5 Easy Steps to Buy a Second Home

buying second home
••• © Big Stock Photo

Before setting out to buy a second home, you probably have reservations that are stopping you from making an immediate decision. You might wonder if it's too extravagant, especially if you've grown up with the financial outlook that only rich people buy a second home. When interest rates are low, if you can afford a high-end car payment, you can probably afford a second home; providing you don't go hog wild and are looking for this home in a reasonably priced area.

Step 1: Determine Your Location 

You might assume that deciding on a sales price first is the most important step, and while price carries weight, it is not what always drives the decision to buy a second home. If you've got your heart set on a vacation home on the beach, let's say, on Hawaii Island, for example, you may find it a bit shocking that you cannot buy a single-family home on the water for half a million. If the only place you can afford is near Puna and you don't want to live where it rains a lot, then your search on that island is over.

Location is the driving factor in real estate. It's why you hear the mantra location, location, location repeated so much. You need to decide if you want to buy a second home within a short distance from your present home or if you will take a train or fly to get there. For the moment, there is no Scotty to beam us up.

How often you plan to use the second home will have a direct bearing on its location. If it's a getaway house for the weekend, most likely you want this home within an easy commuting distance. If the second home is for a couple of family vacations a year, it can further away or located in another state or country.

Step 2: Determine Type of Home 

The type of home you may choose to buy for a second home could also involve location. For example, if you're planning to buy a home in the mountains, on the more affordable end are small cabins all the way to high-end ski resort haciendas that can run in the millions. If you want an oceanfront home, situated squarely on the ocean, even a small shack will cost a lot more than you may imagine. The harsh truth is in today's economy you may need to settle instead for an ocean view.

A home in the country is on the bucket list of many people. Maybe you would like a farm or a quiet estate found down a dirt road and behind a locked gate? Or a home on a lake? Or a modular home/manufactured home that you can place on a lot?

Perhaps a condo or townhome is more your style because you might prefer more amenities, less yard work or maintenance. Condos also offer a lock-and-go lifestyle, which makes some absentee owners feel more secure while away from their second home.

Step 3: Determine Your Sales Price 

Buyers who get in over their heads usually either get swept away by the grandeur of it all, or they have failed to establish an upper-end limit, a maximum amount they are willing to pay to buy a second home. Many buyers who want to buy a second home intend to finance that purchase. Part of the reason to get a mortgage is that it offers tax deductions such as interest and property taxes.

If you intend to finance the purchase, your maximum price might be affected by interest rates, and the amount of your mortgage payment (plus taxes, etc.) may have a greater impact on you than the sales price. One way to figure out if you can afford the mortgage payment is to begin socking away that amount into a savings account every pay period. If it's comfortable and not a strain on your budget, you will most likely be OK down the road, providing you maintain a cushion. Experts recommend at least 6 months of a reserve fund.

If you begin to find there are few homes for sale in the price range you have established, then it is time to revisit steps one and two. You may need to adjust your expectations. Either choose a different location or a different type of home. You will notice I did not suggest exceeding your budget.

Step 4: Find a Realtor

Not just any Realtor. This is not the time to haul your cousin George out of the cobwebs and ask him to help you to buy a second home. Look for a local real estate agent who represents buyers in the area where you want to buy. A local agent should possess valuable insight and knowledge in the area.

Make sure the agent has completed a sufficient number of transactions and can produce reviews from satisfied clients.

Also, don't make the mistake of thinking the listing agent will have your best interests at heart or that the listing agent will give you a break somehow because that's not how it works. This is not to suggest there are no unethical agents in the business because there are bad agents in the business just like in any other profession, but do you want a bad, unethical agent to represent you in any way, shape or manner? Probably not.

Step 5: Secure a Preapproval Letter 

Your local real estate agent can probably refer a local lender to you. You will fare better with your offer if you use a lender the seller and listing agent are familiar with. You may want to use your own lender back home, but your preferred lender might not lend in that area. And, if an unknown mortgage lender will hurt your chances when submitting an offer, why take that chance?

Many listings agents will advise their clients to reject an offer if it appears without a preapproval letter and there is financing involved. Ask if you can fill out a mortgage application online. You do not need, in most instances, to meet with the mortgage lender in person.

Also, by using a local lender, you increase the chances the lender will pull an appraiser from a local pool of appraisers. It is important to have a local appraiser who is familiar with the neighborhood to appraise your home. Some "online" mortgage lenders end up with out-of-area appraisers, and that's one way to get a low appraisal that could blow your transaction.

At the time of writing, Elizabeth Weintraub, CalBRE #00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.