Buying a Vacation Home in a Down Market: The Pros and Cons

are about as flat as they are going to get,” she says, and people who have been waiting for the drop are coming in with cash offers and closing in two weeks. “The median price of homes has gone from $259,000 last year to $176,000 now. Last year at this time there was nothing under $200,000.” Typical Vacation Home Vacation home prices have slowed since 2005. A snapshot of typical vacation homes from the NAR survey may help in your decision making. In 2007, the median price of a vacation home was $195,000, down 2.5 percent from $200,000 in 2006. In 2007, fewer detached single-family homes and more condos were purchased as vacation homes. Fifty-nine percent of vacation home sales were single-family homes compared to 67 percent in 2006. Condos were 29 percent of the vacation home sales compared to 21 percent in 2006. Townhouses or rowhouses (7 percent) and other (5 percent) types of real estate accounted for the remaining sales. Twenty-eight percent of vacation home buyers paid cash for their property. Sixty-five percent of vacation home buyers purchased existing homes while the remainder purchased new homes. The South was preferred with 41 percent of vacation home purchases there. The West saw 24 percent, the Northeast saw 19 percent and the Midwest, 16 percent. Thirty percent of vacation homes were purchased in rural areas, 20 percent in resorts, 20 percent in a suburb and 14 percent in an urban area or central city. Avoid the Downsides While it has become a buyers’ market, obtaining a mortgage has become more difficult. Underwriting has tightened. Credit rating and income ratio to existing debts are important considerations, says John Mechem, spokesman for the Mortgage Bankers Association in Washington, D.C. Those factors will help determine if a person can even get a mortgage and, if he or she can, then what interest rate will be charged. Mortgages for vacation homes typically are higher than for primary residences. Mechem says that’s because if people get into financial trouble, they’re more willing to let their vacation home go before their primary residence. “A lot of people in recent years have financed homes with very high loan-to-value ratios, meaning they were not putting much money down,” says Mechem. There’s a greater chance of getting a vacation home mortgage if a person is willing to put more money down, to have their own “skin in the game,” he says. That way, the lender is assured that the homeowner also has something to lose if he or she defaults. If a vacation home is in your plans, research is vital, says Christine Karpinski, the director of Owner Community for HomeAway, Inc., a vacation rental Internet business and author of two books about buying and managing vacation properties, suggests considering supplementing mortgage payments through renting. Whether you plan to rent or not, research the area to make sure your investment will hold its value. Karpinski says purchasing in an area that's well developed may bring you less worry about getting your money back down the road. “The supply is still low in these areas so historically they hold their value," she says, noting that emerging markets require that a buyer exercise caution to be sure there are not too many new developments than exceed demand. Investigate ownership costs such as heating/cooling from the present owner’s billing history and get insurance estimates before buying. A home across the street from the beach as opposed to right on the beach could have a significantly lower insurance premium. Karpinski says to be aware of and check into any potential location problems. Those could include bans against short-term rentals, beach restoration issues, proximity to a fire station or pumpable lake for insurance, and past insurance claims such as hurricanes that could make a property uninsurable. Virginia Beach Realtor Helfant-Browning suggests “test driving” the lifestyle of the area you are considering. “The softening of the market provides many opportunities,” she says. “Some people find that their vacation home turns out to be the place they want to be when they retire.”

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