when Buying a Second Home
Due Diligence is not exactly an exciting subject to talk about, yet it is one of the most critical actions you need to undertake when investing your time and money into a second home and lifestyle real estate. Thankfully, hiring professionals to conduct much of the diligence and report back to you makes this more convenient. Then it becomes the case of reviewing the findings and asking the right questions.
From lawyers and home inspectors to title and financing, and even walking the neighborhood on foot, due diligence has to be conducted to protect your capital and avoid making an uneducated and unwise decision.
Following are other areas of due diligence to think about in specific lifestyle real estate locations, over and above the standard home inspection itself. This is not everything, though a great starting point. By having an exceptional real estate advisor working with you, they can connect you with the best-proven professionals for the job.
BEACH & COASTAL DUE DILIGENCE
From the healing attributes of salt water to having nothing between you and the sunset or sunrise, other than the crashing waves upon powder white sand, or the lapping ripples of a lagoon…you get the idea. Breathing the fresh sea air and enjoying a coastal lifestyle with loved ones is a gratifying escape for many who invest in a second home, though it’s not quite time to relax in your hammock just yet.
If you feel that you are entirely in control by living on a picturesque beach, or along a wooded coastline, you apparently haven’t given much thought to the power of Mother Nature.
Coastline covers close to 13,000 miles around the U.S. From the small beach town of Encinitas in Southern California to homes around the Puget Sound in Seattle; from the multimillion-dollar escapes of the Hamptons to the vibrantly beautiful beaches of Miami. And, of course, an abundance of coastline in the Gulf.
Here are some additional ideas for the type of due diligence to think about: If directly on the coast, hire an engineer to overlook the building plans and check that the specs are up to current code, including physical inspection of the foundation and footings. Especially if the home is receiving any coastal water activity such as homes in California or Florida.
If there are minor conditions that require repair, your advisor could negotiate fixes into new terms for the contract. You could even go as far as reviewing Google Earth to give a historical layover of the area for erosion or pull up historical weather stats for the area. Some parts of Florida and the Gulf are hit by major storms every year or two.
Almost anything metal rusts, from air conditioners to the pipes under the home. Ask an HVAC (Heater, Vents & Air Conditioning) specialist and a plumber to check the property from top to bottom.
Check for electrical problems. Just because a light turns on, it doesn’t mean there’s no rust problem behind it, especially outlets on the exterior. How well is the interior of the home sealed to protect electronics from becoming destroyed?
Depending on where in the country you are, a sewer can be public or private. If private, does the septic tank need to be pumped? Is it well constructed or crumbling and now problematic? Is there an odor wafting towards the home. How is the leach field? How well does the leach field perform?
Where is the potable water coming from? Public source or a private well? How is the pressure? Could it get contaminated? If that’s possible, can it be avoided?
The furnace is another metal product you will need to have the HVAC person review. Where is it located? Is it propane or natural gas? Is the tank owned or leased? When was the propane tank last inspected for corrosion?
Salt spray can erode most metals, so how are the nails in the roof, if there are any? Salt spray can also shorten the lifespan of shingle roofing. Have there been leaks previously from rusted hardware? Are there solar panels on the roof? If so, what’s their condition, and the status of the battery bank and inverter system?
As you see, there’s a lot to take in. Some point may not even need to be addressed. Just make sure when you do purchase beach or coastal property that you hire the right qualified specialists. Be pennywise.
MOUNTAIN & SKI DUE DILIGENCE
North America’s Rocky Mountain West stretches from way up in British Columbia, Canada, south to New Mexico. That’s just one of the many incredible mountain environments we get to enjoy here in the U.S. From illustrious slope-side ski estates in the west to a rustic cabin in the high desert mountains and over to the magnificent smoky mountains of the Appalachians. These mountain lifestyles provide incredibly diverse environments to choose from all year round. Some are as popular in summer as they are in winter.
Each has healthy residential communities within a town designed for attracting tourists year round. California can offer various different lifestyles from one location, such as Mammoth in the Sierras.
The Wasatch mountain range offers Park City, which boasts the largest ski resort in North America, as well as Deer Valley, voted the best resort in the country multiple times. Colorado has the Rocky Mountains with Aspen, Vail, Breckenridge, Steamboat, and Telluride. Idaho has Sun Valley, while Wyoming has Jackson Hole.
To the east, locations such as Stowe, in Vermont, offer incredible summers. Then there is Charlottesville, in the foothills of the Blue Ridge Mountains, with wineries to rival those of Napa. Ever heard of Pigeon Forge? A mountain town that Dolly Parton’s ‘Dollywood’ put on the map, with over ten million annual visitors. I tell you, there is mountain living to suit anyone’s taste.
Depending on which town you are in, mountain living is primarily seasonal. Let’s take Steamboat for example. It’s one of my favorite little towns in the Rocky Mountains. Fundamentally, there is not too much to do during the summer months for vacationers, and it’s left for the residents to enjoy. Yes, there are tourist activities to be but nothing compared to winter.
What does this mean for lifestyle property buyers? If you want to own it for personal use only well, then it doesn’t matter. Though, if you are looking to purchase a home where you hope to make rental income throughout the year to cover running costs, it’ll be an uphill struggle. The polar opposite of Steamboat, Colorado is Park City, Utah.
It was primarily a seasonal ski town up until the 2002 Winter Olympics when it was placed on the map internationally. The city has seen a lot of growth over the past decade, due in part to its incredibly easy access from all over the country: travel time from the international airport is less than 30 minutes to the ski resorts dominated by Deer Valley and the Park City Mountain Resort (operated by Vail Resorts).
In summer the area provides over a dozen or more nationally known events from the Sundance Film Festival to Savor the Summit. It also offers several hundred miles of hiking and biking trails out your back door, including one of only six international gold medal mountain bike trails assigned by the International Mountain Biking Association. There are events and amenities for all to enjoy. What does this mean? It can provide great short-term rental opportunities year round and long-term opportunities for those looking to purchase a pre-retirement property.
Do you see the difference between Park City and Steamboat? Both are incredibly beautiful, but they offer entirely different mountain lifestyle opportunities. One is quiet most of the year, while the other is busy year-round and attracts people from almost all walks of life, but there is a variety of resort towns across the country.
So where does this leave you?
Ultimately you will need to decide. Do you want to purchase a second home for personal use for your entire family to enjoy only? Or, do you wish for it to earn short-term vacation rental income to help pay the yearly carrying costs, such as property tax, HOA, property management fees, mortgage, etc?
With condos and townhomes, seasonal issues are taken care of by the HOA. Over and above usual due diligence when inspecting a property for purchase, think about these: ‘Winterizing’ the home before temperatures plummet in winter. This means blowing out the sprinkler system, checking heat tape and gutter systems to avoid ice dams, and checking insulation around windows, etc. Set up a contractor for snow removal if a long-term tenant is not doing it.
Checking for burrowing rodents in springtime, like voles. They look similar to field mice but can destroy your lawn if precautions are not taken in advance. Spring is also an excellent time to check the house for leaks around basement areas and make sure the runoff for snowmelt has been taken care of. Also, have a professional fire and sprinkler check before the drier months take hold.
Dealing with raccoons, skunks, elk, moose, bear, snakes and all sorts of nature’s wonderfully awesome animals that are active in summer. (Quick warning: moose are not cuddly – they are to be respected and given a wide berth, or you could end up a brutally damaged human being!) Check all exteriors of the home in case they are in need of upkeep due to the dramatic temperature differences, which can wreak havoc on paintwork and seals. If you have a wooden home, also keep a lookout for bee and hornet nests.
During the fall there is usually less to do. Enjoy the fresh cool air, the stunning colors of the mountains, and the local events before the winter tourist season starts. Living in a mountain town comes with a vast array of fun activities throughout the year.
Just keep in mind that if you are coming from a non-mountain state to resort towns, often they are above 6000 feet, so be prepared to drink more water to help avoid headaches and altitude sickness. If enjoying the restaurants in resort towns, alcohol affects your more at altitude, so just keep a note
LAKE DUE DILIGENCE
Lakefront homes are incredibly relaxing for many. From fly fishing or water skiing to jumping off a dock with children in hand, lakes (and rivers) can be a fabulous lifestyle location to regenerate one’s inner child. However, a lakefront property doesn’t come without complexities attached.
Making this leap first requires a home inspector who understands the issues to look for when checking the home. Although some of my best memories of childhood come from stunning New Zealand lakes, such as Lake Tarawera and Lake Rotoiti, and more recent memories from a family RV trip with the wife and kids to Wanaka and Lake Pukaki, it’s easy to become mesmerized and forget about the simple things.
When purchasing property on or near a large body of water, there are more than a few things to be aware of:
THE ENVIRONMENT: Being on a lake has many benefits and just as many drawbacks. As a majority of homes on lakes are around forestry and lush lands, I will concentrate more directly towards homes with these surroundings. There will be increased moisture content in the air, which can increase the growth of mold spores and wood rot. It can also understandably create havoc “with metal products, if not protected. A large lake can affect weather patterns and its level can rise or fall depending on snow and rainfall patterns, or even due to water-starved cities drawing from your backyard.
ASPECT: Will you receive sun in the morning or afternoon? What if you are in an area known for gorgeous summers but hard winters? Where will the main wind chill, driving rainstorms, or snow drifts occur around the lake?
ASSOCIATIONS: Associations are usually good things, for the most part, and contribute to the happiness of the many. They can help protect the lake’s future from over-development or health issues that may occur from overuse by the public, and they can find remedies to potential problems. The most recent issue facing many lake associations is the increase of destructive algae blooms and weed. If a lake has a lot of public use, boats come from all over and from many bodies of water. Just like a young child with the flu entering a classroom, a boat owner not concerned about the cleanliness of their own equipment can spread the problem elsewhere.
An association will look for solutions to the problem. On the other hand, some lake HOAs may place too many controls on how the lake is to be used. This may defeat the purpose of why you are looking for a lakeside home. “Make sure you do your due diligence when it comes to usage because the last thing you want is to purchase a property that does not entitle you to seek the full enjoyment you intended to use it for.
VACATION HOME OR PRIMARY LIFESTYLE RESIDENCE? Do you wish to use the property for seasonal pleasure for water skiing or a summer getaway for the family to swim and layout on the raft? Maybe it’s just to take in the views throughout the ever-changing seasons? For the most part, those who wish to live lakeside year-round understand the potential weather issues up front. In many areas, it can be regarded as a combination of lake living mixed with mountain living. Nature will have its own say each year and every year will likely be different. Just be prepared with backup power, food (use plastic snap lid storage boxes to avoid rodents), and water storage (with water purification pills).
CONVENIENCE & AMENITIES: Just because you are looking for peace and quiet, it doesn’t mean that you will not have to visit the local grocery or convenience store. How far are you located from a propane tank dispensary or a place to buy milk for the kids’ breakfasts? What if there was an accident? Are you close enough to hop in the car to find the nearest clinic? This comes down to prioritizing but not to the point of being a ‘worry wart,’ as my mom would say.
SEPTIC/SEWERAGE CONSIDERATIONS: It’s inevitable that a septic system will eventually fail. When purchasing a home near the lake, consider inspection of the system as these are costly to replace. It is even possible that the current owner is unaware of a problem. A $150 visit by a specialist may save you $10,000 or more to remove and rebuild (pennywise again).
An advisor knowledgeable about the lake could potentially negotiate the price down based on a costly failure about to happen. Sellers of lifestyle real estate are typically already in the mindset to leave, “so they do not necessarily want to handle these issues, but they need to be taken care of. Obviously, if you are located near a township providing sewer lines, that’s one thing, but the protection of the natural resources of the lake is paramount for all.
RENOVATIONS: Quite often communities and/or local ordinances and zoning regulations have height restrictions, so those who live further behind can build an additional level and also enjoy the views. So, if you are thinking of coming in and adding a second or third level, you’d better check. This is also true for expanding a home. Many properties are initially purchased as small cottages, but new buyers have thoughts of grandeur. Be cautious here as the plot of land may be limited and also zoned to remain within a small build envelope. This is to limit over-development and allow homeowners a degree of privacy to enjoy the same surroundings, without having to look out their kitchen window and see their neighbor in the bathroom!
VIEWS: Views are often the primary reason for wanting to move to a lakefront home. Stepping out onto your deck in the early morning, warming your hands around a fresh cup of coffee as the fog gently rises from the water’s edge is so relaxing. The sun begins to peek through, highlighting the gorgeous blues and greens…… you get the idea. Although true lakefront homes come with a premium price, it doesn’t mean they are necessarily ‘lakefront.’ Some sellers and listing agents misrepresent these homes as ‘lakeside accessible.’ If this ever comes up, or a variation thereof, check the pricing of homes which DO NOT sit on the water’s edge. Often the advertisements are designed to attract your emotional triggers and settle quickly.
If you wish to be located further away from a lake, know where your easement or lake access will be, if any. Access, or easement, may be as simple as a pathway two feet wide to get to the water’s edge. Base your views and location on your budget. Remember, It can be just as peaceful-looking down upon a lake from an elevated location than actually being on it.
ACCESSIBILITY: Lakes, like mountains, often have diverse terrain. Just because it may be readily accessible in summer doesn’t mean it will be when winter hits. The steepness of the grade, not just the driveway to the property but maybe the grade towards the water, can be problematic. The older we get, the more we understand our bodies are not as agile or spritely as they once were, so if you are looking for a pre-retirement home on the lake, take this into consideration.
Another consideration is whether you really want the romantic notion of the only access point to the lake home being by boat? This can make access only seasonal. You need to make sure you have food to last for extended periods, with backup power. If a long storm blows through and you have not prepared in advance, it can make for a miserable time. The last thing you want is to have to take a boat in poor weather conditions.
PRIVACY: Depending on how close your property is to the water’s edge and where around the lake you are situated, you can potentially have a lot of traffic enjoying the same location that you thought was so peaceful. If you are located on the northeast side of a lake, you will tend to get the best sunsets. Of course, you will also have most of the sun throughout the afternoon, possibly attracting people and their watercraft to congregate outside your property. If this is not a concern for you, then great.
LEGALITIES: From zoning restrictions to conservation, there are reasons why we need to follow the rules, which are for the greater good of a precious natural resource. Whether the lake is protected by local, state or national judiciaries, there is one purpose, and that is conservation. As water is the most precious resource on the planet, lakes serve many great purposes including providing quality water, preserving fish and wildlife habitats, storing floodwaters, and providing irrigation throughout dry periods. So restrictions may be necessary to the powers that be.
With the understanding that lakes come in all shapes and sizes and in multiple different climates, the zoning and regulations may change from one location to another. There can be a ‘do not disturb’ rule which applies directly to lakefront homeowners preventing them from constructing anything from a deck to a dock, or from disturbing the natural surroundings (including clearing or even planting trees). Therefore, do your homework.
PESTS: Mosquitoes mainly, plus everything from bears to raccoons and all other living things that require water to survive and shelter to enjoy. This is even more important if you are using your property seasonally. Button it up well! I’ll leave it at that. All things being equal, homes located right on a lake are typically more valuable than homes set further back. Just as with beach fronts, location really matters. While your initial expense will be higher, there generally is greater potential for appreciation with a lakefront home. When the market drops, lakefront homes also tend to keep more of their value. However, buying a lakefront property is far more involved than a typical home, because it is a dynamic environment with a natural resource that needs to be protected at all costs. Once again, due diligence and an advisor familiar with lake living is important.
I’ll leave you with a list of additional factors to consider, which need no explanation:
- Location in relation to a township
- Size of lake
- Type of lake
- Characteristics of the surrounding land
- Water quality
- Privacy – Popularity of lake, especially in summer.”
- Recreational facilities: kayaking, boating, jet skiing, fishing, snorkeling, water skiing, bird watching/hunting?
- Access either to a beach or boating launch point
- Can you build your own dock?
- Does the lake flood? Is flood insurance required?
- Ducks and geese – can they be considered a pest? (Nothing worse than constantly standing in poo)
- Noise ordinances
- Rentals – long or short term?
- Lakebed: rocky, sandy, muddy?
- Shoreline Access
GOLF COURSE DUE DILIGENCE
Believe it or not, this section is more about the community and lifestyle than the home itself. A home inspector is all you primarily need to inspect the property, as these developments tend to be very well constructed, with very few issues. From amazing Country Club courses to public courses with few amenities, living around a golf course seems to attract the wealthy and the retired, with very few in between. You have done very well for yourself in business and are reaping the rewards by playing golf 500 times per week, or you are enjoying your cottage on the green through your retirement years like my parents are expected to do sooner or later.
Back in mid-2000, developers could not construct golf courses fast enough. The concept of ‘If you build it they will come’ was chanted in
development offices throughout the country. Build a course, preferably with a name such as Arnold Palmer (may he rest in peace), Jack Nicklaus, or Pete Dye attached to its design made good business sense. The developer would sell development parcels and homes around the course to capitalize on the lifestyle they created. With over 16,000 golf courses around the U.S. during the peak of 07/08, this is now closer to 15,000.
The slow decline has made getting into such locations a little more attractive. When the going was good, it was incredible, but such a long correction has meant that people have had a more difficult time selling because they were over-built. The one exception is courses built to Championship-level designs, which have rebounded in a very healthy way.
What we are seeing from these higher-end luxury developments is the provision of many more amenities than just golf. These developments often have equestrian areas, children-focused areas and activities, hiking, swimming pools, and tennis courts. They have become destinations for the whole family, rather than just those who love 18 – 36 holes on the best fairways and greens. Of course, the good old 19th hole is always attractive too.
Bear in mind that, if you are looking to purchase a property at a golf course development, you will find incredibly effective salespeople. They are there to sell as many options to you as possible, with a beautiful home to go along with it. Avoid them! What you need is a buyer’s advisor familiar with the particular course and location you are interested in. Parts of golf course developments are often built to look incredibly impressive from the outside, but you will never know the workings unless you remove yourself from the ‘snake oil’ type salespeople. It’s a business.
Often, once the developers have sold their entire inventory, they will pass the keys to the kingdom to someone else to run. The salespeople relocate to another development, and the marketing and advertising offices that created the vision of an incredible lifestyle are just distant memories. The golf club needs to continue the branding in order to retain its value, but the people who receive the keys to this kingdom rarely have any idea how to continue capitalizing on the brand.
Almost half of the new golf courses opening up are part of housing developments. Some golf courses are only partially built when the dream is sold and have never been finished. A 14-hole course is not my idea of a thriving golf course community, though they are out there. On top of all this, there are HOA fees, membership fees, green fees, and reserve funds. This can add thousands to hundreds of thousands to the costs.
The higher-end developments that the wealthy become part of are incredible and, to them, well worth the investment. But if you are looking to purchase a property for $400,000, all these fees could become an incredible burden, especially if you’re looking to buy a property to make money. It’s hard to determine how well your property will do in a rental program on a golf course, as developers have a tendency to run that program too. It may be difficult getting factual information from them. Once again, hiring an advisor familiar with a golf course lifestyle is extremely important.
As already mentioned, most homes on golf courses are built incredibly well, with all the bells and whistles. Usually, investors are pretty adept at the home purchasing process and tend to be a little more critical of ‘where’ on the course the home is situated than any concerns with the actual structure. “Which hole or green does the property view? In many cases, a home sitting on the final three holes of a championship course may appreciate better than any other location – unless the course provides a signature hole similar to those that Pete & Perry Dye like to offer, with an island green.
Everything from the square footage to what sun exposure the property will receive counts towards its value. In many ways, a small home in a brilliant location may have a better ROI and appreciation than a beautiful large home on a marginal area of the course. As courses begin to provide a broader range of amenities and the baby boomer set is looking for less ‘home’ but wanting to remain active, a golf course community is an increasingly viable location for people from diverse backgrounds.
DESERT DUE DILIGENCE
Most people talk about mountains, beaches, and golf courses when they consider lifestyle properties. But what about the desert? Who really wants to live in a dry, hot place with things that bite and sting, with the running costs for AC 24/7 for six months of the year? Well, often enough desert locations are just that, a six-month location for people to escape winters up north. It is why Palm Springs, Scottsdale and similar places tend to be very attractive to snowbirds. There is another large group of buyers who like the concept of ‘true’ desert locations. An oasis.
Full disclosure here: unlike the other lifestyles I speak of, a true desert environment is a place I have never lived. So I’ve had to do a lot of research to bring you quality information here. In fact, many love
the desert environment, and that’s why I include it here. Actually, I was pleasantly surprised while researching this: a southern desert environment can be beautiful. A place to relax in the cooler months with limited upkeep year-round.
From the red rocks of St. George, Utah to the unique countryside of Texas, Arizona, or New Mexico, there are some fantastic desert retreat locations around the U.S. One of my favorite places to visit is New Mexico. With its diverse American Indian culture – 23 tribes from Pueblos, Apache, and the Navajo Nation – the area lives and breathes history. Cave art abounds, and the wide open spaces mean you may not see anyone for an entire week. Possibly your ideal lifestyle is similar to my friend Billy, who enjoys mountain biking on the Sedona trails of Arizona for half the year. Or, when you think of ‘desert’, you may think of basking by the pool at your Palm Springs oasis, with your favorite cocktail in hand. Or even hanging out in Vegas?
I will focus on the version of desert that is sought by those attracted to the solitude of such a unique environment: with the dry heat, limited pollution, and everything else that goes along with it. So what new issues does this type of desert living bring? It’s not for everyone, so what do you need to be looking for, when located so far away from amenities and conveniences? What are the real issues associated with a desert oasis? When purchasing in a desert location, the four MOST essential issues to look into are water supply, temperature control, pests, and the environment.
WATER SUPPLY: By definition, deserts lack H2O. As you well know, water is the lifeblood upon which all living things depend for survival – and you are no different! If you are in a remote area of the country and a distance from a public water utility, this will be your number one concern. If you are not looking to develop out your land and look for a well, you can potentially install a large water cistern to receive delivered water. Make sure the cistern is large enough for long periods of time as deliveries can be costly, and have extra water treatment in reserve in case you need to remove water-borne bacteria. If you are purchasing an existing home, there will likely be a well already nearby. If you are building, there is the added expense of putting one in. To do this, you will have to look into:
- The suitability of your water table and its depth.
- Conducting a soil sample to test for contaminants, types of sediments, and any hazardous material or chemicals which could make the water unusable.
- Depth/type of earth to drill through and associated costs.
- The regulations of the city, state, and federal.
- The highest water pressure you can take from the well. Much depends on your location and the local regulations.
- Contacting the local authority to conduct your own due diligence and obtain a fact sheet on what you can and cannot do.
TEMPERATURE CONTROL: This covers on-the-grid electricity, off-grid solar, or similar. Also, the type of material used for insulation from the heat and the cold is important – yes, deserts can be extremely cold, so producing and retaining heat is a concept to respect on cold nights. There happens to be a good reason why so many homes are not built with wood. With shrinkage and warping, the sun makes wood practically useless as an insulating product.
Primarily, homes in deserts are built from stone, ICF (Insulating Concrete Forms) or adobe (mud bricks – usually made of clay and straw). Obviously, areas that are close to electric utilities have abundant air conditioning available.” But what happens if the power goes down? The AC goes down? The pump for the well dies? It happens from time to time, and emergency services find it hard to help the elderly quick enough before it becomes a morbid state of affairs.
So in deserts, it’s essential to have an emergency generator to compensate, just in case. Consider this small investment an insurance policy. This can be either already hardwired into the electrical panel or with a junction box to feed the critical parts of your home. If you are off the grid, it is important to have your home well insulated with the above types of materials.
As solar panels have become less expensive to install and more efficient at converting sunlight into power, having a good system which can hold power into a backup battery system is certainly a great idea. With the right set up and inverter system, it is possible to cool your property with energy-efficient air conditioning units that are on the market. The prices of these AC units have dropped dramatically in recent years.
PESTS: The desert has no shortage of these. From subterranean termites that love decimating softwood, such as pine or plywood and straw/dry grass (used with clay to make adobe bricks), to scorpions, snakes, and other creepies that crawl in the day AND night. How does your property fare with keeping out these unwanted critters from the inner sanctum of your walls? Ideally with kids in mind. For this, it is best to check in with the local pest controller. Some areas can be more prone to certain pests than others.
ENVIRONMENT: As silly as it sounds, some of the most blatantly obvious considerations with the environment are overlooked. How is the access? Do you have an easement to access your property? If you are purchasing land to build, make sure this is spelled out in the sale. Are you looking to attract people to visit your desert oasis through Airbnb or the like? If so, how appealing can you make your surrounding yard, as grass and trees are not likely to be an option. It’s probably cactus and rock! Maybe a fire pit located in an area to get the perfect sunset?
Does the property lie in a valley which has a tendency to flood from canyons miles away? Believe it or not, just because the desert doesn’t receive much rainfall itself, it doesn’t mean it can retain water from elsewhere. You can drive through sections of the Mojave Desert and see that the railway systems have viaducts every couple of hundred yards. These often span eroded areas to avoid washout from rainstorms created many miles away.
Overall, desert living can be the most peacefully attractive environment out there. But purchasing in this type of environment, you need to consider your surroundings just as much as the structure itself.
LUXURY HOME AUCTIONS
I was brought up with the mindset that there are two sides to everything. Life was extremely simple and straight forward. Right and wrong, moral and immoral, black and white, yes and no. No grey areas in my thought process. The only time there is a “maybe” involved is when the power of yes or no does not fall on my shoulders. But wow, what a difference age and experience make. Grey areas indeed…but trying to navigate through those areas without “muddying the waters” per se’ is an interesting experience. And, in many ways, auctions should be handled like a high-stakes poker game, where grey is your friend.
If you are sitting at the table, would you bet 5 million dollars or even 10 million dollars, without the knowledge that the odds are dramatically
in your favor? I would take a guess and say, not in your life. Same with high-end luxury auctions. It’s high stakes poker with one caveat; you can withdraw at any time without losing a dime before the winning bid is settled….so long as yours is not the highest bid that is.
Visit the link below to learn how to become a buyer at high end luxury auctions and certain things you should know before entering.
Auctions in the past stir up visual thoughts of homes going into foreclosure, IRS sales and the like. But, in fact, auctions are becoming more a part of the Real Estate process than ever before with high-end luxury property. Whether the auction is a “Reserve” or an Absolute (No Reserve auction).
A property going to auction does not mean the seller has a dire need to sell. In fact, in many cases, a seller, especially of a luxury home, may wish to move their money into a different market, area or field. And with an auction, they know they will sell it on the day of, especially if a No Reserve, Absolute Auction.
Here are some of the grey areas to navigate. In this article we will look at the prospective buyer/bidder’s side of the equation. For the seller side, visit this link. Even though each state and area may have different regulations to follow, and auctioneers have their own version of the process, there are certain parts that are standard.
To even become an active bidder you must be able to provide the following:
1. Provide a certified bank check in the amount required. e.g. $100,000 to enter the process.
2. A personal blank check to cover 10% of the final bid price minus the $100,000 certified check that will be signed over immediately if you are the winner.
3. If you are not able to attend, you may release a POA (Power of Attorney) to the auction.
4. And obviously, legal paperwork. As I primarily work with buyers at auctions, this is a fantastic opportunity for them to take advantage of the process.
This is a fantastic opportunity to be able to purchase a property much lower than normal market practices.
Especially when there are fewer bidders (players) who have disposable cash that can close within 30 days with multiple millions of dollars. But, if this is the arena you can play in, then take advantage of the opportunity.
There are two main types of buyers; investors and retail (generally speaking). Retail buyers are pretty self-explanatory. They wish to buy the property at a realistic price and hold onto it for the pure enjoyment and satisfaction for years to come, whether it is a primary residence or a vacation home. Although a buyer does not wish to overpay from what market comps are suggesting, the investment part of the equation is not as important. Pretty straightforward.
Now, the investor side. The investor is about coming in, adding some lipstick and flipping it for top dollar….and that requires buying it at bottom dollar. An investor knows that when there are “retail” buyers in the room, the chances of them winning the bid is relatively rare.
Example: There was a luxury home going to auction not too long ago that I forwarded to a client. It piqued his interest so I visited the property 3 times to establish some due diligence on his behalf before he drove up to inspect the property. He was accompanied by a couple of his investor friends who flip multi-million dollar luxury homes for a living.
As auctions are sold “as is” then the buyer needs to know some fundamental facts regarding construction. Or at least know what to look for. It was not necessary for them to hire an inspector as these guys were professional luxury home flippers. The property was built in 2000, so the flow of the home was dated, but more-so the interior had an enormous amount of light brown timber. Huge logs EVERY-WHERE! This was the elephant in the room and a big reason why it had not sold over the last 2 years on the market….well that, and the price a huge $14 million. Market comps were showing closer to $8 million.
So the idea was to get into the home at a low purchase price, remove some walls, extend the kitchen, remove two fireplaces, refinish floors, box the logs (Wainscoting) and stain what was left to something warmer and current. Not a large job but 6 – 8 weeks’ worth at least. Approximately $300 – $500,000 remodel.
We had a top dollar of what the property was worth to my clients. But inevitably there were multiple retail buyers in the room. So this was the basic equation:
Winning Bid Price + Auctioneers Premium + Remodel Costs + Taxes & Fees + Time = Real Purchase Price.
Prospective Sales Price – Minus Agent Commissions – Capital Gains = Potential Profit.
Then, this brings up another load of questions:
- What is a realistic sales price – one that the market can bear once complete?
- Is the remodel attractive enough to attract retail buyers?
- How long will it be on the market before locating a buyer?
- Is the market seasonal? If so, what is the window?
- Will the remodel be complete while still in peak season?
- If the property does not sell, how much can the property rent for?
- Will the rent cover the carry costs?
Now the biggest question after all others have been asked. Is there going to be enough potential profit to make it worthwhile to tie up millions of dollars for an unknown amount of time? Well, that is something that I cannot answer…..and the only logical answer is maybe.
For an investor, who has the knowledge and where-with-all to complete such a project, there is a lot of money to be made. This is a big boy’s game, and one that many are not cut out for. I find nothing more exhilarating in real estate than to help the client find a fantastic deal, and especially at an auction. Keeping your cards close to your chest for this high-stakes poker match is extremely important….and do not let the auction house know what your plan is.
Either way, as a winning bidder you will be paying a premium. Often 10% on top of what your winning bid is. There is no way around this. No negotiating after the fact as all of these contracts are signed before the auction starts.
That being said, real estate agents are paid a commission by the auction house, so to engage in the services of a licensed buyer agent who knows the market and the auction process is one of the most diligent decisions you can make. If not, the auction house will keep all monies. Agent/advisors can help you with due diligence, market analysis and more to provide you the necessary information of not paying too much, and what you are getting in to. Have an advisor on your side who can gather the right information for you.
But, the fundamentals still remain. Buyer wishes to buy. Seller wishes to sell. That about sums it up. But, know what you are getting into.