July, 2009

Perhaps the biggest factors to look at is the string of month-after month sales figures – Have these figures continued to increase across the nation?

In July, the Pending Home Sales index was up for the fourth month in a row, indicating the buyers are back in force writing contracts on properties.

But in some cases, we’ve seen a large number of those deals fall through, and those failures have caused a closer examination of new appraisal rules — rules designed to make the process better — but rules which some say are causing more problems, than solutions.

And the upcoming Pending Home Sales report comes on the heels of another key indicator — the Existing Home Sales report for June, which we reported on last week. In it, the NAR reported that Existing Home Sales rose in June for the third month in a row: the kind of back-to-back-to-back performance that shows without a doubt, the buyers are back, helping clear out all that excess inventory.

The latest gains were in every part of the country — another indication that the combination of low prices, low interest rates, and in some cases, the $8000 tax credit, are all combining to have a great effect on the nation’s real estate markets. It’s important to remember, though, that we are talking about the number of sales, not the prices. In most markets, prices are still down. But economists say that getting the nation’s markets back on track is a process involving several steps.

First, the buyers need to start buying, and we’re clearly seeing that in many parts of the nation.

Second, the excess inventory of short sales and foreclosures needs to get cleared away — and with the surge in home sales in many areas, that’s happening, too.

And finally, once the inventory is down, and buyer activity is up? Hopefully then, we’ll see price appreciation also.

Watch for the NAR’s Pending Home Sales report — it’s out Tuesday, and we’ll have all the details on our next show.

Reviewing some studies on second homes, we found some surprising facts.

First of all, according to the NAR’s 2008 Profile of Home Buyers and Sellers, most second homes are single-family detached houses, in the suburbs.

Surprisingly, in second place were condos in urban areas – where many people are looking for a pied-a-tere… as in, a cool little condo where they can live during the week, with virtually no commute. And, even more interesting, some people are buying those urban condos so they can hang out in the city on the weekend – to take advantage of all the music, and shopping and dining that the bustling city can provide.

But also high on the list are small towns, rural areas and resort properties, indicating that many people buying second homes just want to get away from it all.

Another interesting fact — this one from the NAR’s Field Guide to Vacation, Resort and Second Homes — nearly a third of people who buy vacation homes, intend to eventually move in for good, with the second home becoming their primary residence.

But with the downturn in the economy, the second home market has changed in the past couple of years. Many people who had previously purchased a second home to keep it for themselves and their families, are now renting them out — it’s not a bad idea, considering it can be an excellent source of income in a tight economy. And it makes good sense, especially if the place will be otherwise just sitting empty month after month, when you’re not using it.

In fact, the New York Times has called renting out your vacation house a “Bright Spot’ in a down economy.

In today’s market, with affordability at nearly all-time highs, and interest rates nearly at all-time lows, it may be a great time to buy a second home. And if you do go the ‘rental route,’ chances are you’ll find a strong market — and possibly a nice extra income — thanks to your second home.

Your first step? Call a REALTOR® who really knows the market in the area where you’d like to buy a second home. Talk to them about what you’d like to buy, and whether you plan to just keep it, or to rent it out. A REALTOR® will know the market, the prices, the rental rates and where the best deal are… in today’s buyer’s market!

Well, it can be!

But, like most good ideas, there’s the ‘perfect scenario’ and then there’s… reality.

So let’s start with the perfect scenario:

First, you and your partners agree on a REALTOR® and you get to work. You find the perfect vacation house, write a contract, and before you know it, you’re all sitting at the settlement table. And since these are your best friends, or close family, you agree to split everything. The down payment, the closing costs, the taxes, and the upkeep.

You’re all on the mortgage, and you all agree to split the monthly payments.

But, that’s not all… Need a new fridge? You split the cost. Need a new canoe? Once again, you split the cost. And every year you sit down together and decide who gets the place, and when. Everyone’s happy – congratulations!

And that’s the perfect scenario…

But now, let’s take a dose of reality!

First of all, paying for it.

If you and your friends are paying all cash, you can skip this step. You just both arrive at the settlement table with a wheelbarrow full of money. But, if you are planning on getting a mortgage? That’s where things get complicated. Some things you need to consider when getting a mortgage with other people include considering their credit score, and how much money they make every year? …How much do they have saved up? Chances are, you don’t know. And chances are, they don’t know those same things, about you. Remember also, in this tight credit environment, you might have a tough time finding a lender willing to write one mortgage on one property, for two or more families. It’s not impossible, but it will be a challenge.

Assuming you manage to get the mortgage, and you and your friends actually buy the place. Now the real fun begins. Because virtually every decision you make, from paint colors, to replacing the air conditioner, to buying that new canoe, is going to be done by committee. Everyone’s going to have a say — and have to agree — on expenses and bills, in addition to scheduling fair use for all involved.

And, don’t forget the other issues that could arise. What if your friend loses his job, and can’t pay the mortgage, the bills, or any of the expenses? And, on top of that, he still wants to use the place? Or, sometimes in arrangements like these, the friend believes they should pay a lower share because they don’t use the property as often. These are issues that should be accounted for during the planning stages of the property purchase.

And finally… What if your friends want to sell? Depending on the type of deed you get, your friends might be able to sell their part, and you might end up sharing the place with another family, you don’t even know. Or, if your ownership interest can’t be divided like that, you might be forced to either buy out your friend, or just sell. You can’t force them to own it, and keep it - because if they want to sell and you don’t? They could go to court and ask for a court-ordered sale.

And poof! There goes the friendship.

Obviously, there are real challenges to the idea of co-owning a second home, but many people are successful with this venture – they write down every possible issue, and how to deal with them, in an agreement that they all sign. They often agree to appoint one person as the treasurer, and everyone else pays them a lump sum on a regular schedule And, many families agree to be flexible if tough financial times hit.

But for many of them, the real key to making it all work, is the power of friendship. And friendship is the key ingredient to making sharing a second home work, in the long run.

When owning a second home, your taxation differs, depending on the purpose of the home: Is it a home you intend to use with your family, or do you intend to rent it and make income with the property? The rule of thumb is, if you rent it for over 15 days a year then it falls under the rental income category.

When buying a vacation property or second home, the mortgage interest, property taxes, and points that you pay on a second home are treated like they were for a first home, and are deductible. What changes are the tax return forms you use, which depend on what the property is used for. It could appear in Schedule E, or it could appear in Schedule A — that’s where determining if you are using it as a rental property comes into play.

But generally when you buy a second home it is deductible.

One thing to consider with second homes: You won’t qualify for the $8000 tax credit, as that is only available for your primary residence.

When you rent out a property, keep an income statement for it, and track income and expenses; such as property taxes, mortgage interest, depreciation, utilities, management fees, and anything else required to upkeep your rental property. When tax time comes, you will combine your gross income with your rental income, to come to a net number which can be a gain or a loss, which is then reported on your 1044 form.

If you have home equity line of credit on the second home, that’s deductible, as well.

The key is to itemize and keep careful track of your expenses.