By Harvey S. Jacobs March 20, 2010
My father, channeling both Mark Twain and Will Rogers, used to tell me, “Buy beachfront property — they’re not making any more of it.” For generations, that was pretty darn good advice.
Over the past 25 years, we saw modest oceanfront homes in places like Bethany Beach, Del., or Duck, N.C., once costing a few hundred thousand dollars, soar in value to many millions of dollars. Annual appreciation of 20 or 30 percent was common. Prices doubled every three or four years.
Traditional one-story, three- or four-bedroom beach cottages were leveled to make room for palatial eight-, 10- or even 12-bedroom mega-mansions that more accurately reflected the best and highest use for the now immensely valuable oceanfront sand upon which they were built.
Then the great real estate bubble burst and property of every variety and location suffered terrible declines in value. Beach property, often held by the most affluent, took far longer to feel the effects of the bust. But those effects are now certainly being felt. Property values all along the Delmarva Peninsula have declined by as much as 40 to 50 percent from their peak. The amount of time it takes to market, sell and settle a beach condo has also increased to nearly a year, according to Veronica Bishop, spokeswoman for the Coastal Association of Realtors, which tracks the Ocean City marketplace.
But in every catastrophe there is opportunity. For investors, second-home buyers or retirees who have been sitting on the sidelines for years, 2010 may be the time to dive into the beach market. Prices are now almost back to 2001 levels, and buyers previously priced out of this market may now be able to afford their dream home. In addition, the sheer inventory of available homes is quite favorable to a beach buyer.
But before taking the plunge, home buyers must heighten their level of due diligence. It is no longer acceptable to simply make a cursory home inspection and perhaps a pest inspection and then hope for the best. Today’s savvy buyer must also inspect the financial and legal integrity of their town and especially of their condo or homeowners association.
While this may sound a bit extreme, small towns and community associations are experiencing severe budget shortfalls. Cuts in services must be made — and they could affect that location’s desirability. For example, if a town had decided to close off portions of the beach to save on cleaning costs, or if it could no longer afford to hire lifeguards, a beach-home buyer would certainly want to know about it. Such quality- of-life decisions are made in public forums. Official minutes of meetings and printed budgets are all publicly available, often on the town’s Web site. A beach-home buyer should obtain and review these records before making the investment in a home.
A buyer also should consider inserting a clause in the purchase offer making it contingent upon the buyer’s receipt of and reasonable satisfaction with these public documents. Should this review reveal unacceptable financial or legal circumstances, the buyer should have the option to cancel the purchase offer and have his earnest money returned. Then neither party should have any further liability under that contract. Condominiums and common area associations are already legally required to make most of these disclosures.
Although beach-home prices may seem like a bargain now, the total cost of ownership and deferred maintenance must be factored into the overall buying decision. Total cost of ownership includes real property taxes, water and sewer charges, and insurance premiums, including for liability, casualty, hurricane and, if available, flood insurance.
In recent years, insurance premiums have become a much larger percentage of the total cost of ownership. For community associations, total cost of ownership also includes homeowner’s, condo or recreations fees and may include special assessments for maintenance, repair or replacement of common areas. Reserve accounts should be established to ensure that common area associations have sufficient funds on hand when major items such as roofs, elevators, parking lots, pools, tennis courts, decks or swimming pools require replacement, or the beach needs replenishment. Prudent planning and management of reserve accounts can avoid the need for unwelcome special assessments.
Under normal economic circumstances, these costs are apportioned among all the homeowners in the town, or among all the members of the condo or homeowners association. So long as all of the residents pay their taxes and fees, these towns or community associations have the wherewithal to maintain, repair and replace the amenities that make the beach such a wonderful place to relax.
However, in these dire economic times, more homeowners are walking away — or being forced away — from their financial obligations. As a result, beach towns and common area associations are feeling the pinch.
Because beach properties are subjected to harsh natural elements, items such as paint, caulk, weatherproofing, windows, doors, awnings, storm shutters, decking, siding and roofing, as well as exposed hardware such as hinges and locks, require almost constant maintenance. Owners must also be vigilant for signs of less-visible problems such as termites, mold or shifting sands and, if necessary, treat the problem immediately. All of these repairs cost money. With the number of foreclosures and other distress sales occurring, the money for this maintenance is often not available and this essential maintenance is simply not being done.
Now is the time to buy at the beach, but only after performing additional due diligence. That should include structural, pest and even environmental or geological inspections; review of budgets, financial statements (focusing on delinquent accounts), reserve accounts and even bond ratings by a certified public accountant; and a legal audit of meeting minutes and any litigation involving the town or common area association.
While there is never any guarantee that one’s beach investment will be a winner, undertaking this heightened level of scrutiny will increase the beach-home buyer’s chances of making a prudent investment that can be enjoyed for years to come.
Harvey S. Jacobs is a real estate lawyer with Jacobs & Associates Attorneys at Law in Rockville. He is an active real estate investor, developer, landlord, settlement attorney, lender and Realtor. This column is not legal advice and should not be acted upon without obtaining your own legal counsel. Contact Jacobs at (301) 417-4144, email@example.com or firstname.lastname@example.org.