An Introduction to Buying Beach Investments
Thank you for entrusting the Leigh McPherson Team with the purchase of your new condo unit! This is an exciting time as we begin our journey together to find your dream beach home. As we start our search together, we know that you will have a lot of questions. Let’s start with the basics.
Can I get a mortgage on a beach condo? Absolutely! 2023 rates are up from their all-time lows of last year, but while Fannie Mae and Freddie Mac have made some changes in the last several months, our local lenders will work with you to purchase your new property with a reasonable down payment. *Consider a 25% down payment as a safe number to start with.
Condominium mortgages do differ from traditional single family mortgages however. When you buy a condominium, you are not only buying real property, but also a percentage of the building’s common areas. If the seller has a mortgage or vendor’s lien, this must be paid off before or (usually) at closing. Any other debts or taxes due and attached to the property must be paid as well. The Owner’s Title Policy (customarily a seller expense in Baldwin County, with the exception of new construction) protects you as a new owner from any prior liens. Your Buyer’s Cost of Closing Estimate, prepared by your agent at the time of contract, is designed to give you a general idea of costs.
*VERY Important - Regarding Condo Financing -- The amount of down payment that buyers must pay on a condo can vary - DEPENDING ON HOW THE ASSOCIATION MANAGES THE BUILDING AND/OR THE strength of the association budget, as well as federal lending regulations. It is very important for us to look at your financing options before falling in love with a unit. Local lenders are the very best resource for this. We are happy to provide a list of lenders on request. Check out the website, www.leighslenders.com as well.
What due diligence should we perform prior to completing the purchase? Once you are under contract, you will want to schedule a home inspection. With a condo, the home inspector will inspect both the interior of the unit and any exterior mechanicals associated with the unit - that is, the exterior air conditioning unit. The exterior of the building itself is owned by the owners association collectively. Other due diligence involves a close examination of the association documents. By law, (Alabama Condominium Act and FL Condo Act) sellers must provide documents known collectively as a condo resale certificate. This is not necessarily a physical certificate, but it is a collection of documents including the most recent budgets, monthly operating statement, confirmation of fees and dues, master insurance policy, annual meeting minutes and board minutes. These documents will help you get to know your association and help you get a picture of the overall condition of the building and its operation. A section of our purchase agreement lists the Resale Certificate documents in detail.
What closing costs am I responsible for? Buyers generally pay a closing fee (charged by title company), a brokerage document fee, and costs incurred to obtain a mortgage. Our Baldwin County Purchase Agreement stipulates that the seller shall pay for title search, owner’s title policy, and any sales commission. Taxes: Since Baldwin County taxes are paid in arrears, and the tax year begins in October, property taxes for the current year are generally pro rated, based on the closing date. The title company will figure taxes on the portion of the tax year that the seller owned the property, and credit that amount to the you as new owner. You as new owner will be responsible for paying taxes at the end of the year. The tax bill should come to you, once you have taken your recorded deed to the tax assessor’s office.
We are excited about owning a condo! What can we do to speed up the closing process? We will send you an Under Contract letter reminding you of specific tasks and deadlines. For example, you will need to arrange for an inspection ASAP. We are happy to send you a list of reputable inspectors. Once the inspection is done and you are satisfied, the next steps are in the hands of your lender. The most important thing you can do is to stay in close touch with your lender, and be sure that you have provided all the requested information as quickly and completely as you can.
I can’t wait to get into our unit! What about rental guests and agreements? Our contract provides that rental deposits, reservations, and agreements be transferred over buyers/new owner at closing. Sellers are required to provide any agreements for the buyer’s review. The contract calls for five days to review these. ANY CHANGES in booked rentals and changes of management companies will need to be negotiated out during closing. For specific scenarios, see our brochure Buying a Condo In A Rental Program.
We are closed!! What is next? Congratulations! Time to enjoy your new condo. But there are still a handful of things to do post-closing. *The title company will take your deed to the probate office and have it recorded, then mail the recorded original to you. After that, you must go to the county tax assessor’s office and have the property ASSESSED in your name, according to use. This is how future property taxes are determined. This is an important step - we will send you a reminder. It may be possible to do this online - please feel free to ask about this. *You will receive a copy of the Owner’s Title Policy a couple of weeks after closing. Store it in a safe place -when you sell, it will save you money. In the rare event that a title issue should arise, the policy protects your ownership. *The title company should notify the Condo Owner’s Association of the change in ownership, but reach out anyway. You can arrange for monthly dues payments and email receipt of important association information. *Most utilities can be set up in advance, but some require a deed or settlement statement to initiate service. Please complete this process as soon as possible after closing. *Finally, get to know your board and association management. Get active - attend annual meetings and carefully read all communications from your association. Take the opportunity to make your new community an even better one. As an owner, your voice should be heard. Please review carefully and message or call us with any questions you may have. Remember, you have a whole team here to assist you!
Q: Can my rental income pay my condo mortgage?
A: That depends on the initial downpayment you make on your condo loan. Although it is possible to purchase a (second home) condo for as little as 25% down, it is likely that you will have to supplement your income with additional funds to make your payments. See the sample cash flow on this page for examples.
Q: I have never managed a rental property before, but I would like to try. Can you help?
A: The emergence of VRBO and now Air BNB has made it very enticing to second homeowners and investors to manage their own rentals, even from far away. Technology and a good local support system can help owners do a great job with this. The Leigh McPherson Team does not manage rental properties, but we do have a strong network of clients who manage their own properties. Give us a call and we will help you answer your questions, and put you in touch with condo owners who do their own rental management. If you find that doing it yourself is not for you, we have several rental management companies we can recommend.
Q: My hometown banker assures me that I can borrow money on any property I choose - Why do you prefer me to use a local lender instead?
A:Fannie Mae and Freddie Mac (the entities who back conventional mortgages) view condominium loans differently than a loan made on a single family unit. Because of presumed additional risks, the structure and organization of a condo building have an impact on a lender's willingness to lend on condominium projects. That is, the buyer can have stellar credit and excellent income - but still may not qualify for a loan on a condominium project.
Our preferred lenders specialize in condominium and beach property loans. They are familiar with the different condominium buildings and know which ones are considered solid risks. Key documents that a lender will want to examine include the covenants and restrictions, any engineering reports or scheduled repairs to the building, and - very importantly - the current budget. Our local lenders are a step ahead in approving condo loans because they usually have these important documents on file and are familiar with them. A condo questionnaire may also be required. The budget, covenants, and condo questionnaire can determine whether a down payment of 25%, or more is required, or if conventional financing can be done at all.
Q: I just sold another property in another state. May I use those proceeds to purchase a beach property? Can I get a break on my taxes this way?
A: Yes! Be sure to ask us about the tax benefits of using funds from one sale to purchase another property. And you may be eligible to exercise a 1031 tax exchange, which enables you to defer some of the taxes you may owe on the gain created by the sale. Remember that everyone's tax situation is different, so be sure to discuss with your accountant. We have some basic literature to get you started. Give us a call and we can point you in the right direction.
1031 Exchange Musts
