Vacation-home sales accounted for 13 percent of all transactions in 2013 — their highest market share since 2006 — according to the National Association of Realtors’ 2014 Investment and Vacation Home Buyers Survey. As growth in the equity market continues to benefit households, consumers are gaining the confidence to invest in second homes for recreational use.
When considering the purchase of a vacation home, buyers should enlist the help of a qualified residential real estate appraiser to help them evaluate the property’s investment potential.
What is the location of the property worth?
Buyers can do their due diligence by familiarizing themselves with the location of the recreational property to help them determine if they want to make the investment. Does the neighborhood feel safe? Is it currently well-kept and in close proximity to entertainment or attractions that are important to the buyers?
However, buyers need the expertise of a real estate appraiser to help them understand how location and the future prospects of land values influence property returns in addition to the physical structure of the home itself.
According an Appraisal Institute brochure, “Understanding the Appraisal,” it’s the appraiser’s job to investigate the nature of the market for that property, competitive properties and the buyers and sellers who constitute the market for that property type. The principles of supply and demand, substitution, balance and externalities help the appraiser develop a credible opinion of value.
What is the property’s rental potential?
Because this is a second home intended for recreational use, buyers will likely spend only a portion of each year using the vacation property and might be interested in the rental potential of the home in order to recoup some of the money they invested.
To develop an opinion of the property’s rental potential, the Appraisal Institute says a real estate appraiser will investigate specific data, including the comparable rentals in the area, how much income the property can generate based on the comps, the expected reduction in gross income caused by vacancy and/or collection loss, and the anticipated annual operating expenses required to maintain the property.
Should any personal property be included with the sale of the home?
Is it beneficial for buyers to request that personal property — such as furniture, cars or boats — be included with the sale of a recreational property?
In an interview with radio station KPLU in Seattle, real estate appraiser Richard Hagar, SRA, says if the buyer is paying cash for the property, or if it is seller financing, then including personal property in the sale is not a problem. However, Hagar cautions that personal property is not supposed to be part of a mortgage.
“A mortgage should be a loan only on the value of real estate, so any personal property must be subtracted from the loan amount,” Hagar said.
Posted by Appraisal Institute Staff