Investing in real estate is a complex and, often times, tricky endeavor. Along with the cycles that coincide with housing industry, business practices are ever changing and fluid. While the process of acquiring a property is relatively easy, it is by no means universal. Different types of properties require different approaches. Having said that, the criteria for buying a luxury home do not apply to the average single-family residence. Vacation homes, waterfront properties, expensive lake houses and similarly exuberant pieces of land all require a unique approach. Every detail that goes into purchasing a higher priced home, from determining an offer to closing on a deal, is different than that of a lower-priced home.
In proceeding with the acquisition of a higher-priced home, you must mind due diligence. Even the smallest details warrant an acute an attention to detail. Do not assume the process will resemble that of lower-priced homes. As they say, the devil is in the details when it comes to buying high-end properties.
High-priced homes, whether they are vacation properties or waterfront mansions, are unfamiliar territory to the average investor. While their potential profits are more than enough to catch the attention of some, they are equally daunting and intimidating. After all, with a promise of higher returns comes more risk. However, with the right tools and systems at your side, you can sidestep a lot of the risk and mitigate any complications that may arise.
Preparing To Buy
As with any real estate investment, preparation is the key to a successful transaction. It is absolutely imperative that you know exactly what you are getting into before committing to a property. You must be capable of handling anything that is thrown your way. Failure to take a higher priced property seriously will only hurt your business, as everything is magnified when the costs are beyond that of what you are typically used to.
Here are six steps you should take to prepare yourself for buying higher-end properties:
- Obtain your pre-qualification letter, or determine exactly how much cash you have to spend. Since luxury homes and waterfront properties often fall into the jumbo loan category, lenders will only consider very qualified buyers. Keep in mind, pre-qualification can take longer on hefty loans, and they are much more intensive.
- Find a real estate agent who specializes in luxury or waterfront properties. Just like rural property or commercial property, luxury homes and waterfront properties come with their own challenges. Most single-family home agents will not be aware of all the variables. Buying a property is always complex; but when you throw a waterfront space or 6,000 sq. ft. of living space into the mix, things can become even more complicated.
- Find a location that you truly love. When dealing with waterfront and high-end homes, land is much more important than structure. The old adage, “location, location, location” is very true when purchasing these high-ticket items. You can change the house, but not the location.
- Make sure your insurance is sorted out early. Insurance for waterfront properties can be very costly and often require more than one policy. In some states, you have to purchase flood, wind, and general hazard insurance; and typically not all through the same insurance company. A luxury home will also require more insurance, so contact your insurance company before purchasing and get an idea of the costs.
- Talk to the neighbors. This is always a good idea whether you are buying a mansion, waterfront, or urban single-family home. Neighbors know a lot about what is going on in that area. In general, some people feel uncomfortable knocking on neighbors’ doors; however, most people are understanding and willing to offer information about what they know. A good way to approach them is when they are outside, in front of their homes. Engage them in a short conversation about the neighborhood.
- In rural areas, check into the utilities. Luxury home and waterfront buyers who are accustomed to the connivance of suburban life may assume the availability of water, cable, electricity, and an adequate septic system. This is not always the case. Bringing these services to a remote area can be very expensive, make sure and investigate these issues before you buy.
Determining & Understanding Your Needs
While it is important to understand what you want out of a higher-priced property, it is equally important to understand why you need it. Determining and understanding what you want your subject property to have is one of the most crucial parts of buying a luxury home. Due to the increased expenditure associated with such an acquisition, you want to make sure you are getting everything that you need.
In assessing your requirements, you want to consider the buyer that you will be catering to. Buy-and-hold investors will need to consider the population of renters that will look at their property for lodging.
Bargain Shopping In Higher-Priced Neighborhoods
Despite a significant drop in home prices over the past two years, home prices have recently experienced a very rapid rate of appreciation. That being said, luxury homes are just that, a luxury to those that can afford them. The cost of buying in a high-priced neighborhood or community can be scary, but high-end properties can reap huge profits. Flips with a sale price of $750,000 or more rose 21 percent from a year ago, while homes priced below $400,000 declined as a share of all flips from a year ago, according to RealtyTrac. Homes priced between $750,000 and $1 million had a 41 percent return, which explains why flippers are heading to higher-priced neighborhoods. Of particular interest to investors, however, are bargain properties in expensive locales. The following will help you find bargains in higher-priced areas:
Neighborhoods Not Recovered Fully
The recession had a major impact on neighborhoods across the country, but the degree in which each was changed is not universal. Some communities were crippled more than others. Having said that, some areas that were once too expensive may be ripe for the picking. Look in areas that have not recovered fully, or at the same rate as the rest of those in the same tier.
“Home flipping is settling back into a more historically normal pattern after a flurry of flipping during the recent run-up in home prices in 2012 and 2013,” said Daren Blomquist, vice president at RealtyTrac. “Flippers no longer have the luxury of 20 to 30 percent annual price gains to pad their profits. As the market softens, successful flippers will need to focus on finding properties that they can buy at a discount and efficiently add value to.”
The following markets represent the metros with the best returns on flips in the second quarter of 2014:
- Pittsburgh (106%)
- New Orleans (76%)
- Baltimore (73%)
- Virginia Beach (66%)
- Daytona Beach 63%)
Consider Investing In Rural Areas
The concept behind this strategy is simple: people are more likely to pay a lot more for convenience. Those areas with easy access to shopping, or access to parks and entertainment are more likely to fetch a higher price. Conversely, rural areas void of these pleasantries may not have unexpected additions to the price tag. However, it is important to note that it will make it harder to sell down the road.
Condos are great opportunities to get all the features of luxury living at a fraction of the price. A lot of the time, there are amazing views and lots of amenities not included in a house, like a pool, weight room, hot spa, and the convenience of being close to town.
If you must be close to water, duplexes are an option that can help you be able to buy a free standing home. In some locations, you may have the option to purchase one side or both. If you are able to purchase both, use the other side as a rental. There are a lot of people who pay for their waterfront dream home just by renting out the other side. If the idea of being a landlord scares you, remember there are also rental companies that can manage the property for you.