Monthly Archives: October 2016

Learn More About Strategies To Buy The Perfect Vacation Home

Everyone knows the standard summer safety tips: Only swim where there’s a lifeguard, apply sunscreen liberally, drink plenty of liquids. But there’s one item your financial advisor would probably like to add to that list: Beware of the sudden, seemingly unstoppable urge to buy a second home in the place where you just spent two idyllic weeks of vacation. As one financial website puts it: The summer is “a time to relax, kick back and make dumb financial decisions.” Buying that home may not be such a dumb decision after all, but it needs to be one that’s made with your head and not your heart – and only after consulting financial, legal and real estate experts.

If you do decide to buy a vacation home, you will be part of a rising trend that the National Association of Realtors (NAR) has been tracking since 2003. NAR’s 2015 survey reports that the purchase of vacation homes soared to a record high in 2014, with an estimated 1.13 million vacation home sales. The typical buyer had a median household income of $94,380 and bought a property a median distance of 200 miles from their primary residence. Lawrence Yun, NAR chief economist, calls it “astonishing growth” that nearly doubled the combined total of vacation home sales of the previous two years.

So what’s behind the surge? Yun attributes it to the fact that “affluent households have greatly benefited from strong growth in the stock market in recent years” and there’s been “long-term growth in the numbers of baby boomers moving closer to retirement and buying second homes to convert into their primary home in a few years.” Linda Rheinberger, a regional vice president of NAR who lives in Las Vegas – “ground zero when the market fell,” as she describes it – thinks that some of the reason for increased interest in vacation home buying now is that “people are tired of worrying when the next shoe will drop, their outlook on their finances [is] ‘calmer’ than a few years ago” and they don’t want to put off buying the vacation home they want.

Note: In this post, we are talking about purchases primarily for the buyer’s or his/her family’s personal use, not purchases made principally as an investment. Interestingly, the number of vacation home buys for investment purposes has fallen for the fourth year in a row.

Decision strategies: 6 questions to ask yourself
When it comes to the vacation home decision, Karyn Glubis, a broker in Tampa, Fla., has this advice: “Take your time. You don’t have to buy the first property you fall in love with…just like dating, there will be another to choose from that in the long run may be a better choice.”

And, before you say “I do,” ask yourself these six questions:

1. Can I afford it?
This is probably the most important question of all. For the answer to this, disengage heart, engage brain (and the brains of your trusted financial advisors). Calculate what the costs of owning a vacation home will be, including:

mortgage payments
property taxes (which may be higher for non-residents than for residents)
insurance (post Sandy, flood insurance on the East Coast has skyrocketed)
water, gas, electricity
association membership in resort developments
trash removal
landscaping
an alarm system
the cost of someone to watch over the property while you’re away
And, you need a “slush fund” for the inevitable emergencies: Financial consultant David Monberg suggests that you set aside 1% to 2% of the purchase price of your home.

A calculation that may help answer the “is it worth it?” question: Estimate the number of weeks you will be spending in your second home each year and multiply that times the weekly rental rate at a favorite vacation spot. Is the rental more or less than you would spend on the second home? Andrew Novick, a Pennsylvania-based financial planner, says: “A good rule of thumb is to keep housing costs – for one or two homes – below one third of your income.”

Owning a second home is as much a lifestyle, as it is a financial investment issue. Monberg suggests starting with a thorough financial analysis – what are your long-term goals, and how will the second home purchase affect them? “Will it get you off course on your savings plan or your investment model? Is this a new goal or one that’s already been figured into your planning? Are you ready to add another five years to the timeline to accrue enough for retirement, for your kids’ college education?” There are no guarantees, he says: “You can’t factor in a ‘perfect scenario’ – the market will go up and it will go down. You need to factor in the bad times and the good because there will be both.”

For high-net-worth families: When considering the financial ramifications of purchasing a vacation home, Nikolay Djibankov, a financial advisor with the Matterhorn Group at Morgan Stanley Wealth Management, explains that typically for families with a net worth of under $10 million the primary questions are “can we afford it, what is the impact on our cash flow and long-term wealth plan, should we liquidate investments or finance the purchase with a fixed or variable mortgage?” For those with a net worth of more than $10 million, the issue becomes “how to structure the purchase of the property in order to mitigate estate-tax liability when property passes on to children and grandchildren? Structures such as the Qualified Personal Residence Trust (QPRT) may be useful – consult a reliable estate-planning attorney for advice on this.”

2. Shall I buy it with my friend, my brother, another family?
Co-ownership is one route to making the purchase of a vacation home financially feasible, but as broker Lee Williams cautions: “Get all the terms in writing. Nothing will strain or ruin a friendship faster than not having had a full discussion of potential issues before the deal is done. If you’re buying with another family, will both of you be using it at the same time? What are the guest policies? What happens if one family uses the home more often than the other?” And what happens if one family gets tired of it and wants to sell?

3. How will I use the home?
Are you really going to use this second home enough to make it worth the purchase? Tyler Gray, a financial advisor in Oklahoma, asked one client who wanted to buy a vacation home whether he could see himself vacationing in the same place for the next 15 to 20-plus years. “He answered, ‘No, of course not!’ We sat in silence for 10 or 15 seconds before the lightbulb went off in his head….for him it was a much better plan to simply rent a vacation home so he wouldn’t feel tied down to one place.”

If you do plan to rent out your home to offset the costs, be realistic about the income you’ll be able to generate, and be sure to check all of the building documents and association bylaws (if you’re in a resort community) and familiarize yourself with local laws that impact renting.
Peggy Fucci, a broker in south Florida, recommends that you turn to your broker to oversee the renting of the property if that’s the route you want to take. Remember, too, that being a landlord may not be something you’re going to want to be and that having someone else manage your property and rentals for you can carry with it a hefty fee – sometimes as much as 50%.

4. Where should my vacation home be?
If you are like most vacation home buyers, you want to buy in a place that’s totally unlike where you live full-time. Rheinberger says that 9 times out of 10 people want a climate, scenery, just about everything to be different from their primary residence. Forty percent of all vacation home purchases are in a beach area.

To see what are the most popular destinations for online searches for vacation homes, check out Trulia’s interactive site. Click on a city, and you’ll see what the top five most popular vacation destinations are in that area. According to this map, are top five in the U.S. are Ocean City and North Wildwood, New Jersey; Kissimmee, Florida; Ocean City, Maryland and Marco Island, Florida.

If renting out your home is part of your plan, you’ll want to buy in an area that attracts tourists. Ben Kinney, a realtor in Washington, suggests checking out Airbnb, HomeAway, VRBO, LoveHomeSwap, VRBO and Flipkey to find out what the favorites are on these sites.

To be sure you really like a location, rent before you buy. Novick recommends to his clients that they do this for a year. As he points out, “it can be an expensive mistake if the perfect vacation house turns out to be in the next town over.” Spend time in your prospective vacation home during all four seasons. “What is serene in the spring can be noisy and chaotic in the summer,” cautions realtor Melanie Siben.

Sharon McIntosh, a broker in New York City, bought a 1920s vintage Montgomery Ward kit house two years ago, which she’s been renovating and restoring ever since. She recommends that you look at the transportation possibilities. “How will you get there? If the drive is more than two or three hours you won’t want to go every weekend; I set my own limit at two hours,” she says. “How will your guests get there? It’s great to be on a train route, even a bus route is fine for some.” Also to consider, she says: Do you need hiking, swimming, access to restaurants, cultural activities? If the latter, consider a college town. Do you want to get away from it all or be with others who share your interests?

If you have young children, be sure that there is enough entertainment for them as well. Contact the local school district, recreation department, religious institutions to get a feel for what’s available for kids; talk to parents in the local grocery store and at the playground.

5. What kind of house will it be?
The majority of vacation home buyers purchase a single family home; 27% buy a condo and 18% buy a townhouse or row house. Tammy Barry, who does sales and marketing for Heritage Harbor Ottawa Resort in Illinois, says that buyers need to decide whether they want “the turnkey, maintenance-free lifestyle of a townhome or condo community or the extra space of a single-family home.” Either way, “vacation homes are places meant to spend time with friends and family; open floor plans and flexible spaces that can be turned into extra sleeping areas when company comes are what people want most.”

According to the NAR survey, the size of vacation homes declined by 200 square feet from 2013–2015, but some in the biz would like to see it decline even further. Dan Dobrowolski, founder of EscapeHomes, designs 400-square-foot cottages, many starting at $75,000. He promotes them for their beauty, affordability and portability. “We can produce and deliver a new authentic cottage-style vacation home within 60 to 90 days and folks can begin living in them immediately.” Who buys these “tiny homes”? According to Dobrowolski, “young couples and families, empty-nesters, single men and women, you name it.” Recent clients included a Silicon Valley couple who are putting theirs on property in wine country and professors at the University of Iowa who are putting theirs by a lake.”

6. What are the tax implications of a vacation home?
Current laws offer several tax breaks that can help make second-home ownership more affordable. If you use the property as a second home, not as a rental, you can deduct mortgage interest as you would for a primary residence. You can also deduct property taxes. When you rent out your property for more than 14 days, the rules get more complicated.

Information About Seasons Impact Real Estate More Than You Think

Cooling weather can mean a cooling real estate market, depending on where you live. Whether you are purchasing or selling a property, the supply and demand of housing matters. One of the factors impacting housing supply and demand is the seasonality of your market. While you might not think the seasons of the year have an influence on the price you are paying or asking for your home, it makes a big difference – in some cases, as much as 10%. How’s that for a seasonal discount?

Know Your Real Estate Market
The seasonality of a market varies from location to location. Each market has its own nuance. For example, cities like Phoenix experience a snowbird effect, wherein winter months are popular due to an influx of people coming from different regions, like the Northeast, who are relocating or buying a second home. Alternatively, in cities like Denver, the cold weather climate plays a part in the seasonality of the market by slowing down the typically brisk pace of home sales.

It’s important to be able to identify the factors that influence your region so you can understand the impact of seasonality trends on the housing market.

Key Factors in Seasonal Real Estate
While the weather is something that will differ in each market, there are some nationwide considerations that contribute to seasonal trends in real estate. The holiday season and school year both hugely influence the supply and demand of any given market.

Buyers and sellers with children typically do not want to uproot their family in the middle of the school year and will wait until its conclusion so they have more free time for moving and the chance for a fresh start once the next school year begins. In fact, studies have shown the busiest moving times of the year occur during the summer, with June being one of the busiest months and July 31 the single busiest day, meaning people are likely shopping the housing market at the end of the school year and as the summer draws to a close.

Additionally, you will likely find fewer people moving during the holidays, which essentially eliminates the period between November and January. During this time of year people do not want to add the logistics of moving to an already hectic holiday season filled with family obligations, end-of-year deadlines, unpredictable weather conditions and more.

How Seasonality Works for Home Buyers
Due to the fluctuations in supply and demand, it’s during this identified “seasonal pattern” that you’ll find you don’t have as much competition from the average homebuyer. With summer being the busiest moving time of year, people buy more aggressively than in the winter, limiting the number of available houses and raising market prices. In the winter, though, since nobody wants to deal with the inconvenience of moving during this time, these low-demand periods are perfect for those who are looking for a good deal. Because sellers aren’t necessarily getting a lot of interest or offers from others, they’re more willing to negotiate and you’re able to obtain a substantial discount on pricing.

Approaching Seasonality As a Home Seller
If you’re a seller, it usually means you’re a buyer. For a lot of people, this means you do not have the luxury of selling when everyone else is buying and buying when everyone is selling, because you need a home to live in during that gap. Additionally, as a seller, you want to be able to sell in a peak market when everyone’s getting eyes on your property and demand and pricing is high. However, if you don’t immediately need the proceeds from selling your home to go into the purchase of your next, then buying in the winter, setting up a short-term living arrangement – whether that be leasing, temporarily moving in with others or something else – and then selling in the spring, is a great way to maximize the trade between what you’re selling and what you’re buying.

Make the Most of Your Seasonality
For homebuyers, one of the best ways to determine how the seasons impact your specific market is to talk to your broker or agent. They should be able to provide you with the market metrics for your area, allowing you to monitor the patterns and fluctuations of average sales price for each month in the city where you are considering buying your new home. By comparing different months and years, you’ll be able to identify where there are significant peaks and lows and determine when there are substantial discounts on housing prices in your market.

Once you’ve defined the seasonality of your market, don’t let the “inconvenience mentality” keep you sitting on the sidelines. By not buying when everyone else is buying, you can find the house of your dreams and save money. Not only will you face less competition for the homes you are interested in, but sellers will be more motivated and any offer you submit on a home will stand a better chance simply because there are fewer buyers, meaning it’s unlikely you’ll have to deal with the aspects of multiple offers or going above asking price.

As with your groceries or clothes, when you’re able to get a discount it doesn’t make sense to skip the discount and pay full price. With real estate seasonality, it’s the same. You can save anywhere between 5%-10%, or tens of thousands of dollars, and have a better equity position in your home. Seasonality is simple supply and demand – don’t try and buy when everyone else is.