Today’s market is full of Catch-22’s. Now’s the perfect time to buy a home because prices, not to mention interest rates, are at historic lows — but no one wants to give you a loan. Foreclosures, short sales and REO’s present tons of opportunities for second-home or investment home buyers to secure inexpensive properties — but a significant portion of these homes (some say as high as 40 percent) are a result of previous second-home and investor purchases gone awry.
Most savvy investors can see there are abundant deals out there for homebuyers. But with the mistakes of past investment home purchasers haunting the housing supply it’s difficult to tell who is and isn’t well positioned to take advantage of this buyer’s market.
“As a general rule, the set of people who would have been considering a second home now anyway should be the set looking at this market,” said Greg McBride, a senior financial analyst for BankRate.com. “It should not be somebody who woke up yesterday and said, ‘Gee, I want a second home.’ It should be somebody who had their eyes on this as a goal for a few years.”
In order to give readers a better sense of the current investor profile that comprises second-home buyers, NuWire examined some of the statistics recently released by the National Association of Realtors.
The Average Second-Home Buyer is in His or Her Mid-40s
According to the National Association of Realtors, the average investor who purchased a vacation home last year was 46 years old. Those who purchased investment homes were 47 years old. These statistics support McBride’s assertion, as he noted that most investors who have thought about purchasing a second home for a few years have also thought about retirement. “Somebody who is perhaps in their peak earning years and is looking toward retirement in the next 10 years or so [is likely to take advantage of the current housing market],” he said. “These are people who are trying to put their assets in place now and are realizing that the low prices can give them the lifestyles they’ve envisioned.”
Careful not to take the connection between retirement and second homes too far, however, as many middle-aged Americans have experienced a significant drop in equity through 401k losses and the roller coaster that has been the stock market.
Plan to Hold for a Long Time
As current owners of vacation and investment homes know, the days of buying a second home, using it for a few years and selling it for a huge profit are over. Instead, most people who are purchasing vacation homes at rock-bottom prices are prepared to hold them for extended periods of time. NAR noted that 58 percent of the vacation-home buyers it surveyed said they did not plan to sell for at least another 11 years. Investment-home buyers plan to hold for an average of five years. “Homeownership is a long-term investment,” McBride added. “It is not a get-rich-quick scheme. That realization is just dawning on many Americans.” Economists initially predicted that the housing market may turn around as early as mid-2009. Being that it’s already April, however, it seems more likely that those assertions may need to be pushed to early or mid-2010, if even then. Consumer confidence, unemployment and a barrage of other factors still need to turn around before anyone can anticipate a steady, let alone thriving, housing market.
Those Getting the Best Deals are Paying with Cash
It may sound obvious that cash buyers are the ones getting the best deals, but it has never been more true than it is today. One of the biggest problems potential second-home buyers are running into is that they can’t secure the proper financing to take advantage of these previously unheard of deals. Whereas a few years ago they may have been able to obtain a loan in a snap, making the housing market an extremely competitive place, borrowers are now losing out to all-cash buyers.
NAR’s survey noted that 30 percent of vacation-home buyers and 40 percent of investment-home buyers paid cash for their properties in 2008. With the subprime mortgage debacle and the credit crunch in full swing it’s clear that sellers would prefer cash. If an all-cash transaction just isn’t a feasible option, investors must realize that lenders are much tougher on second-home purchases because these assets are luxuries and not necessities. “It’s going to take a hefty down payment,” McBride said. “For second homes, 30 percent is very typical. The threshold for credit scores has also really gone up over the last couple of years. You’re probably looking at 740 and above.” Even if financing is secured, investors must realize that they can still lose these deals to all-cash buyers who put in substantially lower offers because many sellers have become jaded and distrustful of the lending market. This is compounded by the widely publicized fact that many investors who have initially obtained financing have seen that financing fall through before the close of escrow.
Many Second-Home Owners are Considering Renting their Properties
Though a small portion of vacation-home owners consider renting their second homes anyway, the financial impacts that are being felt throughout this current downturn have caused a large number of second-home owners to consider renting. NAR reported that a record-setting 27 percent of second-home buyers in 2008 bought the properties with the intentions of renting them out.
Even those buyers who did not initially intend to rent out their second homes when they purchased them have considered this as a viable option in such a slow economy. HomeAway, an online marketplace for vacation rentals, noted that 66 percent of those it surveyed said that current economic conditions have increased their interests in renting out their vacation homes. McBride cautioned, however, that just because investors are savvy enough to purchase second homes does not mean that they have the means necessary to become good landlords. “Becoming a landlord is not a decision that should be made on a whim,” he said. “And in this market in particular rents have really been driven down by virtue of the fact that there are so many vacant homes.” What McBride means by this is that many renters who weren’t previously able to afford homes are now taking advantage of low prices. Many who could not afford their current homes are also downgrading to apartments, which can make it difficult to capitalize on a rental property.
Sales of Vacation and Investment Properties have Fallen 30 Percent
Though this fact does not shine any light on the investment profile of the average second-home buyer, it does provide some context on the state of the market. This drop is due to a number of factors, many of which are mentioned above. Among the most telling factors are a lack of available financing, a significant drop in many investors’ net worth, an ever-depreciating housing market and waning consumer confidence. While every investor’s situation is different, the past few years have provided a much-needed wake-up call that has caused Americans to re-examine their investing, saving and borrowing strategies in a realistic light. For investors who have already done this, however, and have emerged confident and able to take on that second home they will find some of the best deals the market has ever seen.
