REAL ESTATE NEWS....California home sales boom hits six-year high

California is performing well as it heads into the spring homebuying season, at least in terms of homes under offer.

According to the latest California Association of Realtors report, pending home sales in the state soared in February to record the first doubled-digit annual gain in nearly three-year and the third straight year-to-year increase.

This should hopefully translate into improved market conditions and more closed transactions in the coming months.

As a whole, California pending home sales increased in February, with the Pending Home Sales Index growing 24.8% from a revised 89.9 in January to 112.2, based on signed contracts.

The month-to-month increase easily topped the long-run average increase of 17.9% observed in the last seven years.

Statewide pending home sales were up 15.6 percent on an annual basis from the 97.1 index recorded in February 2014. The yearly increase was the largest since April 2009 and was the first double-digit gain since April 2012.

Click to enlarge

Source: CAR

This comes as good news for the state since it infamous for having a tough housing market to enter.

Dwight Johnston, chief economist for the California Credit Union League, explained that California is not changing anytime soon. There is no movement to loosen the problem in the states, and if anything, there are people who are restricting changes.

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His tip for how to afford living in California: save.  

In the old days, people didn’t need to put as great of an emphasis on saving, Johnston explained. However, now it really requires incomes to rise and people to save more.

Saving for a down payment, allows for a better loan-to-value ratio, keeping a borrower safer from risks of defaulting.

And if borrowers are struggling to save, Trulia (TRLA) outlined simple, but feasible, ways people can save over $10,000 in as little as three years if they just cut back in various areas.

REAL ESTATE TRENDS...Leased solar panels can complicate — or kill — a home sale

Can going green by leasing solar panels for your roof cost you money — or give you
headaches — when you go to sell the house?

Possibly both.

Say you get pitched by one of the growing number of companies offering solar panels
 at no upfront cost that they claim will save you lots of money on electricity bills. Sounds
 like a slam-dunk. So you sign on.

Then a few years later you decide to sell the house. You assume that the presence of
solar panels can only be a marketing plus, maybe even get you a higher price. Everybody
goes for green, right? But that's when it gets weird. Some would-be buyers balk when
they learn that they'll need to qualify on credit to take over your solar lease payments for
the next 15 to 17 years. Others say they like the house but won't sign a contract unless
you buy out the remaining lease payment stream — $15,000 or $20,000 or more —
because they're worried that the solar equipment will become obsolete or won't save as
much on electricity bills as advertised. Issues like these are popping up increasingly in
California and other states and are interfering in sales and closings, according to real
estate industry experts.

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Consider what happened to Nora and Andrew Barber when they wanted to sell
their home near Fresno. They needed to move because of an employment transfer
to Thousand Oaks. Their house attracted offers quickly, but two successive sets of
buyers backed out of contracts because of the leased solar panels on the roof. They
either thought the long-term cost of the lease from Clean Power Finance was too high
or got cold feet after hearing what credit qualifications they'd need to take over the lease.

Meanwhile, the Barbers were in the middle of negotiations to purchase their new house
and making preparations to move.

"It was a nightmare," Nora said. "We were in a panic" — pressured by the need to close the new purchase yet still dealing with unexpected complications caused by the leased panels. Finally, they paid $22,000 to get out of the lease and sold the house.

Steve Olszewski, senior vice president of operations for Clean Power, said that as a matter of policy, the company does not comment on cases involving its customers. He added that "we have seen very few instances" of home buyers "not wanting solar." In 95% of cases, he said, buyers take over the solar agreement as-is or the home seller "pre-pays the agreement" or purchases the equipment outright.

Lynn Farris, a realty agent with Windermere Hulsey & Associates in Vacaville, Calif., says disputes arising over solar panel leases are "becoming an increasing problem" for sellers and buyers, and because of the rising popularity of solar, "it's going to get worse."

She has seen sales fall apart when the parties couldn't agree on how to handle the substantial payments owed on long-term leases — in one case it was nearly $30,000 — or because buyers thought the leases "were really bad deals." Out of four leased panel agreements she has analyzed, "only one was any good," she said.

Nationwide, residential solar installations are booming — up by 50% per year since 2012, according to the Solar Energy Industries Assn. More than 600,000 homes and businesses now have on-site solar, with the fastest growth rates occurring in Maryland, Massachusetts and New York.

The biggest player in the field, SolarCity — backed by deep-pocket venture capital and chaired by Tesla Motors and SpaceX CEO Elon Musk — says it now has 190,000 customers in 16 states. Jonathan Bass, vice president of communications, says working out smooth transfers of leased systems from sellers to buyers — or buyouts of systems — is a priority. SolarCity has a 12-person team that already has arranged "close to 3,000" transfers, Bass said.

Takeaways from all this? Top of the list: Be aware of the potential complexities that can occur when you lease, rather than buy, solar panels.

If you opt for a lease, understand your long-term obligations, and talk to your current utility company about the savings claimed. Most important, if you've got a leased system and plan to sell, contact the leasing company well in advance to learn about the lease transfer and buyout options. That way you'll be ready if prospective buyers have problems with your panels.

REAL ESTATE TRENDS...To rent, or not? Depends on your 'horizon'

Should you buy or rent? To answer that question, ask yourself where you will be in 28 months.

Zillow Chief Economist Stan Humphries tells CNBC's "On the Money" that home ownership is a good bet when "buying is more advantageous than renting." On a national level right now, he says, that number is on average just 2.3 years.

"Everyone understands if you're going to be in a house 20 years, you should buy a house," Humphries says. "And if you're going to be in a house for six months, you should rent it."

Still, there is a caveat: "What they don't understand is when those two lines cross," Humphries said, calling that the "Breakeven Horizon." That is the gray area in which consumers should make the decision whether to rent or purchase, when the accumulated costs of renting exceed those of buying.

With mortgage rates so low, "nationally you don't have to be in a house very long to make that decision," he says. Although the average "break-even" point across the country is just over two years, there's a big variation depending on where you live, Humphries added.

According to Zillow research, in New York City (Manhattan), the "break-even horizon" can be five to seven years. In Miami or Detroit, however, that number is closer to one year.

"So if you're going to stay overnight in Detroit, you should think about maybe buying a house." Humphries joked.

Realtor.com

Humphries is co-author of a new book, "Zillow Talk: The New Rules of Real Estate." He writes that before the real estate bubble crashed, conventional wisdom was heavily tilted in one direction. He explains that in 2005 there was "hysteria, and people didn't do the math."

With home values constantly rising, "appreciation was so high people didn't even think buying versus renting, like they should have. Everyone thought the default decision was always buy the house."

That, however, turned out to be the wrong assumption. Shortly thereafter, the housing crisis sent the global economy into a tailspin, and sent foreclosure rates skyrocketing.

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Historically, four to five years is the normal break-even number, Humphries says, especially when buying is a better deal. Even in markets where home prices are high, he says his data shows that it still looks better to buy than rent, because mortgage rates are so low.

According to Freddie Mac, lenders are offering conventional 30-year mortgages at an average rate of 3.78 percent, down from 3.86 percent a week ago. But Humphries warns, once mortgage rates rise, the break-even horizon will rise, too.

Humphries says another new rule of real estate applies to renovations. "Every year I read surveys about the home improvements you should do, and kitchen is always at the top of the list," he said.

Zillow researched home sales over the past seven years and found which home renovations had the best return on investment (ROI) to the final resale value. The data yielded a surprising result, the economist said.

"Conventional wisdom says the kitchen, but we actually crunched the data [and] we found out it's the bathroom," he said. He adds that one reason is because kitchen improvements are often very specific, and tastes vary. Future buyers may not like the color of your backsplash, or the granite you picked.

A mid-range bathroom upgrade resulted in the best ROI for sellers. He explained the best ROI for sellers.

Is what's called a mid-range bathroom upgrade. "Which is basically taking a barely functional toilet and turning it into a bathroom you could use for guests," Humphries said.

REAL ESTATE TOPICS...Economic calendar

Economic Calendar for the Week of March 23-27, 2015

Remember, as a general rule, weaker than expected economic data is good for rates, while positive data causes rates to rise.

Economic Calendar for March 23-27, 2015

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REAL ESTATE TRENDS...Residents are Staying Local, and So Should Your Marketing

by Courtney Soinski

Do you see yourself as the type of person who moves around a lot? Or, are you still living in the same state where you were born and raised? The truth is, most people living in the United States have remained in their local area, according to Census microdata obtained from ipums.org at the University of Minnesota Population Center.

Take a look at the map below. This shows the percentage of the population in each state who have kept their home local. Each shape represents where the people living in a state were born.

nytimes.com

Read more – Mapping Migration in the United States

In Louisiana, for example, 79% of the population still lives there. That means nearly 4 out of 5 residents were born in the state, which has stayed consistent over the past decade.

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When residents are THIS local, your marketing should be local, too. Once you’ve defined the geographic profile of your target audience, you can use this information both offline and online by placing advertising on the real streets of those locations. That may mean a billboard, a direct mail campaign, or a locally distributed real estate magazine, like The Real Estate Book®.

REAL ESTATE TOPICS...What actually effects your credit score

What Actually Affects Your Credit Score? TransUnion Survey Reveals Consumer Confusion

Survey finds majority of consumers have difficulty identifying what’s included in a credit score and report

CHICAGO, Ill. (March 12, 2015) – A recent TransUnion survey reveals consumers are largely confused about what affects their credit score and what is included in their credit report. In fact, nearly half of all consumers falsely identified rental (45 percent) and cell phone (47 percent) payments as those that directly affect their score; however, these are not regularly reported to credit bureaus.

While consumers who frequently review their credit report incorrectly identify some aspects of it, consumers who rarely or never review their credit report have an even higher level of confusion. Among survey respondents who reported checking their report in the last 30 days, half mistakenly believe their full employment history (55 percent) and income level (41 percent) are included in their reports.

“Our survey found that there is significant confusion about what types of payments and other information are included in credit scores and reports,” said Ken Chaplin, Senior Vice President at TransUnion. “As credit reports have a significant influence on consumer credit and lending options, it’s important to debunk the credit myths so consumers can have a clear understanding of what affects their score.”

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Surprisingly, even consumers who characterize their credit as “excellent” or “good” had trouble identifying credit report factors. Among those who characterized their credit as “excellent,” 49 percent mistakenly thought rental payments are included in their report, yet currently they are not regularly reported to credit bureaus in the same way that auto and mortgage payments are reported.

According to the survey findings, there are several noteworthy points of confusion about what affects a credit score and what information is included in credit reports, as follows:

• Pay raises: Nearly half (48 percent) of respondents who’ve checked their credit report in the last year incorrectly believed an increase in income improves their score.
• Credit inquiries: 40 percent of respondents who’ve never checked their report are unsure how it affects their score, and 20 percent who checked their report in the last year mistakenly believed checking their report would decrease their score.
• Paying down debts: 61 percent of those who checked their report in the last 30 days erroneously believed paying off debts from late payments automatically increases their score.
• Trended information: 70 percent of those who’ve checked their report in the last year incorrectly assumed that it reflected recent changes or trends in their finances over time.

To help consumers better understand their credit score and report, TransUnion is helping to debunk the following six myths:

Myth #1: Your score drops if you check your own credit.Fact: Viewing your credit report counts only as a "soft inquiry" and doesn’t change the score. “Hard inquiries" by a lender or creditor, though, can slightly lower your credit score.

Myth #2: I should close old or inactive accounts to help my credit score.Fact: This might actually have the reverse effect of lowering your credit score because it can shorten the measured duration of your credit history.

Myth #3: Paying off a negative record means it’s taken off your credit report.Fact: Generally, negative records like collections or late payments will remain on your credit reports for up to seven years.

Myth #4: Co-signing doesn’t mean you’re responsible for the account.Fact: If you open a joint account or co-sign a loan, you will be held legally responsible for the account, meaning activity on the joint account as well is displayed on the credit reports of both account holders’ reports.

Myth #5: Making on-time rental, utility and cell phone payments helps my credit score.

Fact: While outstanding rental, utility and cell phone debt that has gone to collections can negatively affect your score, generally, on-time payments are not regularly reported to credit bureaus.

Myth #6: My credit score reflects recent changes or trends in my payment behavior.

Fact: Historically, credit scores have not incorporated trended credit information, meaning they are a moment-in-time glimpse at consumer risk. However, TransUnion recently launched CreditVision®, a new scoring model that incorporates an expanded view of payment data and up to 30 months of history on each loan amount.

“Credit scores play a significant role in determining credit terms and rates, so we encourage all consumers to take an active role in understanding their credit” said Chaplin. “An easy way to maintain a vigilant eye on credit is to subscribe to a credit monitoring service like TransUnion’s, which can help consumers regularly check their score and get instant alerts about any potential fraud.”

REAL ESTATE NEWS...CALIFORNIA PENDING HOME SALES CLIMB IN FEBRUARY

CALIFORNIA PENDING HOME SALES CLIMB IN FEBRUARY
Pending home sales in California soared in February to record the first double-digit annual gain in nearly three years and the third straight year-to-year increase, suggesting improved market conditions and more closed transactions in the coming months, C.A.R. reported this week.

Pending home sales data:

• California pending home sales jumped in February, with the Pending Home Sales Index (PHSI)* increasing 24.8 percent from a revised 89.9 in January to 112.2, based on signed contracts.  The month-to-month increase easily topped the long-run average increase of 17.9 percent observed in the last seven years.
• Statewide pending home sales were up 15.6 percent on an annual basis from the 97.1 index recorded in February 2014.  The yearly increase was the largest since April 2009 and was the first double-digit gain since April 2012.

Equity and distressed housing market data:

• The share of equity sales – or non-distressed property sales – grew slightly as a share of the market after declining for three straight months.  Equity sales made up more than 89 percent of all home sales in February, up from 88.1 percent in January and 85 percent in February 2014. Equity sales have been more than 80 percent of total sales since July 2013 and have risen to or near 90 percent since mid-2014.
• Meanwhile, the combined share of all distressed property sales fell in February, down from 11.9 percent in January to 10.9 percent in February.  Distressed sales made up 15 percent of total sales a year ago.  Seventeen of the 43 counties that C.A.R. reported show month-to-month decreases in their distressed sales shares, with Amador and Mariposa having the smallest share of distressed sales at 0 percent, followed by San Mateo (2 percent) and Marin (3 percent).  Glenn County had the highest share of distressed sales at 36 percent, followed by Yuba (25 percent) and Siskiyou (24 percent).

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REAL ESTATE TOPICS...MOST MILLENNIALS UNAWARE OF CLOSING COSTS

MOST MILLENNIALS UNAWARE OF CLOSING COSTS
A new survey by ClosingCorp reveals that approximately two-thirds of millennials who plan to buy a home are unaware of closing costs. The survey also found that across all adult age brackets, more than one-third of potential homeowners are "Not Very" or "Not At All" aware of closing costs.

The survey of more than 1,000 adults also found that most people learn about closing costs from their real estate agent, or by doing their own research. In fact, millennial homeowners are more likely to learn about closing costs from their agent as opposed to a lender by a ratio of nearly two-to-one. 

"This study is very interesting in that it shows millennials are more dependent on REALTORS® than previously presumed," said Brian Benson, CEO of ClosingCorp. "We know they are more tech-savvy than their predecessors, so we believe this really highlights the complexity of a residential real estate transaction. Whether they are researching a home on their own or getting help from an interested third party, the bottom line is that people need access to the correct information, and it needs to be simple for them to understand. With the upcoming changes to the disclosure process being made by the Consumer Financial Protection Bureau this August, we as an industry should be stepping up our proactive education efforts to ensure homebuyers are fully prepared to make the most significant financial transaction of their lives."

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WHAT'S NEXT FOR THE MILLENNIAL MARKET?
C.A.R. CEO Joel Singer will share insight into the behavior of millennials as part of his presentation at C.A.R.'s annual Midyear lunch titled, "The Evaporating Dream: Homeownership in California." On Thursday, April 23, at the Sacramento Convention Center, Singer will touch on how the demographic shifts of millennials' behavior have impacted homeownership rates and why it still remains challenging for millennials to purchase homes.

Along with information about millennials' attitudes toward homeownership, attend the Midyear lunch to learn more about the lasting influence of the "renter nation," what defines the "new middle class," and what economic obstacles remain as a result of the affordability collapse. 

REAL ESTATE TOPICS...Buyers offer more for a staged home

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REAL ESTATE TOPICS...The Mortgage challenge

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REAL ESTATE TOPICS...2% Down...reality!!!

The biggest barrier for many would-be homeowners is the pile of cash that's needed before a bank will even discuss a mortgage. The Federal Housing Administration, in an effort to boost the housing market, recently lowered down-payment requirements to 3.5% of the purchase price, but by the time would-be buyers consider closing costs, they still need roughly 7%. Even in an FHA loan, families buying a typical $300,000 home need a $21,000 bank account — no small feat when median American household income is about $54,000.

Building up a $6,000 mortgage war chest is a lot easier, and puts homeownership within reach of far more low and moderate-income families. That's the goal of Homewise, an organization that arranges low-cost financing that covers 98% of the purchase price for buyers. But an easy-to-reach down payment requirement is only one benefit of Homewise, which serves New Mexico residents. Borrowers also get to skip high-cost mortgage insurance, high upfront FHA fees, or expensive second loans often required of less-than-20%-down purchases. And, if they use Homewise real estate agents, they pay a lot less in closing costs, too.

To qualify, buyers must complete a program designed to teach them the ins and outs of homeownership, including what it takes to ensure mortgage payments arrive on time. And their household income can't exceed about $82,000.

Impressive Results

Combine low down payments, cheaper monthly costs, and educated borrowers and what do you get? Default rates that are stunningly low compared to traditional low-down-payment FHA loans. The Urban Institute recently released a study of Homewise, and found that the organization's 90-day delinquency ("serious delinquency") rate was 1.1% for loans serviced between 2009 and 2013. This rate is well below the 7.3% serious delinquency rate of FHA-backed loans at the end of 2013.

"This is a neat model that appears to work," said Brett Theodos, who wrote the report. He's a senior research associate in the Metropolitan Housing and Communities Policy Center at the Urban Institute. "And they've captured something like 25% of the (low-cost loan) market share in that area."

Thanks in part to the low default rate, Homewise is profitable, making it potentially repeatable around the country, Theodos said.

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So far, Homewise is still relatively small: it's financed about 3,000 home purchases, while working with 11,908 clients, said spokeswoman Rachel Silva.

Plenty of nonprofits have offered housing counseling before; separately, others have offered low-cost loans. Part of the Homewise charm is it works with buyers through the entire process — from helping them open special down-payment savings accounts, to signing closing papers. Most nonprofits' housing counselors prepare would-be homebuyers and then hand them off to traditional banks, where things might not go smoothly. And those nonprofits have to struggle for funding.

In the Homewise model, modest profits from closing loans are used to fund the counseling activity. Homewise loans are ultimately sold to Fannie Mae like traditional mortgages, allowing the firm to originate new loans.

"This allows them to capture the value. What would be exciting is if this model caught hold with other types of orgs doing this kind of work," Theodos said. "In an era where foreclosure mitigation counseling is going away, HUD counseling is being pared back, there needs to be some model that's sustainable for helping people get into homes."

How Homebuyers Save

It shouldn't be very surprising that Homewise clients pile up success stories. Just avoiding mortgage insurance saves average clients about $130 monthly, the Urban Institute says. And there's another serious benefit — Homewise real estate agents are paid by the hour, not a commission based on percentage of the sale price. That saves clients money and helps make sure buyers get into homes they can afford.

"Homewise's model suggests that with a carefully structured, vertically integrated system, homeownership can be encouraged in a way that better aligns risks and incentives for the counselor, the borrower, and the lender," the report says.

Homewise is not a nonprofit. It's a "Community Development Financial Institute," a set of small financial institutions authorized by the Treasury Department that have a stated goal of being profit-making, but not profit maximizing. They offer personal and business loans to consumers who might not otherwise be served by traditional banking.

One barrier to replication of the Homewise model — for-profit banks might balk at the idea, although Theodos is not too worried about that. Many banks aren't crazy about doing these low-cost loans, anyway. That risk would only arise if Homewise started reaching into higher-income client pools.

Instead, Theodos thinks the real challenge is finding institutions that have both the heart to do counseling and the head to do loan underwriting.

"We don't expect it will replace FHA loans, and don't think that's the goal or expectation," he said. "(But) the ability of the program to make revenues … and through those efforts to fund counseling and coaching, that's really interesting."

Can You Get a Low-Down Payment Mortgage?

What if you want a low down-payment loan? Unless you live near Santa Fe, or Albuquerque, where Homewise is now expanding operations, you can't work with Homewise. FHA loans are the closest alternative, with the aforementioned caveat of higher down payments, a big upfront insurance fee, and ongoing insurance premiums.

Military veterans have the option of getting a zero-down Veterans Administration loan, but they pay a "funding fee" of roughly 2% to 3%. Some credit unions offer similar zero-down, funding-fee programs, such as Navy Federal Credit Union.

Finally, many consumers can qualify for more traditional 5% down payment loans if they agree to pay private mortgage insurance. That can easily add a couple of hundred dollars per month to a mortgage payment, but PMI can be canceled once a homeowners' equity reaches 20% through a combination of loan payments and increased housing value.

Your credit score will be a key factor in how much house you can afford, as well. If you haven't checked your credit recently, you can see two of your credit scores for free on Credit.com.

REAL ESTATE TOPICS...What You Need to Know About Home Improvements and Taxes

When it comes to taxes, repairs and improvements aren’t always treated the same.

When we bought our first house, it was perfect. Well, except for the 40-year-old heater. And the green kitchen with beige appliances circa 1970s. And the creepy basement. But otherwise perfect.

Over the years, we made a number of improvements. We also made a number of repairs. We replaced the roof, added a powder room, and replaced the front porch. We painted walls and swapped out windows and doors.

When we sold our house a few years ago, I still had a list of things that I had wanted to make happen that we never got around to doing. We never did refinish the basement or knock out the kitchen wall. I never got a new master bath. Like many homeowners, my husband and I weighed what we wanted to make happen against what needed to happen: time, money, and resale value were all factors.

When you pay for a repair or an improvement to your house, the immediate hit to your wallet is the same. However, how that repair or improvement is characterized determines whether you might get a break down the road.

Here are a few rules for sorting it all out.

What constitutes a repair?

For tax purposes, a repair returns your home to its previous condition but doesn’t necessarily make it better than before. To figure how the repair will be treated on your return, you’ll want to consider the nature and timing of the repair.

Repairs that you make simply to make your home look or feel better — like patching and painting the walls — offer no tax advantage: they’re tax neutral.

Repairs that you make following a fire, hurricane, tornado, or other disaster may be deductible under the casualty/loss rules. The rules can be complicated, but generally you can deduct the cost of a repair to return your property to the state it was in before the disaster.

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What’s the difference between a repair and an improvement?

While repairs restore your home to its original condition, home improvements make it better and can boost the sale value. As a rule, you don’t get to take a tax deduction for increasing the value of your home — with a few exceptions.

If the improvement is to accommodate a disability, you can claim some or all of the cost as a medical expense. This would include, for example, the cost of a wheelchair ramp. If the cost of the home improvement does not increase the value of your home, you may claim the entire amount as a medical expense; if the improvement increases the value of your home, the difference would be a medical expense. Remember that the rules for medical expenses still apply, including the 10% floor.

What about energy-efficient upgrades?

If you improve your home using alternative energy, you may qualify for an energy tax credit — at least through 2016. The Residential Energy Efficient Property Credit is equal to 30% of the cost of qualified equipment. Qualified equipment includes solar water heaters, solar electric equipment, and wind turbines. There is no cap on the credit for most types of property and the improvements don’t have to be made to your main home.

Can updates to a home office be deducted?

If you make a repair to or improve part of your home that you use for business, including a home office or a rental, you can claim a deduction. You’ll want to make sure that the repair meets the criteria for business expenses to take the deduction. You may also have to deduct the cost over time, so check the rules carefully.

What if none of these circumstances apply?

All is not lost. If your home improvements are considered capital improvements, you may still get a break by increasing your basis for purposes of calculating a gain or a loss when it comes time to sell.

Here’s my rule of thumb for figuring capital improvements: if you can carry it out of your house (like that microwave), it’s not a capital improvement. If you can’t take it with you when you go (like that master bath), it’s probably a capital improvement.

Here’s how it works by the dollars. Let’s say I bought my house for $100,000. And let’s assume that I really did get around to adding that master bath at a cost of $10,000.

My new basis? $110,000. That’s $100,000 (purchase price) + $10,000 (adjustment) = $110,000. At sale, I would figure any capital gain (difference between selling price and basis) with an adjusted basis of $110,000.

The reality is that you can’t always plan your repairs or home improvements around your tax return. Leaky roofs and disabilities don’t always show up when it’s convenient. But knowing the rules ahead of time can help you ease the hit to your wallet — and help you time the improvements that you can control.

REAL ESTATE TOPICS...8 Questions You Should Ask Yourself Before Buying a Second Home

Although tremendously exciting, the decision also comes with its own unique financial considerations. 

1. How much will a second home cost?

We’re not just talking about the sale price here—there are a lot of associated expenses you should factor into the equation too. So while that vacation house you’ve been eyeing may be small, it still requires budgeting for a mortgage, property taxes, insurance, utilities and maintenance fees—and some of those expenses are probably higher than you think.

When you’re not living in a home on a daily basis, you often don’t have the ability to tackle small problems before they become big ones—and that can translate into higher maintenance costs in the long run, says David Blaylock, a CFP® at LearnVest Planning Services. “Plus, you’re not on site. So a lot of the things you might normally take care of yourself, you’re going to have to hire someone to do.”

A good rule of thumb to consider? Consider budgeting about 1% of the home’s purchase price for annual maintenance. So if you bought a $300,000 home, set aside $3,000 a year for such common pop-up costs as an emergency plumbing repair or a new furnace. And if you have an older home that could present more issues or if you plan to rent it, you should aim for 1.25% to cover extra repairs.

And don’t forget to factor insurance into the equation. In general, insuring a vacation home will cost about 20% more than a primary residence, says Craig Venezia, author of “Buying a Second Home: Income, Getaway or Retirement.”

Insurance providers generally view vacation homes as a higher risk because you won’t be living there full-time. “In their eyes, there’s a greater chance the house can be damaged,” Venezia says. “And if you’ll be renting out the property, you’ll need additional medical and liability coverage in the event that one of your guests gets hurt on the property.”

2. Can you really, truly afford a second home?

Buying a second home is a money decision—not just a fun way to spend your leisure time—and it’s one you shouldn’t make until after the rest of your finances are in tip-top shape. Are you mostly debt-free? Are you saving enough for retirement? Do you have at least 20% equity in your primary residence, plus enough cash on hand for a 20% down payment and 3% closing costs for the vacation home? “You also want to consider making sure things like college savings are taken care of before you start evaluating the purchase of a vacation property,” Blaylock says.

And while mortgage approvals for second homes typically aren’t as stringent as they were a few years ago, lenders will still be looking closely at your debt-to-income ratio, which is how much money you have to pay each month for debts like student loans, compared to what you take home. Ultimately, Blaylock says, lenders want to know how capable you’ll be of paying back the loan in a timely manner.

In general, you should be able to accommodate all of your mortgage payments (including the vacation home) and the rest of your debt using no more than 36% of your monthly gross income. If you can’t make those numbers work, this probably isn’t the right time to spring for a vacation manse.

3. Are you buying it for the right reason?

Some people may view a vacation home as a cost savings tool—they see it as a way to save on the lodging fees they’re paying every year when they take a trip.

But Blaylock warns against this strategy: “That’s pretty flawed logic—for the amount you’ll spend on a vacation home, you can take a lot of nice trips each year and stay in hotels.”

Another perspective? View it as an investment—either as a place where you plan to retire or a property that you can sell down the road to supplement your retirement income. When evaluating the investment property’s long-term potential, it’s important to research how prices have appreciated over time in the market where you’re buying.

“I suggest looking at median home prices over the last ten years,” Venezia says. “While this is no guarantee of how it will appreciate in the future, it will give you a sense of how it has performed historically.”

4. How do you plan to use the home?

Are you reserving the property exclusively as a second home for yourself, or will you rent it out to help cover associated costs? “Definitely think about why you want to buy it and how you want to use it,” says Venezia. “This gives you a basis to start thinking about types of properties and where to look.”

If you’re buying the house for your own personal use, you’re free to purchase whatever strikes your fancy—and disregard what might attract tenants. But if you’re counting on rental income to cover the mortgage, you should be more conscious of the home’s location and appeal to others. “For example, you may prefer that secluded cabin in the mountains,” Venezia says, “but many potential renters may find it to be too remote to rent.”

Also keep in mind that very different tax rules apply, according to whether your second home is for personal use or if you rent it. Given the complexity of tax considerations and reporting rental income, make sure to consult with a tax professional before you make up your mind.

5. If you do rent the home, is it the right property?

The first step is to think about how often you’ll want to rent, plus how long the potential rental season will be. “On average, people who are actively renting are doing so about 15 weeks out of the year,” says Eric Horndahl of vacation rental site FlipKey.com. “And they report, on average, that they make approximately $26,000 per year doing so.”

After marketing costs, that’s enough to cover the mortgage, taxes and insurance on the average $360,000 home—if you put 20% down, Horndahl adds. For some perspective, the median vacation home purchase price in 2013 was $168,700, and the median down payment was 30%, according to the NAR.

While you’re vacation-home shopping, take a look at similar properties in your area on FlipKey.com or HomeAway.com to see how active the rental market is, and how other places are priced on a nightly or weekly basis. “This can help prospective rental owners make assumptions on how many nights or weeks they will rent it out for, and project their rental income,” Horndahl says.

Next, consider how attractive the home will be to potential renters: Is it close to local attractions, such as the beach or a vibrant downtown? Does the property have any unique selling points or great amenities?

“When they’re going on vacation, people are looking for a hot tub or swimming pool,” Horndahl says. “Also, people who rent vacation homes tend to be larger groups, so you also want to make sure you’re taking size into account.”

Bottom line: Make sure there are a few characteristics that will help your house stand out from others in the area, helping to make it a top choice for renters.

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6. Will you need to hire a property manager?

If you’ve decided renting makes sense, you need to determine whether you’re willing to do all the work yourself, or if you’ll pay someone to tackle it for you.

And by work, we mean everything from advertising, finding and screening tenants, cleaning, handling contracts and deposits, and regular maintenance and repairs. According to Venezia, you should expect to pay 20% to 30% of your rental income for property management services.

Many people start out thinking they’re going to do it all themselves—until “they realize how much time they have to put into finding tenants and dealing with paperwork,” Venezia says. “Then that 30% isn’t such a bad deal.”

If you live within a reasonable driving distance of the home, you’re handy and you have the time, you may be able to do the property management yourself. It also helps if your vacation spot is a condo—where some of the maintenance is done for you as part of your association fees—or it’s a newer home, which may have fewer issues.

7. Is the home located in a risky area?

It’s one thing to buy a vacation home near the shore. It’s another to buy one in a region that’s regularly hit by hurricanes. “If your home is in a designated flood zone or prone to other natural disasters, such as earthquakes or tornadoes, it will be more expensive to insure,” Venezia says. “Waterfront homes, in particular, will be more expensive. On the flip side, they also tend to attract more renters and command higher rents.”

Only you can decide if the location and potential rental income are worth the extra insurance costs, plus the hassle if your home is damaged. If you do decide to buy in a riskier area, it can be key to budget for higher—and sometimes unexpected—costs.

8. Are you rushing into the decision?

As with any large purchase, you should make sure you’re not buying a vacation home based purely on emotion or impulse. Research the area and sleep on any big decisions before you make them.

“The beauty of a vacation home is that it’s a luxury,” Venezia says. “You have the flexibility of time on your side, so whether you buy something this month or next month isn’t going to make a bit of difference.”

In other words, take your time and find the type of property that you really want—and can afford. Then leap.