Are you thinking about buying land now to build on when you retire? Are you considering purchasing a “fractional” rather than a second home? As the baby boomers near retirement age in droves, an increasing number are considering these options as important components in their retirement lifestyle.

There’s an old adage that says it’s easier to get into a real estate deal than it is to get out of it. Before you or your clients enter into a contract for that retirement or second home, it’s smart to look before you leap.

Are you thinking about buying land now to build on when you retire? Are you considering purchasing a “fractional” rather than a second home? As the baby boomers near retirement age in droves, an increasing number are considering these options as important components in their retirement lifestyle.

There’s an old adage that says it’s easier to get into a real estate deal than it is to get out of it. Before you or your clients enter into a contract for that retirement or second home, it’s smart to look before you leap.

Purchasing raw land and holding it several years until you retire can be a smart move or a financial disaster, depending upon not only the subdivision, but the people who purchase there as well. Many financial advisors suggest that you hold off on buying raw land until you are ready to build and occupy your retirement property.

The reason for this is that there are a number of serious risks involved in purchasing land prior to the time that you are ready to build. First, will the land appreciate, hold its value or depreciate? Will the local building authorities rezone or attempt to slow growth by making the building codes more restrictive? Will increasing construction and insurance costs and taxes make it impossible for you to afford your new home when you are actually ready to build and retire? Will a natural disaster stop you from building because the insurance company won’t write new policies for an extended period? Will you discover defects at the property that weren’t apparent until you began construction and the developer is long gone?

Another key point to consider is the amount of speculation in the area where you are considering purchasing. For example, if you plan to hold your lot until you retire and then build, are you purchasing in an area where others are using the same strategy? Or is the subdivision filled with speculators who have no intention of building and whose primary goal is to hold the property until they can cash in for a hefty profit?

This is a serious issue not only in raw land purchases, but in condominiums and new housing subdivisions as well. When investors purchase strictly for the speculative purposes and there is a downturn, the lots, houses or condominiums can remain vacant for years. This can result in a downward spiral in prices due to foreclosure. Even more importantly, it can make it virtually impossible to obtain new financing. (Some lenders require that 50 percent of a new condominium building be owner-occupied prior to granting permanent loans on the building.) It can also make it much more difficult to obtain insurance. Most importantly, the odds of selling without incurring a substantial loss are pretty much nonexistent.

For people purchasing fractionals, there are different issues to consider. The most important issue to determine is whether you are actually buying a fractional or a timeshare. Andrew Waite of Nexzus Publishing Group outlines four key questions that will help you to determine whether you have a fractional or a timeshare in disguise.

1. Is the agreement for a specific amount of time or is it for an actual title interest? If the company is selling you the rights to use part of their hotel, condominium or house for a certain number of weeks per year, you probably are purchasing a timeshare. According to Waite, timeshares are “horizontal.” In contrast, a fractional is “vertical,” which means that rights can be deeded or passed via inheritance. Fractionals offer a commission opportunity for agents whereas timeshares normally do not.

2. Do you own a door? In other words, do you always use the same unit each time you visit the property or does the hotel or management company give you a comparable unit each time you visit? If the property is a fractional, you will always have the same unit.

3. What percentage of that door do you own? In a true fractional, there will be a split of management costs, taxes, maintenance and other associated fees based upon your percentage of ownership.

4. What sales succession or survivorship rights exist to this asset? Fractionals allow you to pass your interest to your heirs. Fractionals generally increase in value. On the other hand, if it’s a timeshare dressed up as a fractional, it only decreases in value as time goes by.

According to Waite, “Many timeshares have been characterized as fractionals, but they are still the same sleazy play of yore. Many of the major brands are using the vertical title play to help fund and therefore provide a return and lifestyle value to their buyers. Sound and fun play.”

As with any real estate purchase, it’s critical to carefully investigate what you are purchasing, what the neighborhood is like, as well as the potential for price appreciation. Given today’s mortgage environment, it’s also wise to check the percentage of properties that are being held for investment (i.e. people not building or living on the property) and the number of foreclosures in the particular subdivision as well. Finally, don’t forget to check the cost and availability of insurance.

Bernice Ross, national speaker and CEO of Realestatecoach.com, is the author of “Waging War on Real Estate’s Discounters” and “Who’s the Best Person to Sell My House?” Both are available online. She can be reached at bernice@realestatecoach.com or visit her blog at www.LuxuryClues.com.

Show Comments Hide Comments

Comments

Sign up for Inman’s Morning Headlines
What you need to know to start your day with all the latest industry developments
Success!
Thank you for subscribing to Morning Headlines.
Back to top