How to Find a Second Home Bargain

For boomers with disposable income, now may well be a good time to buy.

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"I didn't buy it as an income property, but as a retirement home," she explains. "I have always wanted a home on the ocean and knew that if I waited any longer, I wouldn't be able to afford it. My plan is to pay off the mortgage in 15 years—by the time I retire. Renting it just helps pay some of the expenses. Plus, having it as a business, I get to claim my losses on my taxes. Maybe my accountant would have said, 'You are crazy!' But, I love being there!"

Some boomers, who bought second homes at their peak price, now find themselves alarmingly underwater on their mortgages, which means they owe more than the property is worth. For these owners, Karpinski recommends renting to cover expenses and waiting out the market to give the properties a chance to appreciate.

New buyers, however, "can purchase a vacation home and have it break even from rental revenue . . . because the prices of properties are lower," she says. "If in 2005, you bought for $500,000 and the rental market was $1,500 a week, you'd be hard-pressed to break even." But with a property today at $300,000, "you can indeed break even. The rental rates have not gone down."

Saunders, the Florida broker, says many sophisticated boomers are searching not for home equity but for "lifestyle equity." They care more about their environment than rising property values. Saunders promotes the Sarasota area as the "Culture Coast," offering opera, theater, lectures, and other amenities.

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That "absolutely compelling lifestyle" is what attracted Vic and Sandy Motto. The couple's primary residence is in California's Napa Valley, which Vic says is suffering from a "very depressed" real estate market. In contrast, Sarasota offers "good values" and "mortgage interest rates which are at an all-time low." The Mottos—he's 71, she's 62—paid $1.085 million in April for a 2005 contemporary with a 47-foot swimming pool that was listed at $1.23 million. When prices plummeted during the recent downturn, "all the bells went off," explains Vic, a wine industry investment banker. "We said, 'This is it. Let's jump on a plane and do something about it.' "

In Arizona, second homes are available at fire-sale prices, having plunged as much as 70 percent from their highs in some areas. Foreclosures and short sales have driven prices down, says Phoenix-area agent Debora Nichols. Most of her clients are out-of-staters and Canadians, who are able to obtain lines of credit. "They feel they need to buy now when prices are so low" so "they'll have something to retire in," she says.

For many prospective second home owners, "the difficult part is financing," says Tom Kelly, coauthor of How a Second Home Can Be Your Best Investment (2004). "Lenders are even tougher with second homes than with primary residences." In some instances, Kelly says, when a buyer cannot obtain traditional financing, the seller may be willing to hold the mortgage, acting in effect as a banker. "Go in there and ask what's possible," he advises.

Saunders still sees real estate as a good long-term investment. Those who dream of a second home should consider this, Saunders says: "If you look at return on investment from 2000 to 2009, even though real estate has lost a lot of that [price] run-up we saw, it was still a better investment than the Dow, Standard & Poor's, and NASDAQ" stock indexes.