drops when listing multimillion-dollar properties for sale.