The Downside Of Cheap Vacation Properties

By Jean Folger | May 13, 2011 AAA
The Downside Of Cheap Vacation Properties

Home prices continue to fall across the country, and vacation properties are no exception. Thanks to the real estate bust, bargains abound in many popular vacation and second-home markets. Although these properties are available at attractive prices - close to their five-year lows in some areas - the bargain prices may come with adverse trade-offs. From empty condos to depreciation, there can be a downside to purchasing cheap vacation properties. (There is an alternative to letting your cottage sit empty all year, but turning a profit won't be easy. Check out Vacation Home Or Income-Producing Investment?)

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Vacant Units
Had you visited a condominium in a popular beach town five years ago, the parking lot would have been full. Today, however, many of these same condo buildings have such high vacancy rates that there is a noticeable lack of vehicles. Foreclosures and poor rental activity have left many of the units empty, with no one living in or renting the properties. Additionally, in certain coastal areas prone to strong hurricane seasons, the high costs associated with insurance, which can equal or exceed monthly mortgage payments, have forced otherwise financially comfortable owners to sell or allow their properties to go into the foreclosure process.

Empty Neighborhoods
Entire neighborhoods can suffer the same fate as condominiums: High foreclosure rates and a lack of renters can turn once vibrant rental neighborhoods into ghost towns. In developments (including condos) with homeowners association (HOA) dues and/or regime fees, including monthly, annual and any special assessment fees, remaining property owners can face a multitude of challenges associated with high delinquency rates. Collecting dues on foreclosed properties or from owners who have otherwise become unable to pay can become a significant burden to the Association. While state laws vary, and in most cases there is a legal remedy for this situation, recovering the money can be a lengthy process and can leave the HOA or regime fund without enough money to cover normal expenses.

Deferred Maintenance
When a homeowners association is unable to collect money owed, it can lead to more than just a long legal process. In the meantime, the HOA may be forced to defer maintenance projects, leaving the building, grounds and neighborhood in declining repair. In some cases, the Association would have to dip into budgeted reserve contributions or borrow money to complete necessary capital improvements. This cost of servicing this debt would almost certainly be added to the dues. The higher the delinquency rate for dues and special assessments, the more difficult it will be for the Association to recover and "catch up" on any deferred maintenance or other projects. This will likely contribute to higher dues and more special assessments in the future.

Resale/Appreciation
When maintenance and repairs are deferred, it has an immediate effect on both the curb appeal and value of the properties. Likewise, a condominium or neighborhood with a heap of "for sale" signs on the lawns is not good for business. In some areas, real estate agents and homeowners are prohibited from advertising in this manner, simply because it brings down the value of the properties and makes would-be buyers leery about why so many properties are on the market at the same time. In addition, abnormally high HOA dues can be a deal breaker for potential buyers who could afford the mortgage on the property, but not the mortgage and the dues. (Follow these nine steps to get a picture-perfect summer shack at a great price. See Tips For Renting A Vacation House.)

The Bottom Line
Vacation properties are so affordable right now, in part, because these empty units, oddly quiet neighborhoods, and buildings in disrepair have negatively impacted property values. Since these properties are essentially being sold at a discount, buyers should not expect to profitably flip a property any time soon. It may, however, be realistic to surmise that as the economy recovers and more people purchase second homes and vacation properties, these areas, too, will recover. This revitalization may take years in certain markets, and buyers may face a few headaches and heartaches along the way, but in the end, purchasing a cheap vacation property could prove to be a good investment.

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