Sanity-Saving Strategies For Second-Home Buyers

Several years ago, after vacationing at picturesque Bald Mountain, Idaho, Victor Bernstein and Gail Landis decided the area was ideal for their second home.

Low interest rates and the volatile stock market had done much to convince them — along with hundreds of thousands of other Americans in recent years — that a vacation home would be a good investment.

They set out to find a large house in the nearby resort town of Sun Valley. But finally, after a two-year search, they scaled back their plans.

“We just realized what we were looking for was too big of a commitment, too far away, too soon,” Ms. Landis says. The couple ended up buying a small three-bedroom condominium as a kind of base from which to scout the area more thoroughly, and they now are in the process of upgrading to a larger house.

People could learn a lot from the couple’s experience.

To many Americans, buying a second home represents the great escape from the daily grind. More than just a place to lay your head, second homes can be a chance to live out your dreams. All too often, though, prospective buyers set out with unrealistic expectations, or worse, they make big decisions with a kind of hasty abandon that few would display when purchasing a primary residence.

The result is that second homes often turn out to be disastrous investments. People buy properties they can’t afford, or will never use. They buy in areas that are overpriced or overbuilt. And they buy in communities that are the perfect getaways for a couple of weeks — but wear thin when the weeks turn into months.

The good news is that it doesn’t have to be this way. What follows is a look at some of the biggest errors made by buyers of second homes, along with advice on how to avoid such mistakes and make those dreams come true after all.

Get to Know Your Market Firsthand

This may seem obvious, but given the number of people who ignore it, it bears repeating: Research the local market properly.

“A lot of people vacation somewhere for a week or two and think they want to live there, but they don’t know anything about the area,” says Tim Richards, an Ocean City, Md., real-estate agent who specializes in second homes. “People need to know when the vacation becomes a reality, it’s much different.” For instance, a quiet, relaxing vacation spot may be a popular spring-break destination for college students or an annual meeting spot for bikers with noisy motorcycles.

Even if you’re sure about the area you want to buy in, an effective search can take years, considering that most of your hunting will be done on weekend visits or subsequent vacations.

As a result, experts recommend renting or buying a smaller home in the area — as Ms. Landis and Mr. Bernstein did — to learn the lay of the land before upgrading to a larger investment. A few months after buying their condo, the New York couple found the property they’d been looking for just a few blocks away: a plot of land with an older house that they decided to tear down and replace with a five-bedroom dream home.

“The two-step process was critical for us,” says Ms. Landis, who plans to vacation in her new two-story home this summer after construction is complete. “A house is a big financial commitment, and you really don’t want to make a mistake.”

Don’t Settle for Less Than What You Really Want

Sometimes people make sacrifices when buying a primary residence in order to be closer to work or to send their children to a better school. But a second home should be about pure enjoyment. It’s important to get it exactly right.

Julie Beyer, a substitute teacher in West Salem, Wis., searched for her ideal property for two years and wound up still making a purchase that was hasty. Her dream was to own a lakefront home in northern Wisconsin. But after long and fruitless searching, the 45-year-old Ms. Beyer and her husband, Mark, settled for a plot of land two miles from the closest lake and began planning to build on it. Four months later, they found what they had wanted all along and bought that as well: a three-bedroom, fully furnished lakefront home in Willard, Wis.

But now the Beyers are saddled with the unwanted land.

“I’m still paying property taxes on the land, and it’s tough to sell because most people want a lakefront property,” Ms. Beyer says. “We should have been more patient.”

Look Into Zoning and Other Restrictions

Becoming familiar with local politics, laws and other peculiarities is also important. Many communities, particularly those in coastal areas, have special zoning requirements and other ordinances of interest.

Richard Roll wasn’t aware of the zoning laws in Nantucket, Mass., when he bought his second home. The retiree from Stamford, Conn., thought the area in front of his vacation home was designated as conservation land, which would be protected from residential and commercial development. But because of quirks in the local zoning laws that he wasn’t aware of, Mr. Roll later found out the area was not protected and that buildings could go up there.

“That really put a cloud on the property in terms of resale value,” says Mr. Roll, who has since sold the property and bought a two-bedroom condo in Singer Island, Fla. “It weakened how much we got for the property, and it took us a year to sell the house even though it was a great property.”

Bone Up on Mortgages, Insurance and Contractors

Lenders historically have charged higher rates for second-home mortgages; they view second homes as a greater risk because they’re often the first thing to go when borrowers need to tighten their belts. Such views are changing, though, and experts say that investors can shop around for competitive rates. Local lenders, meanwhile, because they’re familiar with the area and want a local customer’s business, can sometimes offer better rates than national lenders.

You may have less luck finding a good deal on home insurance. Because second homes aren’t occupied all the time, and so are at a greater risk for theft and fire, premiums tend to be higher than they are for comparable primary residences. In addition, they may not be close to a fire hydrant or fire station. Those buying in a remote mountain location or in dry areas may want to consider additional fire insurance. Similarly, houses on flood plains may need flood insurance. Sometimes insurance won’t even be available on a property for some of these same reasons, so make it a contingency on any purchase offer.

You need to be especially careful when hiring a contractor for a second home since you may not be familiar with local builders or know who to ask for references. When retiree Mordecai Arnold was building his second home, a three-bedroom log cabin he designed himself in Auburn, Ala., the retailer that sold him the logs referred him to a contractor to complete the construction. The contractor collected $28,000 upfront, finished only about 10% of the work, then walked out on the job.

“I accepted a recommendation, but I should have done research,” says Mr. Arnold, who tracked the contractor down only to find him in prison. Mr. Arnold ended up spending an additional $28,000 to fix the mess the contractor left. “I also shouldn’t have paid the money in advance. Very few legitimate builders and contractors insist on full payment in advance.”

Is It a Fixer-Upper?

Maintenance issues in second homes can be a bigger concern than they are for a primary residence, if only because you don’t want to spend your getaway weekends doing a lot of chores.

One way to avoid making a purchase that will drain both your time and budget is to hire a professional home inspector — one that doesn’t do repairs — to determine the maintenance requirements. Upkeep should be evaluated in addition to potential repairs. For instance, many homes in rural areas use septic systems, which require periodic treatment to prevent buildup and may require cleaning depending on frequency of use. Some rural homes use wells instead of the community water utility, which may mean the well water has to be tested.

“One thing you definitely don’t want to do is have your second property managing you,” says Jed Gray, a Sun Valley real-estate agent. “You want to be able to enjoy your property.”

David and Karen Strohl of Chicago learned that lesson the hard way. They were thrilled when they bought their second home in Lakeside, Mich., a popular town on the southeast shore of Lake Michigan about 75 miles away from their primary residence. But the couple’s enthusiasm waned after they realized they were spending most weekends overseeing repairs of such things as the roof and basement.

“We had a lot of work, a lot of projects, to get the house in shape,” Ms. Strohl says. “If you have maintenance issues, you might not be doing the same amount of traveling to other destinations, and you might start to resent that.”

The Strohls have now finished their renovations, after several years, and say they’re happy with their home.

Don’t Expect a Cash Cow

For second-home owners using their property as an investment, experts warn not to depend on rental income to cover their mortgage and other expenses. Unless the property is in a prime location such as an oceanfront or other popular resort area, it’s unlikely that rental income will cover all the costs because of the seasonality of most vacation destinations.

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