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Is a Pandemic a Good—or Horrible—Time To Buy a Vacation Home?

August 5, 2020

buying a vacation home during pandemic

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With most of us cooped up in our apartments or houses, it may be tempting to pull the trigger and finally purchase the vacation home you’ve always dreamed about.

After all, mortgage rates are hitting record lows, and a change of scenery sounds awfully sweet right about now. If you can swing it, why not?

Reality check: We’re also living through a time of economic uncertainty. You could lose your job or find yourself up against a major financial challenge in the weeks or months to come.

Then, who knows when the economy will recover from the effects of the pandemic? Is this really a good time to take the plunge on a second home?

The answer depends on your individual financial situation and your plans for the future. We talked to experts to help weigh the pros and cons of investing in a vacation property right now.

Con: This could be a risky time to buy…

“Even though real estate is one of the more sound investments you can make, do you have the tolerance for risk that comes with it?” asks Jen Horner, a real estate agent based in Salt Lake City.

If you see yourself being ready to sell off your second home in just a few years, you should probably hold off on buying, and stick to renting in your dream destination.

If you only plan to keep the property for the short term, you’re more likely to expose yourself to risk and market volatility when it comes time to sell; who knows if your home will retain value over the next few years?

Pro: …but with low interest rates, now could be a great time to invest

“For those with the income stability … purchasing a second home may make a lot of sense,” says James Duncan, director of education and engagement at Thrive Mortgage in Georgetown, TX.

“Lower interest rates have boosted purchasing power, and for those who have ‘buy-and-hold’ mentalities, there likely has not been a better time to buy.”

That means if you plan to purchase a property that you’ll keep for years to come, you’ll be in a good position to weather the twists and turns of a volatile economy in the months (and years) ahead.

“Real estate is always a good investment, provided you have the right financial strategy in place,” Duncan says.

Ultimately, if you’re unsure about it, talk over your situation with your agent and your financial planner to decide if now is the right time to buy.

“Very good Realtors® will not only walk you through the financial steps to ensure a good investment, but will also do their due diligence to ensure you’re investing in the right area with growth,” Horner says.

Con: Getting a mortgage has gotten trickier

“In the age of COVID-19, the primary concern for all lenders has been the continuity of income,” Duncan says.

As a result, buyers are jumping through more hoops than ever to prove that they’ll be able to pay a mortgage.

Before the pandemic, lenders would run a few employment verifications before approving a new loan for a home buyer.

These days, some lenders are running checks seven—or even 10—times before approving a loan. If you lose any source of income during the buying process, that could jeopardize your ability to purchase a second home.

Pro: You can offset the cost of your vacation home by renting it out

If you buy a second home in a popular vacation spot, you could tap into a new source of income by listing your place on sites like Airbnb and VRBO.

Just keep in mind that renting your home to vacationers will add extra responsibilities to your plate, including maintaining the property, keeping photos and descriptions up to date, and cleaning between guests.

The possibility of rental income also comes with a major COVID caveat: During the pandemic, travel restrictions and cleaning logistics have made renting more complicated for hosts.

Be sure you understand what you’re getting into before you bank on rental income.

Con: The market where you’re buying might take a while to recover from the pandemic

Do your homework on the area where you want to buy. What kind of travel restrictions are in place? Will you be able to enjoy the natural beauty of the location, even if the restaurants and attractions are closed? Or will social distancing dampen the appeal?

You also need to consider what this means for your property value.

“If the local economy is largely driven by tourism, is it resilient enough to withstand downturns which could then impact property values?” Duncan asks.

Work with your agent and financial planner to evaluate an area’s risk before you decide to buy.

Pro: You don’t have to be a multimillionaire to own a vacation property

If the idea of a vacation home seems out of reach, here’s some good news: It’s more feasible than you think.

“Second-home purchases are not just for high-net worth individuals,” Duncan says. “There are loads of opportunities for prospective borrowers at lower price points as well.”

If you’re willing to expand your search beyond the main drag or to take on a few renovation projects, you’ll have more options, at a lower price point.

That means you might need to look for homes near the water instead of on it, or to search for homes that need a little bit of updating. If you’re flexible and willing to put in a bit of elbow grease, it’s possible to make your vacation home dreams a reality.

The post Is a Pandemic a Good—or Horrible—Time To Buy a Vacation Home? appeared first on Real Estate News & Insights | realtor.com®.

Want to Buy a Cheap House? Watch Out! Why My $36K ‘Bargain’ Home Was Anything But

September 16, 2019

DarrenTownsend/iStock

As a real estate agent for the past five years, I’ve heard many of my clients tell me how badly they want to find a real deal. Take, for instance, my client Linda, who recently left me an urgent message about a house in Auburn, WA, for sale for only $125,000.

Given that homes in this Seattle suburb were going for three times that much, this had to be the bargain of the century, right?

Alas, no. Allow me to explain.

Why ‘cheap’ houses often end up being anything but

A few hours later, I met Linda and her husband at the house. The yard was overgrown, so someone had hacked a path through the blackberry bushes and brush to the entrance. I unlocked the door, and it creaked open. Brave real estate agent that I am, I let my clients go in first.

Fixer upper entry
First impressions of fixer-upper house

NWMLS

It’s normally good etiquette when touring a home to take your shoes off at the front door. That wasn’t an option here. The floors were years past their due date for being replaced, and covered with crumbles from the disintegrating walls and ceiling. The house had obviously not been lived in for some time, and the electricity was turned off. From what we could see in the dark, the floor plan was cramped and outdated.

I’d seen bigger kitchens in an RV.

Fixer upper kitchen
There’s nothing salvageable in this kitchen.

NWMLS

Yet my clients were not deterred by this shell of a house, or the so-so neighborhood. They were still excited by the $125,000 price tag.

I warned them that the house could end up selling for more than that. As we walked around outside, more people came to look at the house, so we knew we had competition.

As it turned out, the house sold for $315,000—over twice the list price, and in my opinion, far too much.

And even then, Linda and her husband were still determined to find a bargain, so I showed them several more houses and lots, all in the bottom price range of the current market. Problem is, homes in this bottom price range typically had three things wrong with them: They were so rundown they weren’t habitable, they weren’t in a great neighborhood, yet they inspired competition, so that typically, they ended up selling for twice the listing price.

In the end, I never found Linda and her husband that bargain house they were hoping for.

Fixer living room
Sagging ceiling fans and holes in the ceiling can mean water problems.

NWMLS

The downsides of distressed properties

Linda is hardly alone in her desire for a deal. My husband and I have done our own share of deal hunting—and, once, even bought a 100-year-old house in Peru, IN, for $36,000.

Granted, this was back in 1985, but the house was in sorry shape. One corner of the house had to be jacked up because it was sinking. The electrical systems were so old, my husband—a construction professional—said we were lucky the wiring hadn’t burned the place down.

Yet we were young and energetic, so we rolled up our sleeves and made changes—even many that weren’t strictly necessary, such as moving the garage to create a backyard. We also hated the dark, small kitchen, so we enlarged it onto the once-decrepit sun porch.

All told, we spent three years and about $20,000 fixing up the house. When we sold it for $55,000, we didn’t even make a profit!

Working nights
There weren’t enough daylight hours to get this project done.

Sally Herigstad

And that’s hardly the only bargain basement fixer-upper we’ve entertained tackling, either. We’ve seen houses that have been ravaged by fire, or where the wiring has been ripped out of walls, or where people have started remodeling but have given up halfway through. We once even bought a house with serious roof and water damage that apparently had been used as a marijuana grow house. It was a steal at $175,000, but it took us three years and over $120,000 to fix up and sell, not counting our considerable labor.

Fixed up home in Peru
After three years, our Indiana house looked good … but was it worth it?

Sally Herigstad

What to know before you buy a house at a bargain price

It is tempting when you see distressed properties at low, low prices, but my husband swears he will never buy a fixer-upper ever again. And I have to say I agree.

The biggest problem with a house at a rock-bottom price is that all you are about to invest in time and money could probably be better spent elsewhere. If you spend months or years (and tens of thousands of dollars) working on a dumpy 1952 house in an iffy neighborhood, what do you have when you’re done? Probably an over-improved but still slightly dumpy 1952 house in an iffy neighborhood. If, instead, you’d spent that time and money on a higher-quality home in a well cared for neighborhood, you’d have far more potential upside for your investment.

Another factor to consider is how you intend to make a profit on your real estate investment. Is it by improving and reselling the house? Or is most of your profit actually going to be from a general market uptrend?

For example, although we eventually made a profit fixing up and selling our former marijuana grow house, we probably cleared more of a net profit because the real estate market improved during the three years we owned it, rather than because of the improvements we made. It would have been a whole lot easier simply to buy a house in good condition and hold it for the same period of time, then just kick back and watch as the market went up.

All this doesn’t mean you shouldn’t shop for a good deal. It’s just that when you see one, estimate how much it will cost you to fix any deficiencies (and just assume that it always costs more than you think). Don’t forget the substantial costs of purchasing, financing, and selling property. If the numbers work out and you think you can make a profit, you might be looking at a good investment.

But if, on the other hand, the numbers don’t add up, perhaps that low, low price still isn’t low enough.

The post Want to Buy a Cheap House? Watch Out! Why My $36K ‘Bargain’ Home Was Anything But appeared first on Real Estate News & Insights | realtor.com®.

What Is a Real Estate Option Contract—and Do You Need One to Buy a House?

August 3, 2019

 

AnaBGD / iStock

 

Traditionally in real estate, when sellers put their home on the market, they can consider many buyers and sell to whomever they want. But when an option contract is introduced to the mix, that all changes—the buyer gets the exclusive right to buy the property but is not obligated to do so. Here’s how real estate option contracts work.

The basics of real estate option contracts

A real estate purchase option is a contract on a specific piece of real estate that allows the buyer the exclusive right to purchase the property.

Once a buyer has an option to buy a property, the seller cannot sell the property to anyone else. The buyer pays for the option to make this real estate purchase. The option usually includes a predetermined purchase price and is valid for a specified term such as six months to a year. However, the buyer does not have to buy the property, whereas the seller is obligated to sell to the buyer within the terms of the contract.

Options have to be bought at an agreed-upon price. If the buyer doesn’t buy within the time frame, the seller keeps the money used to buy the option.

Advantages for the buyer

A real estate purchase option can be great for buyers. For example, if you want to buy a lot of land to build a new home, a purchase option can be used to keep the lot available for a certain amount of time, until you have funding.

The landowner cannot sell the plot to anybody else during the term of the option. At the end of the term, the landowner must sell the land at the price agreed upon, even if property values have risen in the interim. However, some option contracts may include terms that put a cap on the property’s price, or include other factors to determine the final price.

Advantages for the investor

Investors can use real estate options to secure high-profit investments at relatively low risk.

Here’s an example: An investor notes that a specific plot of land is in a prime location for further development such as subdivisions or a shopping plaza. Instead of purchasing the land outright and then selling it to developers, the investor purchases exclusive rights to the land through an option.

With the option in place, he approaches investors and developers, offering them the land at a much higher price than his locked-in option purchase price. Once his higher offer is accepted, he either sells the option itself for the purchase price or purchases the land and then flips it to the developer, pocketing the difference.

Lease options and their risks

Tenants interested in buying a rental property can use a lease option, also known as a rent-to-own arrangement. A lease option can be tricky and technical, so it’s in your best interest to get a lawyer to go over it.

A lease option allows the renter to purchase the property after a predetermined rental period, which the buyer pays to obtain. The lease option could determine a purchase price or state the property will sell at market value. A portion of the rental payments—which will likely increase due to the addition of a new premium—can be applied to the future purchase. All of these terms will be in the lease option contract.

You will lose money on a lease option if you don’t buy the property. The owner can pocket the additional rent premium and rent option costs if you don’t buy. For this reason, you should carefully review and weigh your options. In addition to a lawyer, meet with a financial planner to make sure you will be able to buy the property before the term ends.

The post What Is a Real Estate Option Contract—and Do You Need One to Buy a House? appeared first on Real Estate News & Insights | realtor.com®.

4 Money Missteps to Avoid With Your First Home Flip

May 15, 2019

Meriel Jane Waissman/Getty Images

So you’re zeroing in on your very first real estate investment purchase: a home with potential that you’re planning on flipping. Congrats! But now it’s time to get to work.

Just be aware: Even if you spend weeks, or months, getting your investment property ready to sell, these efforts don’t necessarily guarantee profits. To give yourself a greater chance of making money off of your flip, you’ll want to avoid the following mistakes.

1. Hanging on for too long

For professional investors, flipping a home should be seen as a short-term process.

“I’d rather take a shorter profit in a shorter period of time than a marginally bigger profit over a longer period of time,” says Joshua Jarvis, CEO of Jarvis Team Realty, in Atlanta. Why? It can interfere with your year-end goals of making more money on flipping other properties. If your money is tied up in a project, you can’t invest in a new one.

“A 10% per annum return on a three-month investment is fantastic, but that same return doesn’t look so hot if it takes three years to come to fruition,’ says Nick Schlekeway, founder of Amherst Madison Legacy, in Boise, ID.

2. Over-renovating

Time is of the essence when flipping a home, and the quicker you can make it look good and sell it, the better. Any additional time spent on over-renovating it or obsessing over minute details can cut into your bottom line.

Patrick Freeze, owner of the Bay Management Group, in Baltimore, advises investors to “make the necessary repairs to your property but don’t over-renovate.”

The longer it’s not getting sold, the more potential revenue you miss out on. Plus, sinking money and labor into additional features can also mean you’ll make less money at the end of the deal.

So to make sure your house will fit in with comparable properties in the neighborhood, look for trends. In your neighborhood, are there McMansions stuffed with high-end appliances, or are most of the houses from the ’70s with modest updates? Figure it out, and play it close to the medium.

3. Not having an emergency fund

Experienced investors will consider this house flipping 101, but we cannot stress enough how important it is to have plenty of cash on hand in case of emergencies. What if your contractor finds asbestos and you have to pay additional money to eradicate it? What if there’s a downpour on the day you’re supposed to paint? Not having an emergency fund set aside can badly derail your project and put you in the red.

“The larger the fund, the better you are and the longer you can handle any risks,” says Jeff Tomasulo, CEO of Vespula Capital, an investment firm in Greenwich, CT.

To figure out how much you need, add together your overhead per month—mortgage, taxes, insurance, your lawyer, leasing agent, accountant, etc.—and multiply that by six for at least a half-year cushion, Tomasulo recommends.

4. Pricing yourself out of the market

Are you holding out for a higher sale price? You’re doing it wrong. The main reason houses sell fast is because they’re priced right for the market they’re in. That’s why it’s important to look at the comps in your neighborhood and speak to local real estate agents when deciding on a price for your investment property.

I’ve seen many new investors try to get $5,000 or $10,000 more than they should on lower-end homes. When it doesn’t happen, they spend the rest of the time chasing the market, Jarvis says.

His bottom line? “Price it right in the beginning, and get it sold.”

The post 4 Money Missteps to Avoid With Your First Home Flip appeared first on Real Estate News & Insights | realtor.com®.

What to Look For in a Fixer-Upper: Signs the Home Isn’t a Money Pit

August 3, 2018

Home renovation

Vladimir Vladimirov/ istock

Renovating a fixer-upper is not for the faint of heart. It takes money, hard work, and patience. But if you’re able to pull off a successful transformation, you’ll reap the benefits.

“Fixing up a house is an incredible opportunity, but should never be viewed as a TV show. It’s real life,” says Elizabeth Enright Phillips, a financial coach at Running Creek Properties in Lancaster, OH, who has renovated nearly a dozen properties.

Best-case scenario: You’ll end up building your dream home and increasing the value of the property. But fixing up a ramshackle house can cost a fortune. Unforeseen problems can surface that will make your fixer-upper a real money pit.

When looking at real estate listings, you’ll notice that no two fixer-uppers are the same. One may have sat vacant for a while, another may be in desperate need of a new roof, and another may have a mold infestation. Each of these scenarios will cost money to rectify, but some situations are more manageable than others.

To help you out, we tapped experts to identify the features and characteristics you should look for in a fixer-upper, to make the renovation go much more smoothly. On your hunt for that hidden gem of a fixer-upper, keep your eye out for the following signs.

Strong structural elements

A solid structure is ideal for any home, but it’s especially critical when you’re buying a fixer-upper. If the home has a crumbling foundation or serious roof problems, you’ll have to decide if you’re willing to pay to repair this type of damage.

These are the five important structural elements:

  1. Roof
  2. Heating, ventilation, and air conditioning (HVAC)
  3. Plumbing
  4. Electrical
  5. Foundation

 

Mike Coughlin, owner of Summit Design Build in Stoneham, MA, says you can get a good idea of the house’s structure by exploring the basement, attic, and unfinished areas. Focus on those areas rather than the pretty, recent additions to the home.

“You want to look at the basement rather than the granite counters and new bathroom fixtures. All of that shiny stuff is really easy to fix,” says Coughlin, who is working on a nearly 300-year-old home that he bought with his wife, Francine. “The stuff behind the walls is what’s more important. As long as the bones are good, you can pretty much do anything.”

Only minor plumbing problems

There’s a good chance that your fixer-upper will need plumbing work. Depending on the scope of the project, the work will be either a quick fix or a significant undertaking that will eat into your budget. Some fixer-uppers may have low water pressure (fairly minor problem), while others may have pipes that need to be replaced (a big problem).

Before buying a fixer-upper, make sure you’re comfortable with the amount of plumbing work required to bring the place up to snuff.

That said, you shouldn’t immediately flee any fixer-uppers that need plumbing work. If you really love the house, it’s all about balancing costs and diverting money from one project to another.

A sound layout

A logical layout is important in any home (no one wants to walk down a long hall to get to the guest bathroom), but it’s especially critical when you’re looking at an old home. Older homes are often divided into small rooms, but many people in this decade favor an open floor plan.

“The entire family wants to be connected; no one wants to be stuck back in the kitchen when everyone else is hanging out. With an open floor plan, there is no separation between the zones of the house,” says Jean Brownhill, founder and CEO at New York City–based Sweeten, which matches people who have major renovation projects with general contractors.

If you envision needing to knock down walls to create a more open, airy interior, know that the job can be expensive, time-consuming, and dusty.

Little to no infestations

It’s not uncommon to encounter a fixer-upper that has an infestation, be it mice, termites, mold, dry rot, or asbestos. A minor issue such as mice can be resolved by putting out traps and filling holes in the house. However, severe termite damage could require a costly solution, including lifting the house (yes, right off the ground) to access the foundation and check for further damage.

A seller is required to disclose such infestations, but a home inspector will also uncover any issues during the inspection that may occur after the house goes into contract.

If you find any of these problems in your fixer-upper, it’s a good idea to get an estimate from a contractor to resolve the issue.

Recent occupation

Buying a foreclosed home that’s sat dormant for a few years might get you a low sale price, but it may also present a challenge when you start renovating it.

“You never know what’s going on with plumbing behind the walls,” Coughlin says of homes that stand empty for an extended period of time. Maybe the water wasn’t turned off properly in the winter, which can cause the pipes to freeze, split, and leak.

A home without humans can also become a refuge for critters such as squirrels and bats.

“We have found dead mice and rats and a live mother possum feeding her two babies in attics,” says William Begal, president of Begal Enterprises, a disaster restoration company in Rockville, MD.

All of these problems can be fixed—they’ll just add more to your bottom-line costs.

The post What to Look For in a Fixer-Upper: Signs the Home Isn’t a Money Pit appeared first on Real Estate News & Insights | realtor.com®.