Flint Foley Real Estate Blog

Dream of owning a vacation home but find the idea of buying one too intimidating? It’s actually easier than you may think. Here’s a guide to help you analyze your options.
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1. Match housing choices to your lifestyle
Many people assume they must own a primary residence before owning a vacation home, but that’s not necessarily true. What’s really important is matching your housing choices to your lifestyle.

You may live in a city and want lots of space that you can’t afford there. You could rent a modest condo in the city and buy a large vacation home outside the metro area.

Or you may live in a large country house and want to enjoy city life as much as you can. In that case, you could own your country home and also buy a vacation condo in the city.

Either way, the financing and tax implications are almost the same.

2. Decide how you’ll use it
From a financing and tax standpoint, you need to consider how you intend to own and use your property. You have three options:
Primary residence. You can buy for as little as 3 percent down (if your loan doesn’t exceed $417,000), and you get significant homeowner tax benefits.

Second home. You can use your second home anytime you want, but lenders won’t let you rent the home. Buy for as little as 20 percent down, and qualify for the loan using your full primary residence cost plus your full second home cost. Mortgage rates and tax benefits are the same as primary residences.

Investment property. You can rent the home and use it when it’s not rented. Rates are .25 percent to .375 percent higher than second home rates, and your down payment usually starts at 30 percent. You qualify for the loan using your full primary residence cost plus your full investment home cost, but you can use rental income to help qualify. Tax treatment is less beneficial, but the extra income can help with affordability.

3. Understand the total cost of owning it
You can determine what you can afford in seconds. Then you’ll find a lender to formally analyze the cash available for down payment, closing costs and reserves. You’ll also calculate the total monthly cost on your existing home (whether you rent or own), plus the total monthly cost on the vacation home.

You also need to plan for personal budget items that lenders don’t use in their qualifying calculations:

• Gas, electric, cable TV and internet
• Furniture and housewares
• Travel costs to your vacation home
• Total cost of property maintenance items, like cleaning, landscaping and pool/spa upkeep

4. Review monthly and transactional cost line items
Suppose you live in San Francisco and want to purchase a home in the wine country of Sonoma County, CA, for $600,000. Here’s how much it would cost as a primary residence, second home and investment property.

5. Make an offer using a local real estate agent and lender
Many vacation properties are in specialized local markets, so it’s best to find local real estate agents and lenders.

Your real estate agent will clarify local transaction fees, taxes and commissions, as well as advise on local zoning and property rental rules. For example, the town of Sonoma doesn’t allow short-term rentals for vacation homes, but other towns in Sonoma County do.

In destination areas, real estate agent commissions can be higher and can also be seller- or buyer-paid, depending on the area. Only a local expert can advise properly. And, of course, they will structure your offer for you and negotiate on all facets of the deal that are a priority to you.

Likewise, local lenders will be comfortable with appraisals and lending in rural areas. Appraisals are more difficult in less populated areas because comparable sales can be old and hard to find.

If you follow these steps, your closing will be a snap, and you’ll be relaxing in your vacation home before you know it.

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While many first-time home buyers assume that buying a house is a straight-forward process, the reality is there’s a long list of expenses associated with it. And if you’re working with a limited budget, you have to be extra cautious.

5 Strategic Ways to Save Money
Your home is probably the most expensive possession you’ll ever own. Most people are aware of this, but few first-time buyers are familiar with the additional costs and ongoing expenses that come with purchasing a house.
If you want to save money and make home buying less expensive, there are some simple yet strategic actions you can take.
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1. Buy Near an Up-And-Coming Area
One of the best investment decisions is buying near, but not in, a hot neighborhood. Sometimes it’s just not practical or affordable to buy in the hottest communities, but looking nearby might be the best move. You can often save 20-30 percent on the purchase price. And most importantly, you’ll see faster appreciation rates.

To save even more money, consider purchasing a house near a hot neighborhood that also needs a little bit of work. You can then update and renovate a little bit at a time. This saves you money up front and allows you to control your costs.

2. Avoid Standard Commission
Real estate agents do a lot to help their clients find the perfect house, negotiate a fair price, and walk through the legal aspects of closing. In return, they generally receive a 3 percent commission ($9,000 on a $300,000 house). There are, however, ways to save in this area.

One unique option is to use a service like SimpleShowing, which actually refunds the buyer 1.5 percent of the purchase price at closing. Depending on how much house you’re buying, this can result in huge savings.

3. Negotiate Closing Costs
If you aren’t careful, closing costs are where you’ll get hit. Zillow estimates that closing costs will run the average buyer somewhere between 2 and 5 percent of the home purchase price. On a $200,000 home, that’s $4,000 to $10,000.

Closing costs include things like lender fees, appraisals, title fees, attorney fees, escrow fees, interest, termite inspections, radon testing, etc. What most buyers don’t know is that they can negotiate many of these costs. In doing so, you may be able to save a couple thousand dollars right away.

4. Eliminate PMI
If you borrow more than 80 percent on a home, you’ll almost always be required to pay private mortgage insurance (PMI). This will typically cost you 0.5 – 1 percent of the total loan amount (per year). If you can avoid paying it, you should.

“A down payment of 20 percent is the most obvious way to avoid paying for PMI,” personal finance expert Steve Gillman writes. “If this is tough with the homes you’re considering, Realtor.com suggests simply shopping for lower-priced homes for which you can make a 20 percent down payment. Multiply the down payment you have by five to arrive at the highest price you can pay while avoiding PMI.”

5. Shop Around for Home Insurance
Just as you can with any other type of insurance – such as life or auto – you can shop around and compare prices for home insurance. While every home-insurance product is different, you may be surprised to learn just how much discrepancy there is in price. Just make sure you’re getting enough to protect your investment.

Don’t Be House Poor
Just because you can buy a house, doesn’t mean you should. Furthermore, just because you qualify for a large loan, doesn’t mean you have to spend up to the loan limit.

It’s one thing to own a nice house. It’s totally different to own a home and be financially comfortable in it. Spend what you can and do your best to avoid being house poor. You’ll experience much greater satisfaction and peace of mind.

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