When to buy?

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Permalink Reply by Amelia Island Living on January 2, 2010 at 7:47pm

Hi Bob of New Jersey!

There are plenty of folks wondering the same thing about whether it’s time to buy a home in Florida, especially since home values have dropped so much the past few years. Buying a home in the Sunshine State has, of course, become much more affordable.

For would-be buyers of Florida homes that will be “primary residences,” times couldn’t be better, it appears. Lower home prices, plus mortgage interest rates low, and the additional incentive of the homebuyer tax credit being offered to both first-time buyers (up to $8,000) and also to existing homeowners (up to $6,500 tax credit for an existing homeowner buying another home), are incentives to buy. The new rules for the Homebuyer Tax Credits of 2010 require signing a purchase contract by April 30, 2010 and closing on the home sale by July 1, 2010. This link provides further details from the Association of Realtorsâ about the 2010 homebuyer tax credit http://www.realtor.org/home_buyers_and_sellers/2009_first_time_home...

Others, like yourself, kick around the idea of buying a second home (a “future” primary home) in Florida, with the idea of renting it out for a few years until they actually move south. On the surface it does sound like a good plan. But let me float here some things to consider.

Note that the homebuyer tax credits are for the purchase of a primary residence (you have to occupy the purchased home for three years after closing). So it appears renting the newly purchased home is not an option, if you wanted to get the tax credit. There are also income restrictions, so check out the tax credit homebuyer rules at the link above. However, even without the homebuyer tax credit, it’s still a buyers market and it appears to be a great time to be a buyer if you have excellent credit or cash.

If you’ve never been a landlord and rented out a home, beware. It’s going to be quite a learning experience! Having experience managing a few rental properties here in the Amelia Island area myself (as well as rental properties up in New York, previously), I want to share my personal insights. I also have previous experience with the Fernandina Beach/Amelia Island real estate sales market. I was involved in the local real estate market (with an active Florida real estate license for seven years here), but have put my license “inactive” and no longer sell real estate.

But I can offer you my (humble) opinion. I’m going to give a detailed answer, since I think there are plenty of would-be home buyers wondering the same exact thing as you. So here’s my take on your scenario:

For many property owners, renting second homes and vacation properties here in the Amelia Island area is a way for property owners to recoup just some of the annual costs of owning the property. Especially for the owners of vacation rentals where the zoning allows short-term rentals (i.e. daily or weekly). These owners rent the properties to vacationers when they can, but also utilize the properties for their own personal enjoyment during the off season and vacancy periods. The thinking used to be that if a property is appreciating in value each year, (which pretty much had been the trend for a decade), owning rental property was a good investment and had tax benefits.

Today, however, future home value appreciation is something few, if any, can predict with accuracy. Only time will tell, for sure. Thus, I concur with your concern, Bob, about whether home prices will be going up enough in the next 3 and half years (your retirement timeframe), to make it worth your while to take on the risk of buying now and taking on additional debt -- a second mortgage -- with the plan of renting the Florida home out for a few years until you are ready to move south from New Jersey.

Since you said in your question, that “We are not in position to pay for both mortgages if it would be difficult to rent it out,” it sounds like taking on a second mortgage (which may be a difficult feat in the tighter lending environment) will be financially risky for you, especially since you will be relying on the property being rented out. I suggest, if you are the client of financial consultant and/or a tax advisor, that you consult with them on your situation. Get guidance from your financial advisors before making a second home purchase.

Many people wonder whether the market has bottomed, and don’t want to miss out on a buying opportunity at or near the bottom. However, it’s still uncertain whether we’ve hit the “bottom” of the residential real estate market -- there are contrary opinions on this. From peak housing prices hit several years ago in Florida, most would agree that the median existing home prices (single family homes) have dropped 30-plus percent (but the actual percentage for a particular homeowner would be based on the closest comp sales within the property’s neighborhood/community.)

The drop in residential real estate prices has created a buying opportunity for some (particularly cash buyers). But trying to buy at the absolute bottom of a market (be it real estate or stocks) or trying to sell at the very top of a market, is not a realistic goal for most people. Even the top real estate and stock market gurus have limited success achieving this.

When I was selling real estate here on Amelia Island, I found there were a lot of cash buyers --even when real estate was soaring in price and the credit market was much looser and loans readily available. Cash was always “king” in a real estate transaction. Now, in the current environment, for those who do still have the cash to buy property, I’d say cash would be “Emporer of the Universe.” Cash buyers are in an envious position to scoop up Florida coastal property at remarkable prices, in my “opinion.”

But since you indicated in your forum question that you’d need to rent the second property (if you bought one) and without a renter, you would find it hard to cover two mortgages, it seems that your potential reward for buying now (at what MAY be the bottom), does not outweigh your risk of taking on additional debt (a second mortgage). And being a landlord is no picnic. Let me expand on that…

1) Being a landlord -- especially a long distance landlord-- when you’re renting your second or vacation property (say in Florida), while still living in another state -- is not ideal. Plainly said, it’s a hassle. Issues arise, and logistically, you can’t be at your rental property on the spur of the moment (which is sometimes required) if you’re living far away. Thus, many owners have to utilize the services of a property manager to handle tenant and repair issues, as well as the process of marketing the rental property, securing and screening tenants, and handling leases. Hiring the services of a property manager is yet anther cost for the property owner.

2) Stable renters who pay on time are hard to find. If you think you can manage the rental property yourself, and not hire a property manager, here’s a few tips: Never rent out property without properly screening/qualifying a potential tenant, and make sure you get a security deposit (verify it has cleared your bank account before giving occupancy to the tenant), and sign a legal, written lease with tenants. You should get a credit report on the potential tenant to see their payment history and financial responsibility. You might want to also do a criminal background check of would-be renters through the local sheriff’s office in the county where the property is located. You’d be surprised at what you might find. Plus there are con artists and scammers out there.

3) It’s rare a tenant will take care of property the way an owner would. When the renter departs, be prepared to do “rehab” before being able to get the next tenant in. At minimum, you’ll likely have to repaint the interior of the home and hire professional cleaning service to do a thorough cleaning. If it’s a single family home and the tenant was responsible for lawn maintenance, chances are you’ll have lawn and landscaping expenses, too. This can be pretty time consuming and costly for the landlord if the property is turned over annually (one-year leasing agreements). And this is the better-case scenario. There are plenty of less desirable scenarios -- especially tenants who stop paying and leave owing the landlord back rent, in addition to renters who have done substantial damage to the property.

4) The financial side --property owners (landlords) will not cover the annual costs to own the property with market rate rental income, in most cases. Many people don’t realize the overall costs to own a “rental” property -- i.e. -- second home or vacation property that is rented either seasonally, or long-term. With the costs of property taxes, homeowner’s insurance, flood insurance, homeowner’s association fees, routine maintenance costs, potential property management fees, and paying a mortgage on the rental property, in many cases, the rental income is not going to cover the annual expenses for owning the property (unless you own the property outright, so it‘s mortgage-free).

MORE ABOUT THE REAL ESTATE MARKET

As everyone knows, it has been an extraordinary buyers market for those financially sound who can complete a transaction. But it’s not been fun for sellers. Distressed sellers are under severe pressure to sell. Traditional sellers (not in a distressed situation), unfortunately, are having to compete with the short sales and foreclosures on the market, so sellers have lots of competition to get a buyer. For the sellers who get an offer on their home -- they’ve had very little or no bargaining power. Many people are in a position of not being able to buy until they first can sell their existing home.

Home appraisals have also been problematic for residential real estate transactions. It’s standard process in a real estate transaction after the contract is signed for an appraisal of the property (generally ordered by the home buyer and/or the home buyer’s financial institution). Appraisers are sometimes having a difficult job getting good “comps“ within the same neighborhood of the subject property, for the basis of an appraisal. There had been a lot fewer sales occurring, for one thing, plus a large proportion of Florida sales are “distressed“ sales (ie. short sales or foreclosures) -- rather than “traditional” sales. There are also new regulations for appraisers, and from what I’ve heard, the appraisers that some banks are using for real estate transactions, are sometimes not familiar with the local real estate market (i.e. -- they’re from out of town).

What’s been happening in some home sales transactions has been the dreaded gap. That is, a gap that arises between the signed contract sales price agreed upon by the buyer and seller, and the subsequent appraisal (coming in lower than the contract sales price). Meanwhile, it’s often late in the game when the appraisal is finalized, so the seller has already made plans for movers, arranged to buy or rent a new place, and is caught between a rock and a hard place. Deals are falling apart late in the game, if the seller refuses to accept the lower sales price based on the appraisal (an appraisal that some think maybe questionable as to accuracy, in some circumstances).

Often the buyer says “take-it-or-leave-it.” If the seller wants the transaction to close, they have to take a reduced sales price equal to the appraisal. Unfortunately, it sucks being a seller. It can also be stressful for a buyer, though, if they think they’ve bought their dream house at a bargain price, to have the deal blow up due to the appraisal. Of course, the buyer doesn’t want to pay more than they think the home is worth. So the buyer then has to continue to look at homes and try to find another they like as well as the deal gone bad. The negotiating power balance between buyers and sellers, however, may possibly change in the coming year, if the market is stabilizing….see below.

THE RECENT THOUGHTS OF A REAL ESTATE “EXPERT”

For your consideration, I want to share the advice of a well-known real estate mogul and consultant. Here’s what Barbara Corcoran, who appears frequently on NBC’s Today Show, as their real estate “expert” said January 1, 2010, on the show about the residential real estate market. According to Barbara:

-- A word for potential buyers…“The cheapest homes will start going up in price” (these are the most affordable homes).
-- She suggests there will be “a more balanced real estate market in 2010” -- i.e. more negotiation between buyers and sellers, rather than the buyer mentality of an offer that’s “take it or leave it.”
-- Sellers need to “price their homes correctly and come into the market at the right price” when first listing their property for sale.
-- “Sellers should do their own research…go to open houses in your area and see what your competition is, before putting your home on the market.”
-- For buyers, it is the “ideal market to trade-up a home…you’re crazy not to move if you’re trading up.”

IT’S A TRICKY MARKET, SO CONSULT A REAL ESTATE PROFESSIONAL IF YOU’RE SERIOUS (AND READY) TO BUY OR SELL A HOME

Anyone serious about buying (or selling) real estate should also consult a real estate professional who knows the local market where you want to buy (or on the sell side, where your property is located.) I didn’t always think this way. In fact, I have had success selling property “for sale by owner” both in New York and here in Florida (before I became licensed to sell real estate).

However, times have changed. Getting a Realtor on your side of the transaction (whether you are buying or selling a home), and/or a real estate attorney, is a no-brainer these days. It’s a tricky market, and not a time to do anything on your own, in my opinion. On the buy side, consider getting buyer representation. Buyers should think twice before calling on a yard sign for a home for sale, or contacting the listing Realtor when previewing online property listings. If you end up wanting to buy that property, you would be using the Realtor who is the seller’s listing Realtor, who will then handle the transaction for both parties. While this is often procedure and legal in Florida (and thus the seller‘s real estate brokerage company gets the full sales commission), you may prefer your own buyer’s agent who isn’t the seller’s listing agent. When utilizing the services of a Realtor as a buyer, the seller’s brokerage firm (typically) would then split the listing sales commission with the buyer’s Realtor.

WHEN IS THE RIGHT TIME TO CONSULT A REALTOR?

In the current environment, it’s too soon to contact a Realtor if you’re more than six months away from making a purchase. When you’re ready and able to buy (if you were to find a property you like), then contact a local Realtor in the market where the property is located. Being “ready” means you’re willing to go through the financial “qualification” process. Now more than ever, Realtor’s must pre-qualify potential buyers since the credit market has tightened and it’s much more difficult to get home financing (thus, the being “able“). Before buyers go on a home tour and take up a Realtor‘s time, they should be willing to provide the Realtor with credentials to be verified that they have the funds for a home purchase, or to get pre-approved by a lender if the buyer will require financing to buy a home.

For potential buyers who are in the early stages of the home buying process: If you’re “just looking” and not ready for the “qualification” process, there’s plenty of real estate information now online where would-be buyers (as well as sellers) can conduct “do-it-yourself” preliminary research. It’s easy to preview property listings on the internet and get loads of real estate data when thinking about a future purchase of a home. Doing your own initial research to narrow down geographic areas when trying to find a future place to live, as well as getting self-educated on what type of property a certain price range will buy, is easy for consumers to do these days on their own via the internet. Spending time researching online will provide some insight into what’s available at what price in various markets (whether around Florida or different states). When you’re ready to buy, you’ll be more confident that you’ve “done your homework.”

W. B. Lawson
Amelia Island Living

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