(Vero Beach, FL)
September 14, 2011 – Cash is king these days as homebuyers look to take advantage of the lowest interest rates in decades and perhaps even rock-bottom prices. And nowhere is that more true than in the second home-vacation home market.
According to the National Association of Realtors
, a “significant portion” of all buyers paid cash last year. But while nearly one in five primary home buyers paid in full at closing, 36 percent of second home buyers and a whopping 59 percent of investment buyers paid with all greenbacks. (Second homebuyers are those who do not plan to rent their properties, whereas investment buyers depend on rental income to make their deals pencil out.)
That’s not to say financing isn’t available. It is. But lenders have tightened their standards so much since the mortgage market fizzled and housing sector burned that, according to the latest NAR profile, more than half of all second home and investment home buyers last year put at least 30 percent of the purchase price into the deal.
“The real take away from this is that people are buying,” says Lil Miller-Fox of PrivateCommunities.com
, an on-line information service for people searching for primary, vacation or retirement property in a master-planned community. “Whether they need financing or not, they are buying.”
NAR’s figures don’t say whether putting up that much dough was by design or by demand. But if you are in the market for a vacation home, figure on needing at least a 25 percent down payment, according to Keith Gumbinger of HSH Associates
, a New Jersey-based mortgage information service.
You’ll also find that interest rates are anywhere from an eighth to a quarter of a point higher than those on primary mortgages, according to HSH, which publishes a free weekly market trends newsletter. And the fees will be “slightly higher” too. (A point is 1 percent of the loan amount.)
“It’s a challenge today; there’s no doubt about it,” says Gumbinger. “Financing is a little easier to come by in the pure second home market than it is in vacation-slash-rental market. The deciding issue is whether you will need income from the property to make the deal work, because that’s a very uncertain income stream.”
Of course, what you buy and where makes all the difference. At the Anderson Creek Club
in Spring Lake, N.C., at the backdoor to Ft. Bragg between Fayetteville and Pinehurst, where the buy is typically a primary residence, most purchasers take out a mortgage, Sales and Marketing Vice President Lee Handsel reports. “We have some excellent terms available, including 100 percent financing” under the U.S. Department of Agriculture’s Rural Development lending program.
The story’s similar further south at The Georgia Club, a 1,500-acre property in Statham that is so large that it spreads over two counties. The “vast majority” of houses here are primary residences, too.
“Ours is mostly a family market,” says Director of Real Estate Tom Valdes, citing the property’s proximity to the University of Georgia in Athens and Atlanta about 70 miles to the west. Younger buyers tend to opt for traditional low down payment funding, according to Valdes, whereas older “pre-retirees” settling in the area are more conservative and put more equity into their deals.
Even in a largely vacation home market like Ocean City, Md., a family resort town on the Atlantic Ocean, buyers usually can find a loan. Not the 10 percent down kind that was available at the height of the housing boom, but certainly with 20 percent down, says Dave Whittington, an associate broker at Condominium Realty.
Lenders “are now doing loans the way they should have been all along,” says Whittington. “When prices were going up, up, up, if you could exhale, you could get a loan. Now the qualifications are a little tougher and the thresholds are a little tighter. But they’re not ridiculous.”
In recession ravaged Southwest Florida, though, the going is a lot tougher, especially the higher you go on the price ladder. Custom homebuilder Michael Diamond of the Diamond Cos.
in Naples says buyers of his $1 million-plus houses used to finance their purchases. Now, they almost exclusively pay with all cash. “I’ve got four jobs going right now, and they are all paying cash,” he says.
Buyers who have a strong banking relationship back home usually start their hunt for financing there. But it might be better to search for funding where you are buying because local lenders are more familiar with the market.
“If you have a private banking relationship, it doesn’t hurt to inquire about a loan there,” says Gumbinger of HSH. “But they may not know the market (where you are buying) well enough to make a lending decision.”
Whittington agrees, especially if you are buying an apartment or in a planned development where a homeowners association is involved. The lending rules on condominiums and HOAs are “a little bit different,” and your bank back home might not know of the intricacies involved, the he says.
On the other hand, the Maryland agent and others point out that local lenders tend to already have a relationship with the property and its management company, so they can obtain the information they need to make a decision much faster.
Another good option is a lender, which holds loans in its own portfolio as opposed to one that sells its loans on the secondary market. Portfolio lenders, which tend to be local community banks and savings and loans, usually have somewhat looser guidelines than secondary market investors, so they can stretch the rules a bit if they think you are a good risk.
“There are two sets of rules,” says David Homuth of Mutual of Omaha Bank
in Naples, Fla. “There’s the (secondary market) stuff which has tightened up quite a bit and requires that everything be in black and white. And then there’s banks like ours whose guidelines tend to be a lot more ‘understanding’.”
Homuth cites the case of a retired couple who has millions in retirement savings -- “all kinds of money” – but takes only what they need to live on. A lender which adheres to secondary market guidelines will look only at whatever income shows up on the couples’ tax returns. But “rather than pretend their savings doesn’t exist,” a portfolio lender can be much more flexible.
In the case of Homuth’s bank, which is owned by the big insurance company of the same name, the couple would be given credit for the income potential of their holdings.
No matter what kind of lender you choose, though, be ready for a good going over, Diamond, the Florida builder, warns. Lenders “want to see your net worth,” he says. “Yes, the house must appraise, and the lower the loan-to-value ratio, the better. But the final decision is generally based on net worth.”
NAR’s latest buyer profile doesn’t indicate where people are getting the money they need to make their deals work. But the Whittington says his buyers seem to be flush with cash. “I’ve had more cash buyers in the last two or three years than any time in the last 10,” he says. “It seems many people are liquid.”
Some of that comes from savings, to be sure. And some comes from selling a previous residence, as difficult and gut wrenching experience as that can be these days. But others are cashing out at least some of their stocks.
And why not? With mortgage rates so low and prices so inviting, many people see houses these days as a much better investment than the roller coaster stock market.
If you don’t want to touch your nest egg, consider a pledged asset mortgage from your brokerage house, or maybe even your local credit union, if it is large enough.
As the name suggests, a pledged asset loan is one in which you put up your holdings as guarantee for the mortgage. PAMs have all kinds of advantages, and one big disadvantage: You don’t have to liquidate; therefore, you continue to benefit from additional appreciation of your assets. There usually are no interest rate premiums, either. You can even buy and sell your pledged stocks like you normally would, as long as the balance in your account does not fall below the promised level.
Kinecta Federal Credit Union
, one of the country’s largest with some $3.5 billion in assets and nearly a quarter-million members, recently launched what it calls an “Asset Utilization Loan” that enables high net worth borrowers with significant liquid assets to use a percentage of those holdings as income for qualifying persons.
The Manhattan Beach, Calif., CU’s target market for the loan is self-employed and retired individuals. Considered as eligible assets are checking accounts, savings accounts, CDs, stock, bonds, 401(k)s, IRAs and insurance policy surrender values. Annuities, trust funds and hedge funds also may be used if the funds are available to the borrower.
Written by Lew Sichelman, journalist and syndicated real estate columnist.