With the winter weather upon us and wind-chill factors part of the regular weather broadcasts, one’s thoughts drift to the possibility of owning a getaway home in a warmer climate. Here are some tips on making that purchase.
Before you begin your search, you will need to have some idea of the type of lifestyle your second-home purchase will provide. Some folks are looking for nothing more than direct access to the white sands of a sun-drenched South Florida beach. Others dream of a home overlooking the 18th fairway, steps away from the year-round golf and tennis country club. A deep-water boat slip may be an absolute must for the sailors. If you are like the other 90 percent of the home-buying population, you will start your dream-home search on the Internet.
Numerous Web sites provide robust search engines to allow you to quickly home in on the exact area and type of home that will keep you warm over the long, cold winter months. The granddaddy of these sites is Realtor.com. This site allows you to search by: type of home; location; numbers of bedrooms and baths; and price range. Listings are updated every 15 minutes. Because this site is run by the National Association of Realtors, it will also provide you with links to the listing agent. Similar sites, such as FSBO.com, also provide direct access to owners selling their homes without a real estate agent.
It’s a myth that financing is more expensive for a second home. According to Bill Rozek, senior loan officer with Embrace Home Loans in Rockville: “Rates for second homes are basically the same as for principal residences. The difference is in the down payment requirements.” Buyers of principal residences can put as little as 3.5 percent down using Federal Housing Administration financing, or 5 percent for conventional financing. FHA financing is not available for a second home, and conventional financing requires a minimum 10 percent down. “Money for second homes is readily available, but you must have good credit to get good rates,” Rozek added.
Money is even available for real estate investors in warm climates. According to Gregory Hayden, a mortgage banker with PNC Mortgage in Delray Beach, Fla. Investors with credit scores of 740 and above should expect to make at least a 20 percent down payment and to pay three points to obtain a loan at the market interest rate. Hayden also noted that closing costs for Florida real estate may be slightly higher than for cold-weather states but that because Florida does not impose a state income tax, and because annual property taxes are significantly lower than in the Northeast, those costs are more than offset.
Warm climates present factors that complicate insuring homes, especially near water. Insurance costs can vary widely and are a significant factor in your home-buying decision. There are basically three types of insurance that second-home owners should address: homeowners multi-peril (fire) insurance, wind (hurricane) coverage and flood insurance.
Homeowners insurance covers damage from events such as: fire, theft, vandalism, water and perhaps wind. According to Paul Sattler, branch manager of the West Palm Beach, Fla., office of Insurance Express, several factors greatly affect insurance costs: the home’s age, construction materials and proximity to the ocean.
“Homes built after 2001 are far less expensive to insure than homes built prior to 1995,” Sattler said. For example, the insurance premium for a home insured for $300,000 replacement value, built after 2001, might run $1,500 annually. That same home built before 1995 could cost double to insure. Another factor in insurability and cost is the building materials. “Wood-framed homes are nearly impossible to insure. Cinder block, stucco, masonry are the preferred building materials,” Sattler added. Homes near the ocean (loosely defined as east of Interstate 95) may require separate wind coverage, because it may not be available as part of the standard homeowners policy.
Second-home buyers contemplating a home near the ocean or Gulf of Mexico need to factor the cost of wind coverage into their buying decision and annual operating budget. Sattler explained that “wind coverage may add as much as 70 percent to the cost of the homeowners insurance premium, if it is available at all, as part of the standard homeowners policy.” For folks on the Gulf, an additional risk: Sinkholes must be examined before buying that second home. To quantify these special risks, buyers should obtain a wind mitigation report. That report is essentially a home inspection, evaluating the home’s ability to resist wind and storm-related events. Lenders and insurers will insist on obtaining that report before agreeing to lend on or insure your second home. Those reports are generally good for five years and cost less than $100.
Flood insurance is a standard policy administered through the federal government for homes in identified flood zones. The National Flood Insurance Program offers policies for single-family homes, condominiums and tenants. Policies are designed to reimburse homeowners for the damages caused by floods. Nominal annual premiums for contents coverage start at $49. Specific information regarding the National Flood Insurance Program, as well as the names of local insurance agents who can sell you a policy, is available at the Federal Emergency Management Agency’s Web site.
Historically low home prices, interest rates and even airfares make the present time appear to be the perfect time to take that plunge and invest in a warm-weather second home that you can enjoy for years to come.
Harvey S. Jacobs is a real estate lawyer in the Rockville office of Joseph, Greenwald & Laake. He is an active real estate investor, developer, landlord and lender. This column is not legal advice and should not be acted upon without obtaining legal counsel.