5 Tips to Invest Wisely in a Second Home

Clark Howard says, “Second homes are the best deal in a distressed real estate market.” And that’s especially true right now when housing in many vacation-home destinations has bottomed and mortgage rates are at an all time low. But how do you invest with confidence when you’re not from the area and unfamiliar with the market?

After developing more than 35,000 appraisals in the golf mecca and resort market of Myrtle Beach, SC, I’ve seen way too many out-of-towners pay way too much money for a second home. By following a few simple steps, however, you can protect your hard-earned savings and come out ahead.

1) Find a seasoned, professional real estate agent

An agent can save you a ton of time and trouble or add to your frustration, so choose wisely. Resort areas attract transplants, and often agents are new to the area, so make sure you select someone who’s been in the local market at least a decade. They’ll know neighborhood nuances.

Choose your agency first. Then ask to consult with the broker-in-charge. Let the broker know what type of property you want and your price range. Then ask the broker to assign you a seasoned, full-time agent for whatever type property you want.

Warning: Before you sign a Buyer Agency Contract (not required, but many agents push them), make sure you read all the terms and ask whether you can cancel it if you don’t like the agent. And don’t call the listing agent of a property. Why? They can’t equally represent the seller and you. Avoid “dual agencies” and instead, find an agent to represent you.

Before making an offer, know the values. Ask your agent to document in writing

  • The lowest-priced active competing properties
  • Recent sales of competing properties

If it’s in writing, you’ll have recourse if they misrepresent, and thus they’ll be more forthcoming.

2) If you’re buying a condominium

Most condo projects use professional property management companies. Find out the name and phone number of the property manager. Call them and ask these questions:

  • How much are the HOA dues and what do they include (water & sewer, cable TV, insurance)?
  • Is there a special assessment for insurance? If so, how much is it (or was it last time)?
  • What are the reserves? (You want to make sure there’s money set aside for building improvements)
  • Is there any pending litigation?
  • Are there any anticipated special assessments? (You don’t want to get hit with a mammoth bill for capital improvements)
  • What percentage of owners are in arrears on their dues?

3) If you plan on renting seasonally to offset expenses

If it’s a condotel (a condo project run like a hotel), find out what percentage of the gross income the rental management company keeps. Because they provide a plethora of services including housekeeping, 50% is typical.

For off-site rental managers, you can shop management companies and negotiate commissions. In Myrtle Beach, fees range from 5% to 30%, depending on the level of service and the potential for rental income. To get a better sense of costs and potential profit, ask to see a few annual income statements for property similar to yours.

Before signing with a rental manager, find out–

  • Are they available 24/7 (they should be)
  • Do they check on your property from time-to-time? How often?
  • How they handle issues such as a broken refrigerator or air conditioning that goes out.

4) If you’re buying a house

Drive through the neighborhood at different times of day and talk to the neighbors.

Questions you should ask neighbors or your Realtor if you’re buying near the coast:

  • How much tourist traffic the area gets
  • Has the area ever flooded
  • How hard is it to get insurance that close to the beach

5) Consult with a savvy appraiser

If you’re getting a mortgage, chances are the lender will require an appraisal. But even if you’re paying cash, you should still consult with an appraiser experienced in the local market.

Most appraisers won’t tell you this, but any appraiser worth her salt can grid up comps for you, look at available inventory, and give you a good idea of a property’s value range (provided it’s not a terribly unusual home) for a lower fee and quicker turn-around time.

This past spring we did that for cash-buyer on an oceanfront condo under contract at $76,000. Not only did it appraise for 17% less at $63,000, but also we pointed out to him a virtually identical unit on the market at $64,900. For a $250 fee, he saved $13,000.

If you’re buying developer-owned property, make sure you find out if there is any resale activity. It’s usually priced well under developer listings. In one scenario here in our office, Bob and Mary from the D.C. area almost overpaid by $70,000 until we did an appraisal and pointed out resale listings. We pissed off a developer, a Realtor and a lender, but we saved Bob and Mary $70,000.

So make sure you utilize the services of a residential appraiser who is well experienced in the local market. The best way to find one is to ask some commercial appraisers who they recommend for residential work.

Last year sales of investment properties and second homes soared 64.5% over 2010 as buyers scooped up real estate at beaten down prices. If you were ever in the market for a vacation home, right now is a great time to capitalize on distress pricing provided you take a few steps to ensure you’re truly getting great value.

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Kay Van Hoesen is founder, senior appraiser and owner of Myrtle Beach, S.C.-based Certifax Appraisals with local appraisal experience since 1986. She and her staff have developed more than 35,000 appraisals for over 3,400 clients.

Certifax publishes The Certifax Report for out-of-town buyers, researching and identifying below-market distress properties priced 10% or more under market (subscribe).

Kay Van HoesenKay is a state certified residential real estate appraiser in both South Carolina and North Carolina as well as FHA-approved. Additionally, she is a licensed real estate broker in South Carolina, a participating member of the National Association of Realtors, the Coastal Carolinas Association of Realtors, and an Associate Member of the prestigious Appraisal Institute.

Topics: Real Estate Investing

9 Responses to “5 Tips to Invest Wisely in a Second Home”

  1. This is the most interesting and useful article that has been posted on this site in a good while. Thanks for the advice Kay. And please, no more credit card articles…

  2. Yes, good article and good timing! We’re also looking for a second home starting this Fall and your tips were very useful. I do have a question about agency though: I thought it’s always a good idea to get a buyer’s agent as a buyer, because a ‘regular’ agent has fiduciary duty to the seller. Why do you not recommend it? Thanks!

    • Marita, I absolutely believe it’s a good idea to have your own agent rather than using the listing agent (which creates a dual agency). My advice (restated below) is this: If the agent you’re working with asks you to sign a Buyer Agency Contract, make sure you read all the terms and you can cancel it if, for some reason, you and the agent aren’t compatible. If you sign a Buyer Agency Contract, it usually means you can’t work with another another agent; you’re bound to the agent with whom you signed the contract.
      Best wishes in your search! It’s a great time to buy a second home.
      Before you sign a Buyer Agency Contract (not required, but many agents push them), make sure you read all the terms and ask whether you can cancel it if you don’t like the agent. And don’t call the listing agent of a property. Why? They can’t equally represent the seller and you. Avoid “dual agencies” and instead, find an agent to represent you.

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