Home School: Some Tips Before Buying That Second Residence

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Photo of Jonathan Ewing by Sam Robles

True, there’s some foreclosure-related sorrow behind the story, but attractive interest rates coupled with reduced housing prices are making second-home ownership tempting.

Whether you’re buying in a favorite vacation spot or contemplating a retirement retreat, follow these tips to avoid a money pit:

1. Don’t rush. “In our state there are real estate bargains, but researching the market and the developer before handing over your deposit is crucial to avoid costly problems later,” says Fort Lauderdale, Fla., attorney Jonathan Ewing, who counts among his clients a couple who found themselves the only residents in a 32-story skyscraper after the developer ran out of money.

“For example, you can find a condo that was $420,000 before 2008 now selling for $120,000 in some communities,” Ewing says. “Don’t get sucked into thinking the deal is going to slip away if you don’t sign immediately. Will lower occupancy mean increased association fees? Reduced services? Give yourself at least a 24-hour period to do research on it.”

2. Assess the usage. “Is it going to be a vacation home solely for your use? Your eventual retirement home? Do you expect to be able to rent it out? Let it sit vacant?” Ewing advises: “Don’t buy until you know what you’ll be doing.”

San Francisco real estate agent Victoria Kornblum, who specializes in Northern California wine country second-home ownership, concurs. “Distance from your primary residence, upkeep and maintenance are the factors to consider before purchasing a second residential property. Buyers must be realistic about the time they will actually spend in their second home.”

The use of the home affects the terms of your loan. “Generally speaking, a banker will look at how the second home will be used by the borrower as a factor in determining the interest rate and amount the bank will loan for the purchase of the property,” says Koger Propst, president of American National Bank of Colorado and Wyoming. “Generally speaking, a customer with good credit who is buying a second home relying on the use of rental payments should expect to pay a higher down payment and higher interest rate than if the home is owner-occupied.”

3. Forget profit. A second home is not a moneymaker. “If you have to rent it out, learn what the market will realistically yield,” Ewing says. Kornblum advises to focus on the long-term outlook. “Flipping a vacation home property in a year or two is not a realistic expectation.”

4. Experiment living in the area. Kornblum and Ewing recommend staying in the community multiple times before purchasing.

5. Keep taxes in mind. Consult with your tax professional to maximize benefits while minimizing capital gains.

Susan A. Berson is a partner with the Banking & Tax Group of Leawood, Kan. An author of several finance books for lawyers, she may be reached at [email protected].

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