Although COVID-19 pandemic-related shutdowns have impacted the residential real estate market in various ways, the highest end of the market seems unfazed by change. In April, Amazon CEO Jeff Bezos purchased a $16-million condominium on Manhattan’s Fifth Avenue. The same month, Microsoft guru Bill Gates and his wife, Melinda, purchased a San Diego beachfront home for $43 million. In May, former New York City mayor Mike Bloomberg bought a 4,600-acre Colorado ranch for $45 million. In June, record mogul David Geffen purchased an 18,000-square foot Beverly Hills estate for $68 million. And recently, Prince Harry and his bride, Megan Markle – fresh off their split from England’s royal family – purchased a $14.65-million “starter home” in the seaside enclave of Montecito, California.
Due to the unpredictable nature of the entrepreneurship and the entertainment industry, high-net-worth (HNW) clients tend to be dynamic and diverse investors, and are often particularly interested in real estate investment. They purchase alternative homes for themselves or additional properties for their children and family members, and seek commercial property opportunities that offer high-figure rental income.
Many large, national banks – such as Chase and Wells Fargo – maintain divisions that cater strictly to HNW clients. “Elite” clientele also seek mortgages from small, boutique lenders built specifically for this purpose. Other HNW individuals choose to work with private banks – Goldman Sachs, Morgan Stanley, and the like – that focus on wealth management.
Whichever lender HNW clients prefer, this mortgage customer segment comes with unique needs and expectations for the closing experience – so it’s important for lenders to partner with title and escrow providers that can support their clients’ demands for high-touch, responsive service.
Elite service for elite clients
HNW borrowers aren’t always celebrities, noted Kristin Miller, Head of Service Strategy at Doma. “We’re not always talking about the Kardashians or a famous rapper,” she said.
Sometimes they may be associates or business managers of celebrities, or work with them in some way, such as the owner of a top L.A. restaurant. But for the most part, HNW clients are successful businesspeople and entrepreneurs.
While some may assume that HNW clients will be difficult, demanding, or unpleasant to work with, that’s really not the case, Kristin said.
“In reality, they are just like anyone else who is refinancing their mortgage. They may be shrewd in their business dealings, but in fact, they are pleasant, courteous people,” she said.
The biggest difference between HNW clients and other types of borrowers is that HNW clients usually have someone who signs on their behalf, Kristin said.
“This can be a business manager, a trustee of a trust, or other representative of the client,” she said. “For this reason, transactions with HNW clients tend to be a little more complex, and there are usually more logistics in terms of how closing documents are signed. For example, if a document would not be signed at the closing, we usually send out a notary to meet with the borrower. However, if we cannot talk to that individual directly, we may have to go through different channels. If the borrower is actually signing, sometimes we meet in their office or in our branch office, rather than at their home.”
For obvious reasons, confidentiality in these transactions is a must, Kristin added.
“We do not converse with or speak to these clients unless the lender customer approves us to do so,” she said.
White-glove customer service is also a must, Kristin added, which is a hallmark of Doma’s unique machine intelligence and service model. Led by a knowledgeable concierge manager, a dedicated team of title and escrow professionals supports open lines of communication to enable fast escalation and response when needed. A member of the Customer Success team works directly with each customer to understand the lender’s jumbo-loan structures and sets up the processes and service level agreements (SLAs) needed to support each order.
“HNW clients are not any more deserving of exceptional service than other borrowers,” Kristin said.
All borrowers should receive the same level of confidence and service. But our team knows that with HNW clients, we definitely have to be on our ‘A’ game and deliver professional, fast, efficient service. We instinctually apply more attention to detail.
Not immune to market forces
The types of properties sought by HNW clients tend to be susceptible to periods of economic uncertainty, and the COVID-19 pandemic has definitely presented challenges. Many luxury buyers are nervous about pouring money into an investment that may be difficult to sell if the economy takes a nosedive, according to Redfin economist Taylor Marr.
The pandemic introduced some hurdles for HNW borrowers, as Fannie Mae and Freddie Mac do not purchase jumbo loans (greater than $510,400 in most areas, but above $765,600 in certain markets), and other investors have been reluctant to add higher-risk loans to their portfolios.
Jumbo loan terms vary from lender to lender, and their interest rates have been a quarter- to a half-percentage higher than conforming loans ($510,400 or less). According to the Mortgage Bankers Association, for the week ending July 31, the average interest rate for 30-year, fixed-rate mortgages with conforming loan balances ($510,400 or less) fell to a record low of 2.14 percent. By comparison, the average interest rate for 30-year, fixed-rate mortgages with jumbo loan balances was 3.52 percent.
With some banks temporarily suspending the purchase of jumbo loans from correspondent sellers, HNW borrowers may find they have fewer options when shopping for a mortgage, or have stricter requirements. In addition, lenders may require additional documentation such as proof of income, bank statements, or tax returns, or heightened credit score requirements, to prove borrowers’ ability to repay.
Although the luxury real estate market faltered in the second quarter during the pandemic’s onset, the latest data shows it may be starting to rebound. The median sale price for homes in the top 5 percent of market value dropped 2.3 percent in Q2.
“Although access to credit is loosening up now, it tightened considerably for jumbo loans, which a lot of luxury buyers use, in April and May,” Taylor noted. “The fact that prices increased in the beginning of June may represent pent-up demand because buyers held off during the height of pandemic panic.”
The top end of the real estate market will recover more slowly than the rest of it.
Kristin pointed out that in the early days of the pandemic and shelter-in-place orders, many lenders temporarily shifted their focus to strategic internal initiatives or to the Paycheck Protection Program that helped businesses keep their workforces employed during the crisis. However, this slowdown was short-lived, she said.
“Although most of the industry experienced a drop in April volume, the rest of the year has actually been on an incline,” Kristin said.