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Why Are Vacation Homes Still Hot?

Written by on Tuesday, 04 December 2001 6:00 pm
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Home equity to burn, favorable tax laws, and record-low mortgage rates are all converging at an opportune time to make buying your vacation home a dream come true.

That's especially true if you are among the growing bulge of aging baby boomers, many of whom have been burned by other investments and are looking for a less risky way to spend disposable income and their leisure time.

"Vacations homes are a lot more fun to use than stock certificates and because the cost of living is a lot more expensive than it was 10 or 15 years ago, it's a good idea to get a head start on retirement," said Clark Thompson, CEO of Orinda, CA-based EscapeHomes.com, an online portal to vacation home and time-share listings as well as related information.

But before you prop up your feet on your chalet's veranda, bask in a beach-front view, or settle in to call up the concierge, be aware that buying a getaway home isn't quite like buying your primary residence.

Residential real estate transaction fundamentals apply, but why you buy, where you live and how you approach the vacation home venture requires additional considerations.

Seconds Anyone?

Before the economy officially slipped into a recession, the longest economic expansion on record helped fuel steady increases in second home sales, largely because more and more consumers could afford them.

Often purchased as vacation or retirement homes, second homes clocked an estimated 415,000 sales in 2000, up 10 percent from the 377,000 purchased in 1999, which yielded a 9.3 percent increase from 1997, according to "Second Homes/Recreational Property (Revised June, 2001)" by the National Association of Realtors. The year 2000 estimate is up 40 percent from the 296,000 second homes sold in 1995.

The economic expansion created extraordinary equity growth in primary residences and bullish stock market returns. Also, the Taxpayers Relief Act of 1997 allowed already equity- and income-rich home owners keep, tax free, up to a half million dollars in gains from the sale of a home.

NAR's Home Wealth Effect Survey" revealed during the association's Chicago convention earlier this year that the typical homeowner had $50,000 in home equity -- $100,000 for households earning more than $75,000. Older, baby boomers aged 50 or older have still more money on the house -- $80,000. In some California and New England areas and other locations home-earned equity is three, four times as much and higher.

Using home equity wealth to buy a second home is the second most common use of home equity -- behind using equity to buy a move-up home, NAR says.

"It's really the middle income where the bulk of the baby boomers are showing a demographic demand that's very strong and for them it's designed to diversify a totally stock-based portfolio with other forms of more secure investments," said Walt Molony an NAR spokesman.

"In the past, vacations homes didn't appreciate very quickly, but that's changed. Many of the most desirable locations are fully developed. Mid-Atlantic coastal prices have doubled in the past four years," Molony added.

In many cases, vacation home owners get the same mortgage interest tax write-off they get for their first home and there's even some tax-free income available, provided the vacation home isn't rented for more than 14 days in any calendar year. About half of all second homes are investment properties, the rest are used for fun, NAR says.

"There's also 'serial home selling'," says Alamo, CA-based real estate investor John T. Reed.

"Now that you can sell your home and take $500,000 tax free, all you have to do is be in the residence for two years (out of the last five)," said Reed, also publisher of the Real Estate Investors Monthly, a trade magazine for real estate investors.

Since the September 11 terrorists' attacks, more buyers are also seeking vacation homes deemed more secure in small, secluded, sanctuary-like communities, away from the troubles of the world.

Historically, however, vacation home buyers most often are simply after the good life they've earned -- an A-frame on the slopes, a cottage on the beach, a cabin by the lake -- a place to get away from it all. The house may become a retirement home, an inheritance for the kids or even a status symbol.

"You can impress people. You have appreciation to brag about and you can prove how successful and affluent you are," said Reed.

Location, Location, Location

The location decision is always a personal one, but that tends to lead many vacation buyers to California, Florida, Texas, New York and Pennsylvania, the most common vacation home areas, according to NAR.

No matter what state or country they choose, when it comes to type of community, buyers most often seek lakeside, beach front, mountain and other resort communities, says Molony.

As well as the trend toward more secure locales, a growing number of vacation home buyers are also buying into metropolitan urban areas, which are also becoming trendy spots for time-share vacation purchases.

"We have two in San Francisco, one in New Orleans and one in New York City, the Manhattan Club," said Carl G. Berry, principal with Resort Development and Advisorsa San Francisco-based resort developer.

"In terms of urban time sharing it's in cities that have a cultural, sports, shopping and dining base. You have downtown apartments and condos and the point is when you go to the symphony or ballet and you don't want to drive home, you spend the night and leave the next morning. The difference with urban time shares is that you can stay one night at a time. You can buy a week, but you use it one day at a time," said Berry, also past chairman of the Washington, D.C.-based American Resort Development Associations.

Wherever you look for a vacation home or time share, location is also important to value.

If you aren't choosing a new home in a resort or development where prices can be relatively fixed, shop for a second home much in the same way you shop for your first home. For value, buy the cheapest home in the best block or buy into the cheapest neighborhood in the best community.

Also look for appreciation potential, typically found in areas where demand eventually will exceed supply. Avoid heavily marketed, but unproven areas. You want property with future marketability for you or your heirs.

Location is also important in terms of your home's proximity to the activities you want to enjoy -- shopping, night life, recreation, culture, and others.

The best vacation homes are also those within easy traveling distance of your primary residence. If it's too far or too expensive to reach within a few hours, you likely won't use it enough to justify the cost as an owner-occupied vacation home.

Whatever you do, don't sell yourself short by telling yourself if you buy it you'll use it. Instead, rent a condo or home in the area for a season first. See how often you actually manage to get to your vacation home.

"Three hours has been the traveling time limit, but I think that might change given the Sept. 11 aspect. In any event, it's not so much the drive, as it is a direct, non-stop flight so you can get on a plane and be there. There's a lot to be said for a non-stop flight," said Thompson.

Tomorrow: The Good Life (Part 2)

For more articles by Broderick Perkins, please press here .

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  About the author, Broderick Perkins

Individual news stories are based upon the opinions of the writer and does not reflect the opinion of Realty Times.