News Details (Posted: June 7, 2009):

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2nd-home market offers bargains

Should consumers start looking for the vacation house of their dreams?

Home prices have fallen steadily across America since 2005. In many popular second-home markets, shoppers looking for a second home can find great deals.

"Now is the time to buy," says Randy Johnson, the mortgage expert at Credit.com.

The full-blown financial crisis and sharply falling economy have combined to pop the bubble for second homes, sparking significant price declines in vacation-home markets across the country.

For example:

• In Florida, the median sales price for existing homes in January was $139,500, a 33 percent decline from a year earlier, according to the Florida Association of Realtors.
• On Hilton Head Island, S.C., ocean-oriented property has fallen 23 percent while other areas have seen price declines up to 44 percent, according to Andy Twisdale, a Realtor with Charter One Realty and Marketing in Hilton Head.
• Some entry-level houses that went for $400,000 at the market peak on Massachusetts' Cape Cod now are being sold for half that amount, according to Paul Grover, a partner at Robert Paul Properties in Osterville, Mass.
• Significant price drops have occurred in many California vacation-home markets such as Palm Springs, Lake Tahoe, Napa Valley, the Sierra Mountain foothills and Carmel, according to Johnson.

The overwhelming supply of foreclosed homes at discounted prices is driving the market lower. While some second-home buyers may be tempted to wait for prices to fall further, homebuyers who wait for an absolute bottom are likely to miss it, Johnson says.

"You only know if you bought at the bottom five or six years later," he says. "But people will look back 10 years from now and brag about the price they got in 2009. The best time to buy is when a lot of people want to sell."

Today's market
The time to buy may be now. The 3.6 million existing homes for sale at the end of January represented a 9.6-month supply, according to the National Association of Realtors.

Some of the best deals in today's market can be found in foreclosures and short sales, which are pushing prices lower, says Jack Neuman, a broker at ReMax Advantage Plus in Boca Raton, Fla.

"All the really good deals are short sales, where the lender is willing to take less than what the mortgage is worth," Neuman says. "It's no longer a typical real estate market where buyers and sellers agree on a price. Instead, the price is where the bank is willing to take a hit."

Short sales and foreclosures currently make up a small but significant slice of home sales in the Hilton Head region, Twisdale says.

"In the last 90 days of 2008, there were 90 sales in the range of $800,000 to $1.2 million," he says. "About 10 percent were bank sales, foreclosures or short sales. Buyers come in preapproved and ready to jump. When these homes hit the market, if they're priced well, they disappear in a matter of days."

In parts of Florida, values have fallen so low that prices have sunk below replacement costs, Neuman says.

"This is a good time to buy because you couldn't replace these houses for the price they are currently selling for," Neuman says. "If you were to duplicate a house in this area and build from scratch right now, with increases in the price of labor and materials such as concrete and metal, the new home would cost more than the existing home. So you can get a much better deal with an existing home."

4-step plan
Before you shop for a second home, you'll need a good plan to help you secure the best possible deal. Elements of that plan include the following:

Research the area and get expert help. Before buying a vacation home, remember to do your homework.

"It's not like buying a shirt," says Johnson, author of the book "How to Save Thousands of Dollars on Your Home Mortgage."

"If you know a little, that means you don't know a lot," he says.

Educate yourself about the area where you plan to buy. For example, in a market like Cape Cod, there are many different communities.

"A town on the beach will have a different feel from a town five miles from the water," Grover says.

Once you've zeroed in on the right neighborhood, Twisdale recommends investigating whether the location has growth controls to prevent the surrounding areas from becoming overdeveloped.

"Growth controls are critical for sustaining value in the long run," Twisdale says.

A real estate agent familiar with the territory can be an invaluable aide. A good agent can familiarize you with market trends and potential problems in the market.

For example, local knowledge is essential to avoid mistakes such as buying property downwind from a toxic waste dump.

Before making a bid on a vacation home, take a look at recent sales figures, Grover says.

"You have to see what sold in the last six months and what they sold for," he says. "The most recent sales will give the best sense of the neighborhood's true value."

And don't forget to research the current financing environment. Remember, buyers who fail to do their homework can end up fleeced financially, Johnson says.

"There are still lenders out there trying to see how much they can get out of your wallet, and unsophisticated buyers will get taken," he says.

Decide on whether to purchase new or used. When looking for homes, think about whether to purchase a new or existing home. Each type of home offers its own advantages and disadvantages. 

Newer homes make more sense for buyers who don't want the hassle of undertaking costly renovations and repairs to older homes.

"I see value in purchasing something that is new and maintenance-free, something you don't have to worry about," says Paul Boomsma, chief marketing officer for Leading Real Estate Companies of the World.

"This can sometimes be better than buying something with a lower monthly cost, but more expenses to maintain it. It's a convenience factor, but in today's market, convenience factors are very important," Boomsma says.

New homes may have better insulation, newer windows and central air conditioning.

However, older homes also have advantages. They often have more character than newer homes and can be found in the best locations. Older homes typically are closer to the beach than many newer homes.

You may also have a better chance of scoring a bargain by shopping for older homes.

Some people shopping for vacation homes may be tempted to consider condominiums. A potential buyer should be aware of the special dangers in this market.

It can be difficult to differentiate one condo from another. This means the shopper needs to look more deeply to make sure the building is healthy, especially in today's deteriorating housing market.

Right now, many condos bought as vacation homes are foreclosing because the owners had no intention of using the units as anything other than rental properties. With no commitment to the property, these owners are more likely to walk away from their mortgage commitments.

Also, many condominium communities are experiencing an epidemic of owners who have stopped making their monthly maintenance payments. In such cases, the remaining owners often must dig into their own pockets to make up for any shortfall. 

"The condo market is a complete disaster because of the amount of inventory out there with all the overbuilding that came to the market late," Neuman says. "The first market to come back will be the single-family detached house."

Weigh the value of amenities
Ask yourself how important amenities -- golf courses, swimming pools, spas -- or design features are to you.

Amenities and extras are an emotional part of the purchase. It's important to put a tangible dollar value on those emotions.

If you are especially fond of an amenity or feature, figure that into your calculations. In some cases, two appealing homes may be similarly priced. If only one of the homes has a prized amenity, buying that home means you are essentially getting the amenity for free. 

Remember that many important extras can be found in the neighborhood surrounding the home. 

"When people buy a property, they are really buying four walls and a roof," Twisdale says. "The view, bike trails, great arts, kid-friendly environments, the distance to the ocean and other amenities establish its value."

At the same time, don't overestimate the importance of amenities and extras. A lot of older properties don't have as many amenities but are better products. Meanwhile, some newer properties are overloaded with extras.

Amenities can turn into a detriment in some cases -- such as when large numbers of people walk away from their homes and stop paying country club dues in an area with many golf courses. 

The last thing anybody needs is a home on a golf course that's gone out of business.

"Then your house won't be worth anything," Boomsma says.

When weighing amenities and features, try to avoid paying extra for something you don't want or need.

"It's only a deal if it's something you want," Boomsma says. "If you buy something that has put way more into finishes than you would have chosen then you're not getting much of a deal."

Factor in the new tax law
Finally, be aware that the new tax laws that went into effect Jan. 1 make owning a second home less attractive.

Capital gains on the sale of a principal residence are eligible for an exclusion of up to $500,000 for married couples and $250,000 for singles. However, second homes converted to a primary residence no longer get the full exclusion, even if the seller meets the two-year-ownership-and-use test.

The capital gain subject to taxes, called the non-qualified use, will now be based on a ratio factoring the amount of time it was a vacation or rental property after 2008 divided by the years of total ownership, according to Sara Turner, a tax research specialist at the National Association of Tax Professionals.

For instance, if you own a second home for a total of 12 years, make it your main residence in 2012 and sell it two years later, the three years between 2009 and 2012 are the "non-qualified use" period. So, 25 percent of the gain will be taxed, with the rest qualifying for the full home-sale exclusion of up to $500,000.

By Lawrence Carrel • Bankrate.com