If you’re thinking about purchasing a second home or vacation home that may become your eventual retirement place – here are a few things to keep in mind:
1. Remember the key to vacation homes is location, location, location. This may sound like a cliché, but that doesn’t make it wrong. It is wise to really learn the area by visiting it several times to explore the region and check out the amenities before you make an offer on a home.
Spend time in the area during the “off-peak” season after the crowds return home. Different seasons bring a different environment. Some of the local stores, restaurants and shops may only be open seasonally. You’ll want to be familiar with what the area has to offer during the “off-season.”
2. Assess the property’s true rental potential. Areas with year-round rental potential increase your rental income when you’re not staying in your vacation home.
Be certain, too, that the home you’re considering has the amenities renters expect. Properties that double as vacation rentals should have hot tubs, fireplaces and views to lure tenants. Access to the beach for kayaking or trails for hiking offer year-round options for entertainment. A dock or landing strip will give potential tenants easy access to the property.
Before making an offer check with the local government for permit requirements or tax consequences and, if appropriate, the homeowners association, to be sure short-term rentals are allowed.
Once your offer has been accepted complete your due diligence. Hire a professional inspector to assess the condition of the roof, foundation and other major systems. Major repairs may not only drain your savings, they may also prevent you from renting the property to generate income.
3. Do your math before writing an offer. Add up all the costs for buying and maintaining the vacation home. Mortgage rates are sometimes a bit higher for second homes than primary residences and some lenders may require a larger than normal down payment. Property managers may take a significant bite out of gross income so shop for a manager. If you plan to service the property for yourself, calculate the time you will spend performing such services as booking, cleaning and completing repairs to the property.
4. Don’t let yourself become emotional about the prospect of fulfilling your retirement dream. Sleep on it, maybe even give it a month before making an offer. Emotional desire can cause buyers to rush into making an offer. Just because prices and mortgage rates are low doesn’t mean that you need to rush into a premature decision.
Proceed with caution until you feel confident that the home will not only suit your needs today, but in the future. Another consideration is the age-friendliness of the property. This is especially true if you plan to move into the home when you retire. Years from now it might not be as easy to handle a flight of stairs or maintain an expansive garden.
I could not resist the headline. As they are the only thing sure in life it makes sense to write about them. My experience gives me enough knowledge to paint a picture using broad brush strokes. Anyone thinking of purchasing real estate should discuss the purchase with their legal and tax professionals.
Let’s start with a brief note about death. To be specific, let’s talk about what happens to your real property when you die. Simply put what happens depends upon where you live and how you hold title to your property.
State and federal law govern how the estate of the deceased is distributed and taxed. If you live in one of the nine community property states (AZ, CA, ID, LA, NV, NM, TX, WA or WI) and have a surviving spouse, most likely the property will automatically convey to the surviving spouse. If you place the property into a trust the trust may dictate what happens.
If you do not live in a community property state, or have no surviving spouse and the property is not in a trust, then most likely your property will need to go through probate. State law governs how the probate is handled. Some states have an inexpensive, streamline probate process. Other states have an expensive and lengthy probate process. Regardless of the state, any probate may become lengthy and expensive if there is a dispute among the survivors. This is part of the reason why it is important to create a will.
None of us want to think about death. And with the myriad of decisions to make during the purchase of real property this important issue may not receive the attention it deserves. If you have children from a previous marriage, a large estate or any other unusual circumstance it is in your best interest to discuss with the title officer or your tax/legal professional the method of holding title which will work best for your situation. You could also perform an internet search on how to hold title. Each state differs slightly so be sure that any article you read pertains to the state in which the property resides.
Moving on to taxes. As I’m sure the end result of reading about taxes is similar to that of having a lobotomy I’ll avoid lengthy discourse on the subject and limit the discourse to taxes relevant to real estate in San Juan County, Washington.
Since we were on the subject of death you should know that estate taxes will depend upon the total value of the estate including real and personal property. According to the IRS website, as of 2015 the federal tax applies to estates in excess of $5,430,000. The tax will not apply to an estate if it is left to a spouse or a federally recognized charity. Check with the state in which the property resides to determine the threshold for filing state estate taxes. According to the Washington State Department of Revenue as of 2015 that threshold is $2,054,000.
Property Taxes in San Juan County are paid semi-annually with the first half due on April 30 and second half due on October 31. The tax year runs from January 1 to December 31.
Typically the seller of real property will pay property tax to the date escrow closes. The buyer will pay from close of escrow to the semi-annual due date. These prorations are noted on the HUD1 closing statement.
If taxes have been paid on time then property taxes are pretty much a non-issue. Things become a little more complicated when the seller of real property has not made timely payments. This is where the preliminary title report becomes of value.
The purchase contract can provide a title review contingency. This contingency will give the buyer an opportunity to review the status of tax payments. If taxes are in arrears it would be a good idea to check with the escrow company to verify that there are sufficient proceeds from the sale to pay any delinquent property tax.
If the escrow closes in late March or late October I suggest the buyer contact the San Juan County Tax Assessor’s office to make sure any new tax bill is mailed to the correct name and address.
The San Juan County Land Bank Tax is paid each time the property sells. The tax is due at the close of escrow. It is typically charged to the buyer at a rate of 1% of the sales price of the property. All tax funds received go into a fund which is used to “preserve the natural heritage of the San Juan Islands”.
Washington State Excise Tax is also paid each time the property sells. The tax is due at the close of escrow. It is typically charged to the seller at the rate of 1.28% (1.78% for property within the city limits of Friday Harbor) of the sales price of the property. According to RCW 82.46.030 one percent of the funds are put into the county current expense fund and the remainder into the county capital improvements fund. Friday Harbor’s additional .5% tax funds are to be put into the municipal capital improvement fund.
FIRPTA, aka the Foreign Investment in Real Property Tax Act, is a withholding of tax on the dispositions of real property interests within the United States. It is a federal as well as a state (for those states with income tax) tax on the proceeds from the sale of real property by those persons who are NOT selling a principle residence and are NOT a resident of the state or the US. In other words, if you are selling your principle residence you are exempt from these taxes.
The seller of real property may be subject to both the Excise and FIRPTA taxes but it is the buyer of the real property who is responsible for withholding. Normally the escrow or the closing agent will perform the tasks of withholding and the filing of the proper tax forms. It is in a buyer’s best interest to use a qualified closing agent and to check with that closing agent to verify that the seller has completed the appropriate FIRPTA waiver or that the closing agent is prepared to withhold FIRPTA. Also check to ensure that there are sufficient net proceeds to pay any tax due.
Tax deductions (a favorite phrase) are one of the many advantages of owning real property. If you are ready to take advantage of some of the deductions available call or text me. I’ll get you started down the path to ownership.
In my last post I talked about using leverage to buy into real estate. I’d now like to talk about using interest rates to increase your purchasing power. That means we’ll need to do a little math.
Before I begin I would like you to know that it is best to talk with a loan specialist before you begin your hunt for a home. While I can paint a rough picture of your financing, the loan specialist will be able to provide more exact numbers for your interest rate and payment amount.
For my examples I used an online mortgage calculator I found through a search engine. My examples may not include APR or annual percentage rate. They are not intended as an offer of financing.
With a little math we are able to find a starting point for your mortgage payment. As a rough rule of thumb your mortgage payment (principle, interest, taxes and insurance) should be about one-third of your before tax income. Take your monthly gross (before tax) income and multiply it by 33%.
Let’s set aside the tax and insurance costs for now and assume that you qualify for a principle and interest payment of about $1010 per month. At 4.5% that translates into a loan amount just under $200,000. But at 4% that translates into a loan amount just over $212,000. A simple one-half point decrease in the interest rate increased your buying power by about 6%.
Turning that around…with an interest rate of 4.5% your principle and interest payment on a $200,000 loan would be about $1014 and at 4% your principle and interest payment would be about $955. That’s a $59 savings every month just by having a lower interest rate.
There are a myriad of factors used to calculate the actual interest rate you will pay. Until they change the credit rating system your FICO score will be the single most important factor. Think, higher FICO equals lower interest. Work with your loan specialist to find ways to increase your FICO score. And do so long before you begin to hunt for a home.
Improving your FICO score is one way to obtain a lower interest rate. Buying down the interest rate is another. However, before you start spending money to save money, do a little more math. To see what you will really save you’ll need to calculate the monthly savings then determine how long you’d need to hold the property to actually save money. Here’s an example using the $200,000 loan;
You pay 1% of the $200,000 or $2000 to buy down the interest rate from 4.5% to 4%. Your payment goes from about $1014 to about $955. You save about $59 per month. Divide the $2000 initial investment by the $59 per month savings. In about 34 payments you’ll have saved the $2000 you invested and will begin to save money on the loan.
Do you plan to live in the property for 2.9 years? If the answer is yes, then by all means seriously consider buying down your interest rate.
Just as interest rates vary from hour to hour and lender to lender so will “buy down points”. I suggest to all potential home buyers that they contact at least three lending specialists. Ask for a good faith estimate from each so that you will know “the other fees”. Sometimes a lender will advertise an enticing interest rate and will make up the difference by charging higher fees.
Another difficult to execute but effective method for improving your buying power through lower interest rate is to watch interest rates and time your purchase with falling rates. Of course, if you have the ability to see into the future, I doubt you worry much about interest rates.
Currently interest rates are bouncing around at historic lows making now the perfect time to maximize your purchasing power. If you think rates are due to rise in the near future, call me. If you need help finding a proven loan specialist, call me. I can help you get you into your new home before we have to worry about rising interest rates.
The probability that in San Juan county property values will rise before the island economy recovers is something islanders should consider if they are thinking of purchasing a home.
The real estate market in the San Juan islands is a bit different than most other small communities. On the mainland the local economy typically drives the local real estate market.
The San Juan islands differ in that a significant number of properties are second or vacation homes for people who work and live in other parts of the country. These homeowners are using income generated elsewhere for their purchase. Therefore the island economy plays a smaller role in the decision to purchase.
What might an island resident do to achieve their American dream of homeownership in this situation? One possible option is to “play the market”. Invest now into something small and affordable or in need of cosmetic fixing. As prices begin to rise you gain equity. Use that equity by selling the small home and purchasing a larger home.
Remember the big down cycle in the real estate market in the late 1980’s? While it wasn’t a crash as deep and long as the current cycle it did present some excellent opportunities to buy into real estate. Once recovery began many places saw their values recover in less than one year.
If you are looking to achieve your dream of ownership think about getting ahead of the pack. Make your investment now and ride the market upward. You may have to lower your expectations. Instead of owning a dream home, make it your goal to ‘just get your foot in the real estate door’. If you aren’t handy enough to invest in a ‘fixer’, purchase small. If you are handy, consider a ‘fixer’. There is a lot to be said for sweat equity. Either way the plan is to hold onto the property long enough to build equity. Equity is used to leverage into a ‘better’ home as the market improves.
Think about this. Real estate is one of the few areas of investing where you can leverage into an investment. Let’s say you have $10,000 in the bank and have a stable job and good credit. You invest that $10,000 in a $100,000 house. Now assume the market recovers at a conservative 3% in the next year.
If you left the $10,000 in the bank do you think you’d receive a 3% interest rate? Probably not. Even if you were lucky your $10,000 would have earned only $300. Now say you invest that $10,000 in a $100,000 home. Your equity will be closer to $3,000 or ten times more than you’d earn from the bank.
If you’d like to discuss how you might leverage your savings into home-ownership give me a call. I’m here to help.
For many having a home inspection completed before closing escrow is a bit like purchasing insurance. If everything is in working order it seems like a waste of money. You can’t hold onto or cuddle-up with or even resell “peace of mind” which makes the primary reason for an inspection a bit difficult to embrace. For most of us the value is found only when a major defect is discovered and we have the option to cancel the purchase or make a price adjustment.
Yet there is more to a home inspection. These inspections also provide the would-be home-owner a basis for maintenance planning. One of the best ways to retain or improve your home’s value is to keep it in good repair. For example, the report discloses missing or damaged flashing at the chimney. There is no visible evidence of water intrusion. Yet water is and has been slowly seeping into a roofing truss. As time passes a minor repair issue grows into a major repair which lowers the value of the home.
Water, electricity and propane are expensive on the island. Homes in good repair save money every single day in the form of less waste of these resources. Having a professional inspector’s written report highlights existing or developing problems and gives a homeowner the ability to make minor repairs which result in savings on the cost of these items.
At some point, usually ofter closing escrow, it is a good idea to review your inspection report and create a spreadsheet listing the the major components of your home such as heating, plumbing, electrical, roof and foundation. The inspection report usually breaks down your home into these components. From the report note the age and condition and any notations or suggestions into separate columns. If the report doesn’t give you an approximate age and life expectancy you’ll have a little research to perform before you enter that information.
Lesson learned, Orcas Island is a small community where you may run into tradesmen on the ferry, in the local hardware store or in line at the grocery store. The good tradesmen on the island are usually busy. Those who love their trade also love to talk about their service. Whether you hang-out in the store or volunteer with one of the many organizations, go out and meet the locals. Like all small communities people are more willing to give priority to a neighbor over a total stranger. Can you think of a better way to kill an hour long ferry ride than talking to a professional about work you may need to have done at your new home?
If you want to become “a local” and need a place to start, call me at 619.224.9015. We will find you the perfect home while discussing the method of networking which best meets your needs.
This is the first post in a series about the home-buying process on Orcas Island. Falling in love with the island happens to many visitors. If you are a repeated visitor the itch to own can become a burning desire. This is my story.
Let’s start with a little background. I spent part of my childhood on Orcas. Within a month of my eighteenth birthday I fled “Orcastraz” for the mainland. At that time Orcas was a little light on engaging activities. Sailing, boating, and watching door knobs rust were about it. I needed more.
I landed in San Diego where I have spent most of my adult life, the last twenty-five years as a Realtor.
Let’s dial the time machine back to November of 2000. I’m sitting in my car in the parking lot known as “the I-5” staring vacantly at the license plate on the car in front of me, ICURF8. The hot, harsh reality of day-to-day living in southern California has blown away the memories of my idyllic late-summer vacation on Orcas Island. It’s about a hundred and five degrees outside. Oh, how I wish I could just be sitting on a log at North Beach. That’s when I asked myself, “Why not?”.
San Diego’s real estate market was rocketing toward the bubble. I had loads of equity along with a stable income, two of the more important ingredients in the home-buying process. As a licensed agent I have access to like a million loan officers. I call my favorite to learn that I’m pre-qualified for a fairly large loan. Big whoop, right? Pre-qualifying for a loan simply meant that I could fog a mirror and talk to a loan officer.
I am a fairly conservative person and did not want to overextend myself. So I took the next step and completed a loan application with a knowledgable lender familiar with financing on Orcas. After they checked my credit, income and expense reports and tax returns I received conditional loan approval. Conditional? Yes, conditional approval meant that as a borrower I had the income, credit and reserves necessary to finance the purchase of a property. The condition was that I find a property that would qualify for financing. At that time this simply meant that the property actually existed and was still standing.
Time to start hunting for the perfect property. I arranged to spend a little extra time on island my next visit to look at the housing inventory. Stay tuned for my next post when I discuss some of the things I learned about the house-hunting process on Orcas. Or if you have equity or savings, a stable job and are ready to start hunting for your new home call me at 619.224.9015. I’m here to help.