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The 4 Keys to Buying a Vacation Home

The second-home market is getting nutty, so follow these tips before making an offer

By Jodi Helmer | July 16, 2013

Diane Daniel, 55, fell in love with Indian Rocks Beach, a small coastal enclave just south of Clearwater, Fla., after living there in her teens and 20s; she returns often to vacation.

“I have an emotional connection to that beach,” says the freelance writer who lives in Durham, N.C. “A friend called it Mayberry with sunsets — and that’s exactly what it feels like.”
 
Daniel loves the area so much that she hopes to retire in the Indian Rocks Beach cottage on the Intracoastal Waterway that she and her partner just bought and currently rent out year-round. The couple also own a two-bedroom condo in the area, purchased in 2007 and used as a rental property during most of the year.
 
Second Home Sales Are Soaring

Daniel exemplifies today’s vacation-home buying boom. Sales of second homes increased 10 percent between 2011 and 2012, according to the National Association of Realtors. During the same period, the median price for these properties went through the roof – up 23 percent, to $150,000.

(MORE: Should You Rent or Buy a Home in Retirement?)

In some popular vacation spots, the market is even crazier. Take the chi-chi Hamptons on New York’s Long Island. There, the number of transactions soared by nearly 21 percent between the first quarters of 2012 and 2013, according to the Elliman Report, a real estate agency survey.
 
It’s now not uncommon for buyers in sought-after destinations to find themselves in bidding wars, says Regina Tortorella, a real estate agent with Coldwell Banker Village Green Realty in upstate New York.

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4 Tips for Vacation Home Buyers

If you’re thinking about making an offer on a second home in this frothy market – perhaps a property that’ll become your eventual retirement place – here are four things to keep in mind:
 
1. Never forget that the key to vacation homes is location, location, location. Sure, this is a cliché, but that doesn’t make it wrong. Before making an offer on a home, get to really know the area by visiting several times to explore the neighborhoods and check out the amenities.
 
Aside from exploring during peak seasons, Tortorella recommends spending time in there after the crowds clear out. “Different seasons bring different vibes to the area," she says. "Not only that, but some of the local stores and restaurants may only be open seasonally. You'll want to be familiar with what the area has to offer during the off-season.”
 
Craig Venezia, author of Buying a Second Home: Income, Getaway or Retirement, suggests focusing your search on destinations that are no more than two hours from your primary residence.
 
“If you have to drive more than two hours, you won’t go there nearly as often as you think you will,” he says. In addition, Venezia notes, the farther away your vacation home is, the harder it’ll be to check on it or visit to take care of necessary repairs.
 
2. Assess the property’s true rental potential. Beaches and mountains tend to be the most desirable locations to pick up rental income when you’re not staying in your vacation home, according to the National Association of Realtors.
 
If you think you’ll want to turn a place you’re considering into a rental property, check with the town and, if appropriate, the homeowners association, to be sure short-term rentals are allowed — before making an offer.

(MORE: How Risky Is Home Ownership?)

Be certain, too, that the home you’re considering has the amenities renters expect.
 
Tortorella says that in the mountain resort area where she sells second homes, properties that double as vacation rentals must have hot tubs, fireplaces and mountain views to lure tenants. “These features help tremendously for getting the highest rental price and occupancy rate,” she says.
 
3. Add up all the costs for buying and maintaining the vacation home. Mortgage rates are sometimes a bit higher for second homes than primary residences, according to Walter Molony, economic issues media manager for the National Association of Realtors.
 
That’s especially true if you’ll be counting on rental income to qualify for the mortgage.
 
In that case, the lender will view your vacation home as investment property. Not only will you probably be required to pay a higher mortgage rate than normal, you may be asked to come up with a down payment of 25 percent or so, according to an article by CNNMoney’s Sarah Max.
 
You’ll have better luck getting vacation home financing through smaller regional banks, Molony says.
 
Renting a home to offset your costs will also mean paying additional fees, like the cost of professional property management. The manager who Daniel hired for her condo, for instance, charges 15 percent of the rental rate to market the property, process tenant applications, manage payments and maintain the place.
 
4. Before making a bid, sleep on it. Purchasing a vacation home is often the first step toward fulfilling a retirement dream. Too often, though, this emotional desire causes buyers to rush into making offers.
 
That’s especially true in today’s buyer-eat-buyer vacation home market.
 
“There is this feeling that you have to buy now because prices are low and mortgage rates are low,” Venezia says. “But you don’t want to be in such a rush that you jump in prematurely. You really want to take your time and do your due diligence.”
 
So proceed with caution. You'll want to be confident that the home will not only suit your needs today, but in the future. It's a good idea to consider the age-friendliness of the property, since you may be living in the place years from now when it might not be quite as easy to, say, handle flights of stairs.

Daniel and her partner made the decision deliberately and wisely. They carefully analyzed all the potential costs of owning vacation homes in another state as well as in Florida. Then, they waited for the right properties to hit the market before pouncing.
 
“We needed to know that no matter what happened, we could afford both homes,” Daniel says. Now it’s just a matter of time before they’ll kick up their flip-flops in their ideal retirement cottage.
 
Jodi Helmer writes about business and finance for Next Avenue, Entrepreneur, CBSMoneyWatch, Arrive and CreditCards.com. She’s saving her pennies to purchase a vacation home in the mountains of North Carolina. Visit her online at jodihelmer.com.

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