Our expert tells you what you must know before buying at the beach.

By Amanda Gengler
May 01, 2011
Choose a sunny shade for your home’s exterior and you’ll feel warm rays even after the fog sets in.
Sara Gray

With home prices down as much as 50 percent in some coastal cities, this may be the best time to snag a vacation house, but plunging prices might have you worried about dumping money into real estate. Ask yourself:

1. Why Do I Want to Buy?
The answer should not be merely that houses are so inexpensive. Anyone purchasing a vacation home today should do so not for investment purposes, but because they plan to use it as a getaway. If that’s the case, make sure you have realistic expectations about when and how often you’ll use it. Will kids’ sports and other activities really allow you to get away that frequently? Or, if you’re planning to retire there, have you visited during the ofl-season?

2. What if prices dip further?
It is safe to say that the biggest drop of the price plunge is over. Yet the nation’s median home value is still forecasted to fall an average of 5 percent over the next year, and more than twice that amount in hard-hit areas such as Miami. So what looks like a bargain today may not turn out to be one a year from now, warns housing economist and consultant Thomas Lawler. (Go to cnnmoney.com/housingforecast for the outlook in your area.) Buy only if you plan to hold on to the home for at least five to seven years.

3. Can I Pay Cash or Get Financing?
Today, about 30 percent of secondhome sales are all-cash. Paying with greenbacks increases your chance of scoring a deal—sellers generally prefer it, sometimes even if the cash bid is lower than the others, because financed deals can drag on or fall through. For a mortgage in today’s environment, you’ll need 20 percent down, and total costs for your primary and vacation homes should eat up no more than 33 percent of your monthly gross income, says Keith Gumbinger of mortgage publishing firm HSH Associates. Considering a condo? You’ll likely face even tougher guidelines. Consult a mortgage lender before you house hunt.

4. Do I Know My True Costs?
In some vacation areas, home insurance runs up to four times as much as that of your primary home. You’re there less often (meaning you’re at potentially greater risk for theft or damage), and many vacation homes are in flood- or hurricane-prone areas, so get a quote from an insurer before you bid. Similarly, property taxes vary greatly by state, so consult a tax expert. Finally, some condo and homeowner association fees are spiking because fewer owners are paying up, particularly in distressed areas. So ask a real estate agent what to expect in fees, and the likelihood of costs rising.

5. Is the Home Affordable With No Rental Income?
Buyers tend to be overly optimistic about how much they’ll earn from renting the home to other vacationers. To play it ultra safe, aim to cover the costs of a house with your own funds. Think of any rental income as icing on the cake.