Lenders around the world are foreclosing  on mansions and estates and selling  them off at big discounts, writes JUDITH MATLOFF

ARJAN BUIKEMA has been in love for five years. He has yearned and lusted. And soon, perhaps in just a few months, he will finally realise his dream. The object of his affection is a plot outside Cape Town. It’s in a sought-after area and has a glorious sea view. He has done his research: the owner’s debt outweighs the value of her various properties and she’s been trying to sell this one for more than a year.

Buikema, 39, a research analyst with Naspers, the South Africa-based media company, suspects her lender may seize it soon. “I am just being patient,” he says, “not approaching but waiting for the banks to force her to sell. At some stage, hopefully, I can get it at a price that is decent to me.”

Around the world, people like Buikema are bargain-hunting for prime property. As the global financial crisis grows, the risk of mortgage default has spread from modest first-time homebuyers to the high end of the market. Luxury properties still form a small portion of the foreclosures from New York to Dubai. But tighter credit, rising unemployment and falling house prices are pushing even those with estates and mansions to hand keys back to the bank or to sell at deep discounts before they have to.

“This wave of luxury REOs is just beginning,” says Laura Brady, president of Concierge Auctions, referring to properties classified as “real estate owned” on lenders’ balance sheets because they have been repossessed. “The rate of jumbo-mortgage defaults is at an all-time high.” Indeed, LPS Applied Analytics, a US mortgage data service, reports that in 2008 homeowners with jumbo loans were falling behind on their payments at the fastest pace since 1992; 10 months into the year, nearly 2.6 per cent were at least 60 days behind.

“There are a lot of people who are in trouble (and) some incredible bargains out there,” agrees Michael Firewalker, president of World Venture Management, an asset manager based in California. He should know, having just gone shopping for luxury properties with delinquent owners, looking at everything from casino hotels to country manses and finding some to be discounted by 60 per cent.

He is checking overseas markets too – hotels in the Caribbean and wine estates in Italy, France and Australia – but so far his prime hunting grounds have been the US foreclosure capitals of California, Florida and particularly Nevada, where one in 14 homes was seized last year. There, he pondered one six-bedroom gem with pool priced at $4.7m (€3.56m), down from $8.3m (€6.3m).

Las Vegas real estate agent Felipe Crook confirms that upmarket foreclosures are “a hot commodity” in his city, estimating that about a quarter of the 510 luxury homes that changed hands last year were foreclosures or short sales, in which the owner sells at a price below the value of the outstanding mortgage, with bank approval so both parties can avoid the hassle of foreclosure.

Penthouses with mountain views and a gated mansion in a golf course community are among the homes he sold for around $1m (€759,000) each, half their value three years ago.

The trend is the same in Florida, which has the second highest foreclosure rate in the US. “We are currently representing hundreds of investors and homeowners of short sales and many of these people are sophisticated, high-net-worth individuals who simply made the decision to stop throwing good money after bad,” says A Linn Wyllie, principal broker of Wyllie Dammer Commercial Investment Real Estate, which specialises in distressed property worldwide.

He points to one commercial airline pilot who bought a three-bedroom waterfront condo at the Grand Venezia development in Clearwater for $1m (€759,000) in early 2006. The unit, which came fully furnished, was a buy-to-let investment and in a booming market it was easy to find tenants. But when rentals dried up, the owner was compelled to sell. Currently assessed by the county at $357,000 (€270,820), it is now under contract with lender approval for $175,000 (€132,756). Outside the US, actual foreclosures or REOs – as opposed to short sales – among top-notch properties are rare since the wealthy tend to pay cash or are not highly leveraged. But, when there is one, “it’s sensational”, says John Brian Losh, publisher of Luxuryrealestate.com.

That’s one way to describe Melville House in Fife, Scotland, which has the dubious distinction of being the country’s most costly repossession. With extensive grounds – 16.5 acres to be exact – including a cricket pitch and tennis court, the 11-bedroom, 17th-century mansion is priced at £2.5m (€2.68m). This is down from £4m (€4.3m), so “not expensive”, according to James Freeman of estate agency Knight Frank. But he acknowledges it may have to drop further. “If we got anywhere around the £2m (€2.15m) mark, we’d be doing very, very well,” he says.

Discounts are just as deep in coastal Spain, where overextended developers and buy-to-let investors are being forced to offload thousands of properties. Most are shoddy new flats. Yet banks are also seizing more opulent houses, such as a 483sq m (5,200sq ft) trophy home near Santa Pola on the Costa Blanca, which has a floodlit tennis court, mature gardens, a wine cellar, gym, indoor swimming pool, steam room and home cinema.

Valued at €4.2m (€4.5m), it is now priced at €2.3m (€2.47m) through Aberdeen Overseas Properties.

Barbara Wood of buying agency The Property Finders reports that Spanish banks are now seeking “pre-repossession” deals, the equivalent of “short sales” in the US, and says she’s looking in that pool of homes on behalf of a Moscow-based client with a budget of around €1m (€1.076m) because “there will be some fantastic properties there”.

Les Calvert at web portal Property Abroad notes that buyers should be aware that even upmarket foreclosure sales are “as is”, which can mean leaky roofs or rot. And he advises carrying out legal searches on distressed deals to make sure they are legitimate and that the developers can be trusted to finish incomplete units.

Yet he thinks there are significant opportunities for bargain-hunters with cash. “The credit crunch takes no prisoners. It goes through small-time buyers and then crescendos at the top end.”

A villa on the Greek island of Evia is now on the market for €700,000. He is currently offering beach villas on Spain’s Costa del Sol with “the usual” – private pools, marble floors, Jacuzzis, five bedrooms – estimated to be worth more than $1.5m (€1.6m) but being sold by banks for two-thirds less.

Those seeking good buys in the Middle East should head to overbuilt Dubai, where the credit crunch is taking a severe toll. DubaiLandHomes lists growing numbers of distressed villas with owners desperate to sell for quick cash. Many are situated in the exclusive Jumeirah area, overlooking the Arabian Sea. One sumptuous abode with a private beach and pool was marked down to Dh11m (£2m/€2.15m) from Dh38m (€7.76m) six months ago, while lavish mansions at Al Barari were similarly cut to Dh13m (€2.656m) from Dh50m (€10.2 million).

Indeed, Losh says there are only a few supply-constrained, seriously wealthy luxury markets around the world, such as Manhattan, Paris and well-established holiday-home destinations such as Tuscany and the Côte d’Azur, in which he expects to see minimal distressed and discounted selling.

But Michel Madie, who runs an upscale services company that handles castles in France and apartments in New York, is not so sure. He has suffered several late payments and defaults on loans he personally extended to clients.

No one knows how long foreclosed homes, REOs and “short sales” will continue to filter on to the luxury property market. Optimists think – or hope – that prices are near the bottom and may drift up in the second half of the year as inventory bleeds out.

In the meantime, Arjan Buikema waits for his dream deal in Cape Town to come through. “I have been eyeing it since 2005 and even made two offers to the previous owner on it,” he says. “Patience, patience.”

** Judith Matloff is the author of Home Girl: Building a Dream House on a Lawless Block, an account of restoring a house in Harlem (Random House, $25/€19)

© The Financial Times