Tuesday, April 27, 2010

Getting Close

Our agent had cautioned us about short sales from the beginning of our search. If you are confused about short sales, they are properties that are still owned by an individual, but that person is behind in their payments. The bank and the owner reach an agreement to sell the property, with the understanding that the selling price will be less than the amount of the bank note. Ostensibly, the bank absorbs the difference, although in reality, the loss is often passed to the government or to the quasi-governmental Freddie Mac. The problem with short sales is that they may take a very long time. The bank waits to collect offers, and even once a potential buyer has been selected, it takes a long time for the bank to bundle the sale with other sales and pass the property to Freddie Mac.

Despite all of the above, the potential of purchasing a property at an extremely low price, tempted us into looking at short-sale properties. In November we found a beautiful little 1250 sq. ft. cottage (pictured) that was listed at a very attractive price. We put in a bid that was $3,000 under the asking price. This was probably a mistake on a short sale, but my wife hates to pay full price for anything. It took more than a month for the bank to come back with a response. Their offer was 8K over their own asking price. What? This is actually fairly common on short sales. Common or not, we were not paying more than their asking price, when there were no other bidders in the mix. We countered with an offer equal to their original asking price, which they took. On a conventional deal, one my speculate that the bank's actions were simply a play to get us to pay full price, but I don't think banks are operating rationally in this climate. Bottom line, our offer was accepted.

Normally, once an offer is accepted on a conventional sale, escrow is opened very quickly, but on a short sale, escrow is opened when the bank can get itself together enough to agree to open escrow. Oddly enough, after another month of waiting, we were informed that we were in escrow, although we had not completed any escrow papers. The bank had unilaterally opened escrow. Since we wanted to go with the deal, we quickly signed the papers and made the escrow binding.

Now the waiting really began. On a conventional deal, the parties agree to a length of time for escrow (30 days, 45 days, etc.), not so on a short sale. Buyers just sit in escrow limbo for months. During this period, the bank that owns the note attempts to pawn the sale off on the government or an investor. We heard nothing for two months, and had no idea if and when the sale would close. For anyone considering a short sale, patience is absolutely necessary, espcially during this period. Finally, the letter arrived saying that the seller was ready to go ahead i.e. they had pawned off their losses. This is the point we are at today. The deal should close in four days, but when dealing with a short sale getting one's hopes up is a bad idea. We believe it will close in four days, but we could get a notice tomorrow saying "The deal is off; we are so sorry."

If time is important, a short sale is not a good idea. However, if you are looking for a fantastic deal and don't like the idea of an auction, a short sale might be a good solution. (More about short sales and bank-owned sales next time.)

Sunday, April 25, 2010

Be In It For the Long Run

Eventually, my wife and I found the perfect vacation home. It was relatively new, in the right location, and priced right. Thus, we put in a full-price offer, despite it being a buyer's market.

The property was banked owned, and it didn't take long for the bank to accept our offer. Further, we were quickly able to finance at a AAA credit rate. However, there is not a happy ending with this first attempt: The bank's appraiser felt that the property was over priced. The bank appealed its own appraiser's opinion, which took a long time. Meanwhile the seller bank grew increasingly impatient. Eventually, our own bank let us know they would not be able to get the property to appraise; the property fell out of escrow. No problem, right? Wrong! The seller bank blamed us for the fact it wouldn't appraise. They informed us through our agent that they would not sell us the property at any price. Neither our agent nor we had ever heard of anything like this. The bank just seemed to believe that we were bad luck. In the end, we went back to looking for properties.

Monday, September 21, 2009


With things heating up, it was time to establish a maximum price. There were, of course, two primary limiting factors: down payment and monthly payment. We decided that 220k was our maximum price. Five years earlier this would have relegated us to looking for one-room shacks with three walls. However, the extremely depressed condition of the market meant there was a lot of vacation-home inventory in our price range. This is where several years of research and looking at properties paid off. We knew what we could expect to find, and what our price would purchase. Sadly, the large number of vacation homes on the market was a result of many people overreaching. They purchased the most home the bank would allow, which left them little room to deal with any type of economic turmoil.

A vacation home should not be an undue burden to a family's budget or lifestyle. All the members of the family should feel that the second home did not lower their standard of living. If a vacation home is going to result in a family living paycheck-to-paycheck, the vacation home should wait until finances are more secure. The inevitable result of reaching too far to get a vacation home will be stress and unhappiness. Renting that cabin or beach house for a week will probably yield just as much satisfaction for everyone.

How much is too much? A rough gauge is that a vacation home should not take more than 10% of a family's after-tax income. However, there are variables that can significantly raise and lower this figure. The higher the income the larger the percentage a family might be able to afford. If the couple is already burdened with a high mortgage and other mandated monthly expense, this would certainly lower the percentage. Further, if the family has a large cash reserve that was held back from the purchase, this might also raise the percentage of income that could be invested in a vacation home. In all cases, prudence she be a word that is in the back of the mind of any couple considering a vacation home purchase.
Photo Credit (*Kid*Doc*One* (New Icon, Same old same old) @ Flickr

Sunday, September 20, 2009

Your Search is a Product of the Times

Credit (Escapo @ Flickr)

Just as we began our search for a vacation home, the economy went south. One did not need to be a financial analyst to recognize that the economic slowdown was going to be sustained and depress housing values. Indeed, each time we went out, prices in our resort areas of choice were lower. The real estate agents, naturally, insisted that the bottom was here. However, it was obvious that the bottom couldn't even be seen from here.

We made the decision that we would continue to go out and see property several times a year, in order to keep ourselves informed about values and conditions, but we would wait to buy until prices stabilized. Sadly, Big Bear Lake suffered unprecedented numbers of foreclosures during this period. In some areas half of the cabins were empty. This process only accelerated in 2008. Eventually, entire neighborhoods in this beautiful mountain community became ghost towns. We went into several cabins that squatters had devasted. Prices tumbled further and further in Big Bear. Each trip to the town of Big Bear convinced us of two things: the 2+ hour drive was long, and the problems of the area were profound and would have lasting quality-of-life implications. Somewhere around a year ago, we agreed that Wrightwood would become the area in which we would concentrate.

However, Wrightwood had yet to feel the entire brunt of the recession. The obvious decision was to wait for prices to catch up with economic conditions. This soon happened. Cabin prices fell to half of their 2006 values. Fortunately, the Beirut-syndrome which had afflicted Big Bear did not visit itself upon Wrightwood. By June of this year, we knew it was time to get serious about a purchase. This became even more apparent as interest rates reached historic lows.

Economic conditions should dictate any vacation home purchase. These conditions may affect your family's income, down payment, interest rates, or property prices. In the next several years, prices and interest rates will probably begin to rise. For many couples seeking a vacation home, the necessary consequence of waiting may mean higher prices. However, not waiting may mean not having that nest egg topped off to the point you would like. Once again, communicating with your partner and staying informed will go a long way to helping you make the best purchase for your familial circumstance.

Saturday, September 19, 2009

Is Your Relationship Ready?

Most of us have known couples who have chosen to have a child as a way to deal with the problems within their relationship; vacation homes are sometimes used in the same way. This is particularly problematic as finding the right vacation home requires excellent communication between partners. People weave a lot of expectations into the purchase of a vacation home. These may involve childhood memories, status, utility, and recreation. Indeed, some individuals may feel that they have more at stake emotionally in a vacation home than in their primary residence.

Before beginning the journey to vacation home ownership, a couple should ask themselves, "Does our relationship have the maturity to support the frank discussions and inevitable compromises it will take to find the right home-away-from-home?" The couple who is seeking relational healing through vacation-home ownership will be very disappointed.

There have been points in our relationship when my wife and I could not have purchased a vacation home without damaging our marital bonds. However, those years are in the past; on this quest we embraced each others expectations and used them as a road map to find the way to our dream cabin.

Narrow the Search

About two year ago, after easing up to the idea, we started to look for our cabin hideaway. We considered cabins near ski resorts, on lakes, near lakes, in the woods, in mountain communities, and combinations of all of the proceeding.

Eventually a new factor became apparent: how far will the vacation home be from our house? There were very nice cabins less than an hour away from our home. At the same time, we have always loved Banff... a three hour flight and another country away. Ultimately, we realized that we wanted our vacation home to be very accessible. We narrowed our focus to local mountain areas. Since we lived in Los Angeles, this meant Big Bear Lake, Wrightwood, Lake Arrowhead, and Idyllwild. There were a few other areas, but this was our list.

Even four local areas soon proved to be too large. We eliminated Idyllwild as it was the farthest from our home. Distance from one's home needs to be an important discussion between any couple buying a vacation home. The home six hours away might be wonderful, but how often are you going to use it. We also eliminated Lake Arrowhead. It is an older area that never felt right to us. If one or both people do not like an area, based on whatever unseen forces guide the universe, don't ignore these feelings. Like a relationship, the things that bother you a little today, you will hate tomorrow. Thus, Big Bear Lake and Wrightwood became the two communities in which we hoped to find tranquilty away from Southern California's hectic lifestyle.
Image Credit to Californian Em @ Flickr

Friday, September 18, 2009


This blog shall examine our experience with buying a vacation home. Hopefully, it will eventually become an account of owning a vacation home:

The term vacation home is pretty holistic. It may mean a beach home, a home on a golf course, a ski condo, a desert hideway, or an island retreat. Settling on what type of vacation home one wants is essential, expecially if you are buying it with a significant other. My wife and I knew that this was going to be some type of mountain retreat. In the mountains of California there are endless opportunities for buying mountain property. We decided we were looking for a small cabin between 800 sq. ft. and 1400 sq. ft.

The more that you are able to narrow down what you are after, the less time you will waste looking at areas and dwellings that really aren't in the running.