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Buy and Build BEFORE you retire – create your dream in baby steps

Build Your Retirement Home Before You Retire – in other words: Buy (or build) a vacation home now with an eye to retire there.

Buy and Build BEFORE you retire - create your dream in baby steps, Rolf Kramer, Real Estate Agent

By Jeffrey R. Kosnett, From Kiplinger’s Personal Finance, August 2013

Last February, Ken Means bought a 3,000-square-foot home built in the early 1990s on 80 acres of land. Located in the Ozarks near Cabool, Mo., it is six hours from Means’s home near Peoria, Ill., so he can’t go every weekend. But when he can spare a day or two, he works on projects such as building a pond to attract waterfowl. The property is ideal for Means not only because he is an avid hunter but also because all that land comes with a reasonably new house—as opposed to a wreck in need of restoration. Plus, shopping and other basic services are no more than 15 minutes away.

Means, who is 56 and owns a fire-equipment business, says that five years ago he started toying with the idea of buying a vacation home that he could eventually retire to. Now he says he may sell his business in as little as two years—so he can resettle sooner to his spread. Land is cheap in the Ozarks, so his new property set him back less than $300,000, house included. Property taxes of less than $1,000 a year are also low.

The Missouri Ozarks is a low-income area, so there aren’t many locals with the cash to bid up property values. Dollars aside, Means says the smartest thing he did before buying his house was to take the time to look at many properties and talk to residents and real estate agents. He knows he’ll be comfortable living there permanently when the time comes.

“You’ll want to buy something early enough to get it into shape before you do retire,” says Means. “You don’t want to retire and then work your butt off, because that defeats the point.” The remote property is unlikely to attract renters, so he’s not even thinking about a listing. Instead, he has opened the door to his family. His parents recently stayed for two weeks, and his sister and her family will vacation there for a week and a half.

When you’re ready to retire, there’s surely a manicured, gated subdivision with stair-free designs and an unchallenging golf course in your area. And the easiest (and perhaps least costly) decision is to stay in place and carry on, sans the commute (see The Benefits of Aging in Place). Some more adventurous retirees choose to move to a Sunbelt mecca or even to live overseas (see How to Retire Abroad).

But there’s another way: Buy or build a retirement home before you retire. You can enjoy it now for recreation and relaxation, years before you get the gold watch. You can use it as a weekend and holiday retreat, and you can expand or adapt it gradually so it can function as a permanent residence. The home doesn’t have to accommodate every luxury you’d ever want. The location and the lay of the land are the draw.

According to the National Association of Realtors, U.S. vacation-home sales were a relatively modest 469,000 in 2010, rose to 502,000 in 2011, grew to 553,000 last year and will rise again in 2013. Prices are still depressed from the peaks of 2005 and 2006, the two years when Americans bought more than a million second homes. Still, prices rose 24% last year, to a median of $150,000 for existing properties.

With real estate prices booming again, could desirable recreational and resort-area property sell so fast that if you wait even one year to buy, you’ll strike out? Stacy Matherly, the real estate agent who sold Means his acreage, says she is inundated with e-mail inquiries from distant “sofa surfers” who are eager to go home-and-land shopping. David Knudsen, a real estate agent in Liberty, N.Y., says the second-home market generally trails the primary market by six to 12 months. It is definitely on the rebound, if still in the early stages.

Half of all second-home buyers pay cash. But that stat may be misleading because the transaction counts as a cash sale if the buyers draw on a home-equity line on their main residence to pay for abode number two. If you need a mortgage, note that the standards for vacation homes are tougher than for the purchase of a primary home. You will need excellent credit and a down payment of at least 20%. Plan on paying an interest rate on the mortgage that’s a little higher than for a first home.

Brokers who sell property within 150 miles of New York City say that affordable real estate still exists in the region, and buyers are tapping stock market profits rather than taking out bank loans to pay for it. For example, in Sullivan County, in the Catskills two to three hours northwest of Manhattan, there are listings for three-bedroom houses on five acres ranging from $200,000 to $300,000. These houses are rustic enough that you would probably want to invest in some upgrades. Direct water access, whether to a lake or river, and sweeping views pad the price substantially.

Not all preretirees are interested in an existing house, however, especially a dated ranch or bungalow. If you want to build, David Weiner, a New York City architect known for his glass-walled weekend retreats in the Catskills and the Berkshires, says the first and hardest job is finding the land. It can take as long as two years to get local permits. You can also expect to deal with environmental quirks; water and septic conditions are all over the map in rocky places such as Maine and other mountainous regions. In remote southern Colorado, where Weiner has also designed custom homes, people will pay a premium for building sites where there will be 320 sunny days a year to power their off-the-grid solar units.

In the East and Midwest, you’ll pay a premium for proximity to skiing and hiking trails, good roads, and beautiful vistas. Land becomes less expensive about a three-hour drive from a major city. The farther you go, the more land you can get for less.

Some architects will design second homes as small as 1,500 square feet. Weiner says most of his clients prefer a smaller weekend place anyway, because the cost of construction keeps creeping up—especially in rural areas, where the climate can require that the construction withstand storms, floods and wind. The total cost to build can easily reach $250 per square foot; combined with the cost of the land and the architect’s plans, you could be looking at $750,000 for even a pocket-size luxury home in a high-cost region such as New England.

Weiner says you should budget for a 10% to 15% overrun in building costs because something will go wrong, whether it’s a drainage problem or new regulations that magnify the cost of installing utilities. Fortunately, once you’ve acquired land, no one can outbid you. If you decide not to go ahead with the project, you should be able to sell the tract for a profit.

If you’re not ready to cash in your current house, or if you don’t want to or cannot borrow enough against your equity to swing the deal, you may have to negotiate a construction loan with a bank. You can eventually roll the balance into a 15-year mortgage or even pay it off if you profit enough from the sale of your primary residence.

Rent it for income?

To defray the costs of maintaining two homes, you may be able to rent your lair to short-term visitors (see Tax Breaks for Second-Home Owners). Insiders say the rental business is booming in most places, citing a high volume of bookings and rising rents at HomeAway, Vacation Rentals by Owner, Airbnb and other agencies.

In a survey by the NAR last year, more than 90% of vacation-home buyers said they planned to rent their new property within one year, and three-fourths of them expected rents to cover at least half of their mortgage. That’s more realistic now than it was during the recession, but you’re taking a chance if you expect your vacation home to function as an ATM to make the cash-flow numbers work. It’s better to buy or build something you can afford from current resources and shop diligently for the right property and price—even if your heart is telling you to rush to closing right after a memorable vacation.

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rolf kramer, real estate, Williamsburg, VARolf Kramer, REALTOR®, ABR, SRES, e-PRO 757-564-4455 Licensed in Virginia with Liz Moore and Associates, 5350 Discovery Park Blvd, Williamsburg, VA 23188 Williamsburg has become a Mecca for retirees over the past dozen years because of its history, charm, vacation amenities, proximity to major cities and airports, and affordable cost of living. 

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Mortgage Mystery Unraveled

You have finally decided on where to buy, when to buy, and that you are READY. Now is the time to secure your mortgage. Mortgages are probably the most crucial piece to buying, selling, or just plain OWNING a home.

And, honestly, they are not as hard to understand as you might think. With a little homework, you can make the best financial decisions.

house money

Definition of Mortgage: A mortgage is a loan, with your house and land used as security; if you don’t pay back the loan, the lender forecloses on your home. The loan is secured by a lien (the “mortgage”) against the property:  your buildings (improvements) and land. The lender doesn’t own the house, you do. They just have the lien with your house as their collateral (i.e., the security). The bank (and I can give you a good idea of this figure) will help you figure out what you can actually afford and what you can borrow. The lender (the bank) is not going to look at how much your discretionary spending is a month or what amount you’ll be comfortable in spending a month. Most lending institutions are very willing to loan you MUCH more than you think you can spend, on your mortgage. Only you know how much flexibility your lifestyle or spending has. The lender looks at 1) your income 2) your debt 3) your savings and 4) your credit history. These things tell the lender your RISK potential (how likely you are to stop paying, pay late, etc).  After assessing the risk, the lender then looks at the value of the property you are looking to buy and then assigns an interest rate depending on 1) your risk 2) how much you are putting down (your down payment) and 3) value of the property.

So many kinds of mortgages; why? Don’t get confused. Ask yourself: Is this your forever home? Will you trade up in 5 years? Then, you can narrow your mortgage choices.

Why does how long I will live there matter? Because once you narrow your choices of mortgage types, it will help you decide if you want to pay down points (interest points), upfront – this can lower your monthly cost, but it will increase the money that you have to bring to the table (the closing table) and it won’t be part of the down payment.

So, for instance:

  • If you are going to stay in your house and pay off your mortgage over its lifetime, get a fixed-rate loan (payments will not change)
  • If you won’t be in the house that long, you could consider an Adjustable Rate Mortgage, as those usually start at a much lower rate.
  • If you think your income potential will go up, there is an option of a hybrid ARM that is fixed for, say, five years, and then adjusts annually.

Points Demystified. The lender may charge points (each point is equal to 1% of your home loan amount), and required third parties charge for their services, which increases the cost of the loan. If you sell your home in a few years and have paid points to get a better interest rate, you may not recoup the cost of those fees. And your equity in the house will be minimal, but you are betting the home will appreciate enough to cover the fees, or that the money you save in interest will balance out the additional cost of the loan. If you stay in the house longer than you expect, you take the risk that you can’t afford the higher payments as the interest rates adjust, or you risk not being able to refinance. It is EITHER higher rates with lower points or lower rates with higher points. The key is to compare different types of loans to see what works for your needs. NOTE: Never pay more than 1 to 1-1/2 points to a lender (unless you have bad credit or you are buying a great interest rate.)

Find today’s rates by checking Zillow Mortgage Marketplace, which offers rate quotes for free, and anonymously. And, you may not qualify for some of the “teaser rates” that you’ll see advertised, online.

Talk to at least two different lenders to see who has the better loan program for you and who listens to your needs. If you do not understand something, ask your loan officer to explain it to you. Then, keep asking until understand it. When the lenders quote you rates, it will be for interest only, so ask to see the Annual Percentage Rate (APR) as rates are shown as a percentage and an APR adds up the interest, points and fees in an effective annual rate. Then, compare the APR on two identical loans and choose the one with the lesser rate.

Definition of Amortization: Amortization is a true measure of what you are paying per year against your loan. A loan has a life of 15 or 30 years and you pay in installments. The principal (the loan amount) decreases, each month, until the loan is paid off at the 30th year. Each payment is even and spread over the 30 years, with the interest payment of each payment being much higher than the principal (at the beginning) and the principal making up the majority, by the end of the term. The Amortization Schedule shows the payments for the life of the loan, including interest. NOTE: If you pay your house payment every two weeks, instead of monthly, it results in 26 payments per year, one more payment annually than if you just paid monthly. The re-amortized loan will eventually result in more of the payment paid on principal and less on interest. The extra payments go to pay down the principal on the loan.

With all these tips, you have to now ask about Prepayment Penalties, because I hope you are able to pay off the loan before maturity and save interest payments. Some lenders charge a penalty if you pay off early, which could be as high as six months of interest! Why would you consider a loan with a prepayment penalty? Because some lenders will offer you a much lower interest rate if they know you’ll be sticking around for a full 30 years. And, there are situations where accepting a prepayment penalty on a loan can save you thousands of dollars in interest.

Finally, what is mortgage insurance? and do you need it? If you are making a 20% down payment, you’ll have to have Private Mortgage Insurance (or PMI), which ensures that the lender is guaranteed, by the mortgage insurer, 80 percent of the loan if you default. NOTE: If you are getting an FHA or VA loan, those are backed by the government and you may not pay monthly mortgage insurance on them.

In the end, getting the mortgage paperwork out of the way, a little earlier (before shopping for a home) can make life easier for everyone. Once you find your home, you can close faster because you are already conditionally approved and have been through underwriting. This makes you stand out in a highly competitive market. It also helps me narrow down the choices of what to show you and what to be searching for.  Let’s start working together, soon. Contact me, today, and let’s find you your home!

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Rolf Kramer, REALTOR®, ABR, SRES, e-PRO 757-564-4455 Licensed in Virginia with Liz Moore and Associates, 5350 Discovery Park Blvd, Williamsburg, VA 23188 Williamsburg has become a Mecca for retirees over the past dozen years because of its history, charm, vacation amenities, proximity to major cities and airports, and affordable cost of living. Check out www.retiringinwilliamsburg.com for information about the Williamsburg community, lifestyles available, and search for homes for sale.