An exploration of acquiring real estate outside the continental U.S.

Given the costly uncertainties of the domestic real estate market, buying a second home in desirable vacation areas within the United States has become nearly impossible for many. Increasingly, Americans are turning to more affordable regions overseas, some stay close-by in Mexico or Canada, while others are more adventurous, looking to parts of Central America, the Caribbean, and Pacific Islands. In Passport to Exotic Real Estate, real estate expert and travel writer Steve Bergsman offers detailed advice on the benefits and challenges of buying overseas property, including whether or not foreigners can legally own property, tax implications, availability of beachfront land, market trends, investment security, local regulations, and much more. With this book as their guide, readers will be fully prepared to overcome the obstacles of overseas property ownership and discover the benefits of living/vacationing abroad.

Steve Bergsman (Mesa, Arizona) is a real estate, financial, and travel writer with more than 20 years' experience. His news stories and travel articles have been published in more than 100 publications around the world and he has appeared on local and national radio and television. Bergsman is also the author of two previous real estate books, Maverick Real Estate Financing (978-0-471-74587-7) and Maverick Real Estate Investing (978-0-471-46879-0).

Passport to Exotic Real Estate

Buying U.S. And Foreign Property In Breath-Taking, Beautiful, Faraway Lands

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By Steve Bergsman

John Wiley & Sons

Copyright © 2008 Steve Bergsman
All right reserved.
ISBN: 978-0-470-17330-5

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Chapter One

AMERICAN HISTORY

THE EVOLUTION AND MIGRATION OF SECOND HOME INVESTMENTS

On a beautiful autumn day in the Valley of the Sun, the evocative name for the Phoenix metropolitan area, I drove the 20 miles from my house in Mesa to the Arizona Biltmore Resort & Spa in central Phoenix for a mortgage technology conference. Many of the people attending the conference had arrived from cold weather locations and for the two days in Arizona, they thought they were in paradise. I was coming to the conference to interview one of the presenters for a business magazine, but I stayed on through the handsome luncheon. When the folks at my table learned I was a local, they asked a few questions about the surrounding area, just in case they had time to do some local exploring.

I suppose because I was partial to the building, I gave them this small bit of introduction, telling them that if they just stepped out of the conference center and looked up at the top of the hill just in front of them, they would see a large white building. While it is now called the Mansion Club, it was originally a second home of chewing gum magnate, William Wrigley Jr. Actually, it was one of five Wrigley homes, but this one was built as a 50th wedding anniversary gift for Wrigley's wife, Ada.

Now this was a true second home, or vacation home, as defined by standards of American life from the mid-nineteenth century through the early part of the twentieth century. Whereas in Europe and elsewhere around the world, royalty of one sort or another generally boasted of other homes, either in the countryside or on the coast; in the United States, the great second homes were constructed by and for the emperors of business and their families. Thus arose Newport, Rhode Island, the greatest second home market in the United States during the Gilded Age (from 1865 to 1901), where the great financiers and industrialists built their summer mansions. Many of these can still be visited, such as The Breakers, a 70-room summer residence built by Cornelius Vanderbilt II, at a cost of a then wildly extravagant $7 million.

Newport wasn't the only famous colony for the wealthy. Between the middle of the 1800s and the start of World War I, Long Branch, New Jersey, attracted not only the rich, but the famous as well. Jay Gould, infamous stock manipulator and railroad magnate built four cottages in this coastal community, while George F. Baker, banking chieftain, constructed two. Also regular vacationers in Long Branch were two of the most famous actors of their time, Edwin Booth and Oliver Dowd Byron.

By the early twentieth century, a number of smaller second home markets for the less-than-incredibly wealthy began to develop in places such as Lake George, New York. Elsewhere, the American Southwest opened up to travelers and artistic types with the inclination to visit or live close to wide vistas of mountainous desert regions. Santa Fe and Taos, New Mexico, attracted the likes of everyone from writer D.H. Lawrence to artist Georgia O'Keefe, the latter of whom visited seasonally starting around 1930 before moving there as a permanent resident.

Nevertheless, because of two world wars and an economic depression sandwiched between, the business of second homes continued to be the business of industrial and financial barons through most of the twentieth century.

Phoenix, the capital of Arizona, was still a relatively small city (its population didn't exceed 50,000 until after World War II), but it, too, was beginning to attract seasonal visitors. The Biltmore, then simply the Arizona Biltmore Hotel, opened in February 1929. The Wrigley Mansion, originally known as La Colina Solana (sunny hill), was finished in 1931. It boasted 16,850 square feet of living space, 24 rooms, and 12 bathrooms. With all that, it was the smallest of the Wrigley homes and only used sparingly, maybe four to eight weeks of the year.

The area around the Wrigley home and Biltmore Hotel was sparsely populated and guests still felt the sense of nature, untamed desert, and Wild West. Today, the Mansion Club and Biltmore sit in the very heart of Phoenix, which by itself, boasts a population of more than 1 million.

Phoenix's astronomical growth really began after World War II, and the cities comprising the Valley of the Sun, including Scottsdale, Mesa, Tempe, Glendale, and a few others, all grew up together. With population expansion in the 1950s and 1960s, the first large wave of seasonal visitors started arriving, northerners who rented or built a wide variety of residential structures, from mobile homes to small, single-family residences. This was a market for the middle class from cold climates, including Canada.

Phoenix mirrored other warm weather locations, attracting a small, but growing number of middle-class families that came south for the sun and started buying homes to be used occasionally.

In the United States, second homes as a middle-class phenomenon was a post-World War II development, when a strong economy, a greater amount of excess family capital, entrepreneurial real estate development, and the creation of new roadways and airplane travel all helped redefine vacation travel.

Taking a peek at popular second home locations around the country, we find the middle class heading to Cape Cod beginning in the 1960s. As The Boston Globe noted, "During the 1960s, 1970s, and early 1980s, the Cape was a retreat for a middle class who could afford the modestly priced vacation homes being developed then."

Down in South Carolina, the development of Hilton Head Island really got started in 1956 when two things happened: The James F. Byrnes Bridge was constructed, opening the island to direct automobile traffic from the mainland; and Charles Fraser bought his father's interest in Hilton Head Company and began developing it into Sea Pines Plantation. By 1958, the first deed to a lot in Sea Pines was signed. Beachfronts initially sold for $5,350, but it didn't take long for demand and appreciation to set in; four years later beachfronts were selling for $9,600. Part of the reason for the bigger price tag was that the island's first golf course, Ocean Course, opened in 1959.

It wasn't only beach areas that began attracting the middle class for seasonal residency; skiing had just begun to catch on in the United States before World War II, but the war threw ski development plans into a hiatus. Finally, at the end of the 1940s, some of the country's major ski resorts began to take shape. As an example, the Aspen Skiing Corporation was founded in 1946, and the Aspen, Colorado, area very quickly caught on with skiers. Just 12 years later, the popularity of skiing was growing so quickly, Aspen opened two more ski areas, Buttermilk and Aspen Highlands. Expansion continued with the opening of Snowmass in 1969.

Vail, Aspen's big competitor for the high-end skier and cross-state rival, is a younger development. Construction on its ski resort didn't start until 1962 and the town itself wasn't incorporated until 1966. Interestingly, in 2006, the Vail Daily newspaper ran a story about the local residential market and it began by featuring Gary Lebo, the owner of a company called Alpenglow Property Management. A key point in Gary's career history was that he began in the 1970s by selling second homes.

The event that really put skiing on the map for most Americans was the Winter Olympics of 1960, which took place at Squaw Valley in the Lake Tahoe region, which sits on the border of California and Nevada in the Sierra Nevadas.

For the first half of the twentieth century, development around Lake Tahoe consisted of a few vacation homes, but the Olympics, and most importantly, completion of the interstate highway through the region in preparation for the Olympics, opened up Tahoe to development. Here's the telling statistic: Over the 20-year period from 1960 to 1980, the permanent resident population increased from 10,000 to 50,000, while the seasonal population jumped from 10,000 to 90,000.

When I moved to Mesa, a suburb of Phoenix, in 1976, there was already in my town a large swath of RV parks, residential developments, and over-55 communities that catered to the seasonal visitor. The word "snowbird," to connote residents of cold weather climes who traveled south for the winter months, was already used extensively. In my early years in Mesa, it used to amuse me to identify license plates from the various states of the union and provinces of Canada. At the end of my first year in Arizona, I had developed a theory that east of Chicago, snowbirds migrated to Florida, but from the Windy City west, they came to Arizona. (Mesa is the spring training home of the Chicago Cubs-an underappreciated rationale for second home selection is where the home baseball team goes for spring training.)

While the sunshine, beach, and ski second home markets for the middle class began to build in the 1960s, '70s, and '80s, it should be noted for as long as there has been a United States, there has always been a fairly low-end, niche market in this sector for hunters and fishermen, who often owned cabins, camps, lodges, or other rudimentary structures that were used almost exclusively for these outdoor activities. As William Faulkner wrote about the annual hunting trip in mythical Yoknapatawpha County in Go Down, Moses: "It had already begun on that day when he first wrote his age in two ciphers and his cousin McCaslin brought him for the first time to the camp, the big woods, to earn for himself the name and state of hunter provided he in his turn was humble and enduring enough."

This part of the market still exists; some of it has gone upscale, and depending on where the cabin is located, consistent appreciation has been a side benefit to the good hunt.

The 1990s

Consistent appreciation, a traditional hallmark of most second home markets, ended in the 1990s. Instead, the value of vacation homes began to accelerate dramatically. The reason for this was due to a confluence of factors: financial, economic, and demographic.

In 2004, I wrote one of the first major articles on the vast appreciation being experienced in second home venues for Barron's magazine. At the time, markets were peaking. Within a year, prices would begin to plateau, finally dropping into a slight decline by 2006.

My favorite location in the story was Nantucket, Massachusetts, which was, and still is, a playground for the corporate elite, the twenty-first century's equivalent of Newport in the Gilded Age. Before he moved his primary residence to the federal prison system, Dennis Kozlowski of Tyco International summered on Nantucket, rubbing shoulders with Lou Gerstner (IBM), Jack Welch (General Electric), Lawrence Bossidy (United Technologies), and many others. Gerstner had paid $12 million for 1.6 acres on Nantucket.

Well, when Corporate America wants in, that can only mean one thing: Prices are going to skyrocket and Nantucket experienced its own little bubble. Along the harbor, home values in Brant Point and Monomoy were appreciating at a sizzling 10 to 12 percent a month when I wrote my story. Even in the less ritzy mid-island section, homes values jumped about 40 percent annually.

The National Association of Realtors (NAR) first surveyed the second home market in 1989. At the time, it reported there were 288,000 sales of second homes in the country and the median price was $99,200. Ten years later, sales volume had risen to 377,000 and the median price jumped to $127,800.

By 2005, the NAR would report that 12.2 percent of all homes bought that year were vacation residences. Investment home sales were also very high, and the NAR lumped both categories together, reporting 3.34 million second home sales that year, up 16 percent from the year before. Separating out just vacation homes, sales were a record 1.02 million, up 16.9 percent from the previous year's 872,000 sales figure and a long way from 377,000 sales in 1999.

According to the Christian Science Monitor, the number of secondary residences steadily climbed in the last decade of the twentieth century, from 5.5 million in 1990 to 6.4 million in 2000, and by 2010, the newspaper predicts sales will reach 9.8 million.

The question is: Why was there so much sudden interest in second homes on the part of the American middle class? The answer begins with demographics. Like many post-World War II phenomena, this one is being driven by the 80 million strong baby boomers.

In the year 2000, the leading edge of baby boomers began to hit 55 years of age. This is not only the optimum time in life when people become interested in second homes, says David Lereah, chief economist of the NAR, but they are at the peak of their earnings. Indeed, at 55 years, some baby boomers in the upper middle-class range are already retired or planning to retire within five to seven years. Real estate is now a key feature in retirement planning, either because of the possibility of retirement in warmer environs or avoiding the cold winters by spending part of the year in those warmer places.

"Vacation home sales will remain strong for the foreseeable future given the fact that baby boomers are favorably positioned in terms of affordability, as well as being at the stage in life when people are most interested in making that kind of lifestyle purchase," says Lereah.

It's not only earnings power that is driving the second home decisions of the baby boomers but their inheritance potential as well. The parents of the baby boomers, who beginning in the 1950s overcame economic barriers to storm into the middle class or better, often amassed considerable assets, which they passed on to their children. As a means of diversifying their assets, financially astute baby boomers have used that inherited capital to invest in real estate, often the second home.

The single largest transfer of wealth in U.S. history is occurring with the baby boomer generation, notes David Hehman, president of EscapeHomes.com. "Baby boomers are inheriting a lot of money from their parents. They are prioritizing their lifestyle and recreational interests and what follows is a second home purchase."

The baby boomers have been lucky in regard to the second home markets because both government-induced and free market turns have been in their favor.

The first boom for the second home market occurred in 1997 when tax law changes allowed most sellers to exclude up to $500,000 in capital gains from taxation (for a couple who lived in a home for two out of the five previous years). The tax change allowed people to make decisions based on needs and desires rather than simply trying to avoid a tax hit. Under the old law, the incentive was to always buy a more expensive home to avoid a tax penalty. Now people could trade down to a smaller, luxury condo and then go out and purchase a second home.

The second boom occurred after the year 2000, when the Alan Greenspan-led Federal Reserve pursued a low interest rate policy, with the rates falling to as low as 1 percent for federal funds in 2003, which was a benchmark not seen since the Eisenhower administration in the 1950s.

With a recession on the horizon following the collapse of the stock market at the close the of previous decade, Greenspan quickly pushed for lower interest rates. By 2001, the effect on just one sector of the economy, housing, was like a lightning bolt. The low interest rates gave (by keeping monthly payments down) first-time home buyers entry into the market, induced many existing homeowners to trade up to bigger homes, and made the acquisition of a second home a possibility. By 2001, newspapers such as USA Today, were reporting that the low rates stoked the housing market so strongly, they kept the nation out of a recession.

(Continues...)

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Excerpted from Passport to Exotic Real Estate by Steve Bergsman Copyright © 2008 by Steve Bergsman. Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

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STEVE BERGSMAN is a real estate, financial, and travel writer with more than twenty years' experience and visitations to 125 countries. His news stories and travel articles have been published in more than 100 publications around the world, and he has appeared on local and national radio and television. Bergsman is also the author of two previous real estate books, Maverick Real Estate Financing and Maverick Real Estate Investing, both published by Wiley.