Real Estate

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Smack-dab in the middle of the state’s tired economic garden, the second-home real estate market flourishes. Quietly, steadily, it has grown into something rather splendiferous, its lushness fed, ironically, by the selfsame things — downturn, a slumping stock market and worries about terrorism and war — that have caused so many other sectors to wilt.

The desire for more stable investments, family retreats and a familiar place in retirement has meant that “the second-home markets in North Carolina have been surprisingly strong and vibrant through this recession,” says Paul Wilms, director of government affairs for the North Carolina Home Builders Association.

Just how strong? Consider existing home sales. Statistics compiled by the North Carolina Association of Realtors show that total sales dollars for 2002 were up 11 percent to more than $14.6 billion. Resort communities across the state led the growth, with Brunswick County posting the largest percentage increase (58 percent), followed by Wilmington, Asheville and Haywood County.

“The numbers are directly attributable to the second-home market,” says Tim Kent, the association’s executive vice president. He continues: “Really remarkable is what has happened on the Outer Banks. Last year, existing home sales were up only three percent, but the average price of a home appreciated by 35 percent (between 2001 and 2002).”

Certainly, second homes can be found in every state and region. However, those properties in or near resort areas or close to a body of water, seaside or lakeshore, are special beehives of second-home activity. This goes a long way in explaining why North Carolina, with its moderate climate, numerous waterways, mountains and year-round golfing communities, has landed in the national top tier of second-home markets. According to the National Association of Realtors, the Tar Heel state is now the fifth most popular — after Florida, Wisconsin, California and Michigan — for second-home purchases.

And why not? If awakening to breathtaking mountain views are your idea of the good life, upscale country club developments such as Mountain Air in Burnsville and Elk River in Banner Elk can satisfy the craving. If the serene sounds of the Atlantic Ocean stir your insides, there’s the tranquility of the Outer Banks or Sunset Beach.


Baby Boom Buyers

Kent says that people on the uppermost end of the baby boom generation are contributing greatly to the health of the second-home market. In the past, the quintessential second-home owner was 61 years old with a household income of $76,900. But over the past two years the profile has shifted to the point that now the typical owner is 56 and has an annual income of $92,000.

“When it comes to motivations for (second-home) ownership, there are four main factors in play,” Kent explains. “Record low interest rates help make financing affordable. Given the performance of the stock market, there’s a desire to diversify investment portfolio by switching some equity into more tangible assets like real estate. Baby boomers are reaching retirement age and looking at second homes as places where they want to retire, an investment that will help them when they retire, or both. And finally, as a result of 9/11, putting money into exotic overseas vacations aren’t as appealing as putting money into a second-home in a safe place that’s within driving distance of a primary residence.”

In fact, 42 percent of second-home owners choose a second home located in the state where they live. Former state senator Clark Plexico and his family make it a point to visit their commodious Bald Head Island condo every third weekend or so during the winter, fall and spring, and for two weeks in the summer. A decades-long search for such a home, initiated when Plexico lived overseas and ran an international real estate business, finally ended about five years ago. That’s when the self-described “good ol’ Southern boy” who grew up in the foothills town of Valdese found just the place to hang his other hat.

The appeals of the car-free island were many. “It was in North Carolina, within reasonable proximity to Raleigh, where we now live, and it’s attractive, clean, safe and quiet . . . very laid back,” says Plexico, president of Clark Plexico Consulting Inc. Not insignificantly, it also was the first place he and his wife Debby both liked instantly. Their instincts told them that a second home here “would be a place our children and extended family would want to come to, a place where we could create memories.”

They were right. Four kayaks and a canoe are always at the ready at the condo, which overlooks marshland and a creek. They fish. They bicycle. The ocean is nearby should they choose to swim. Golf courses, restaurants and other amenities are also available.

Although not intended as an investment property per se, Plexico, who turns 55 in December, will say that the family’s home away from home “has increased substantially in value in a very short period of time.” Further, rental income received during the vacation season helps to balance the costs associated with living on a private island.

No price can be put on the peace of mind and family time that comes from spending time at the second home, he adds. “In today’s world, where so many families get so spread out, a second home can serve as the old family homestead. It’s a place where everybody can come together for a while.”

It is important, however, to remember that “the second-home market in North Carolina is a national market, not just a local phenomenon,” cautions Bernard Helm, president of Rocky Mount-based Market Opportunity Research Enterprises (MORE), which tracks residential housing trends.

Case in point: Neil and Joanne Webster. He’s 55 and devoted a career to traffic logistics management, she’s 51 and works in the hospitality industry as a human resources manager. The couple, originally from the Philadelphia area, wanted to head South for good and “give up winter.” So three years ago, after a decade of planning and searching for a state that offered the right mix of weather, jobs, real estate values, recreational activities and retirement opportunities, they relocated to Matthews, just outside Charlotte. Immediately prior to the move, they purchased property in Brunswick County.

Since then the configuration of their real estate has changed somewhat (today they own a spacious two-bedroom condominium at Sea Trail, a planned community in the town of Sunset Beach, as well as a single family homesite in Ocean Ridge Plantation, another golf community nearby), but their motivation remains the same: “It’s absolutely about being able to spend time in a beautiful area, a quality area that will appreciate in value,” says Neil.

The condo, which the pair visits about four times annually for weeklong periods of relaxation, is rented for the rest of the year. Rental income has offset a portion of their carrying costs; however, the Websters have realized some tax benefits as a result of owning the second home. As for the land in Ocean Isle Beach, purchased for $75,000 three and a half years ago, its value has risen to $125,000. Given that their daughter, son-in-law and grandchild are living in Colorado, Neil and Joanne are not sure whether they will go through with plans to build a home on the site once they retire in five or six years, if not sooner. It could be they end up selling the property and living in the Sea Trail condo for half the year and in Colorado the other half.

The point is, says Neil, being second-home owners has given them options and a sure stake in a place that’s clean, green and serene. “If we had waited until we retired to buy the vacation home and the land we couldn’t have afforded it. This way we bridged the transition between our working years and our retirement years,” he adds.


Rentals Rev the Economy

While the Webster’s situation illustrates one common motivation for second-home ownership, 74-year old Robert Jenkins’s circumstances prove the other: If purchased solely as investments, second homes are rarely if ever used by the owners. Back in 1996, Jenkins, a retired mechanical engineer from Maryland, was visiting Myrtle Beach with his wife Eva. They happened upon Ocean Ridge Plantation just north of the South Carolina state line, took a tour, talked at length with the developer, and left impressed with the investment potential in Brunswick County.

Ultimately, the Jenkins and one of their four children, Randall, who also lives in Maryland, bought for $219,000 a three-bedroom home located on the eighth fairway of one of Ocean Ridge Plantation’s three golf courses. Since then, Eva has passed away and Bob has no plans to move to North Carolina. Indeed, neither he nor his son has even vacationed in the house, which for the most part is leased to people waiting for their own homes to be built. However, he and Randall visit it for maintenance purposes. And now not only is it beginning to turn a profit as a rental property, it has appreciated by more than 40 percent in seven years.

Of course, many of the qualities that attract second-home owners to an area — beauty, solitude, ease of living, abundant recreation — are the same things that are put at risk by an influx of people. Thus the slow-growth/no-growth debates and worries about adequate infrastructure and harm to ecosystems. All well and good, acknowledges Ray Nissen, executive vice president of the Moore County Home Builders Association, so long as what doesn’t get lost in the discussions is the “fact that in many, many instances it’s the home building and home selling industries driving the economy.”

Richard Hess, general sales manager for Sun Realty on the Outer Banks and president of the Outer Banks Association of Realtors, agrees. “If there are problems in areas that attract large numbers of second-home buyers, then address the problems specifically, but be careful about cooking the goose that lays the golden eggs.”

Richard’s wife, Linda Hess, a broker with Sun Realty and president of the North Carolina Vacation Rental Managers Association, notes that on the state’s barrier islands “real estate in one form or another is the biggest thing going.” Here’s what she means: “In Dare County (where the average price of a home is $349,000), the year-round population is about 30,000, but in any given week during the summer the population is more like 300,000.” All those people, vast numbers of whom hail from Virginia and points north, have to stay somewhere. In 2002, gross receipts from vacation rental units, many of which are second-homes, totaled $168.9 million. Of the taxes on that amount, five percent went to the county and seven percent to the state.

It’s the same farther south in the greater Wilmington area. In Wrightsville Beach, Carolina Beach, Kure Beach, Figure Eight Island and Topsail Island, where the houses range from modest cottages to “McMansions,” it’s the year-round owners who are the minority and the second-home homers comprising the majority, says Donna Girardot, executive officer of the Wilmington-Cape Fear Home Builders Association.

Whether a second home is newly constructed or a resale depends on the available land. In Wrightsville Beach, for instance, land is scarce so many more existing homes change hands, whereas in Topsail and also Kure Beach there’s still room for new construction. What holds true everywhere in this area is that the majority of owners come from in-state (in many cases the Triangle), and because they consider the homes rental property as well as private family retreats, the need for vacation rental managers is growing.

“In New Hanover County alone, a little over 40 percent of all collected occupancy taxes now comes from such rental units,” says Girardot, who’s also the CEO of the Business Alliance for a Sound Economy, which provides legislative services for the real estate and building industries in southeastern North Carolina.


Second Home Values Soar

The complexion of the second-home market in the golf saturated Sandhills is as different from the coastal communities as the landscape. The pace of real estate transactions is more measured; there’s very little renting. People tend to purchase land and build on it, or acquire an existing home, with solid plans to make their second home their primary residence after retirement.

“About 15 percent of our new home market is vacation or second homes. Most often, people who are contemplating retirement, or are already semi-retired, decide to go ahead and build before prices get any higher. And because they’re going to live out their lives here, they want to live comfortably, they want ready amenities in a secure environment,” says Nissen of the Moore County Home Builders, who himself moved to Foxfire Village 20 years ago after retiring as a vice president at Marshall University in West Virginia.

Martha Gentry, a realtor who with her husband, Peyton, co-owns Re/Max Prime Properties in Pinehurst, agrees that second-home owners in Moore County tend to get emotionally attached to their houses and are not of a mind to have others living in them when they can’t be present. It’s not uncommon, she says, for people in their early to mid-50s to start weaning themselves from full-time work by buying a second home and living in it up to six months a year.

Over the last two years Gentry has noticed that there’s another group helping to fuel the second-home market in Moore County, where the average cost of an existing single family home is $210,000. Younger, affluent professionals have been coming from the Triangle and the Triad in search of condos or small single-family homes for weekend getaways.

It’s because nobody really needs a second place to live that second homes represent the ultimate discretionary market. And that vacation-home market encompasses a wide variety of dwellings, half of which, estimates the National Association of Realtors, are located in rural areas. Warning: A rural location doesn’t necessarily mean second homes will be inexpensive or even affordable, using the commonly accepted definition. Take Tim Robinson’s word for it.

“It’s gotten crazy,” declares Robinson, president of the Transylvania County Home Builders Association. As head of a company called Homeworks, a Pisgah Forest-based concern specializing in remodeling and renovations of existing homes, he’s had the opportunity to view close-up the scramble for upper end second homes in places where saleable land is extremely limited. For example, in scenic Lake Toxaway, where for decades the affluent have come to play some 3,000 feet above sea level, the renovation of summer “cabins” can run upwards of half a million dollars. What were $500,000 homes now sell for $1 million; owners use them about eight weeks a year and then may opt to rent them out.

“About two years ago,” recalls Robinson, “a fellow bought a house of $1.2 million. Had it remodeled to the point it was worth $2.1 million, and then eight months after the work was finished he sold it for $3.2 million. It wasn’t that he had planned to sell; it was just that the offer was too good to refuse.” 

Kent Smith, project director for the new Cliffs at Walnut Cove in Asheville, trusts that the only master-planned, gated, golf course community in western North Carolina’s largest city will also prove impossible to refuse.

In many respects, the Cliffs’ target audience is much like that flocking to Lake Toxaway and environs: Middle-class baby boomers — people ages 37 to 56 — in their peak earning years, who may have inherited wealth from parents, who are ready to use the hefty equity they’ve built up in one or more homes, and who want a relaxed yet cultured lifestyle in a mild climate.

Smith and Jim Anthony, president and CEO of The Cliffs Communities, envision the day when second-home owners (no rent outs allowed) join the year-round residents who will live on the 1,000-acre property, which when built out will feature seven golf courses, hiking and biking trails, swimming and tennis facilities, sports therapists and masseuses.

“When you get down to it, the second-home market is all about fulfilling a fantasy,” says Bernard Helm of MORE. “A primary residence comes with a set of criteria which you may or may not like. But a second home is optional — it’s about coming as close as you can to an ideal. A lot of people believe they can find their ideal place in this part of the country. It’s what keeps the market alive.”





In 2001, nearly six percent of all homes purchased in the United States were second homes, according to the National Association of Realtors, whose study of this sector began in 1989.

Recent data from the U.S. Bureau of the Census shows there was a total of 3.6 million seasonal homes in the third quarter of 2002 — up from 3.1 million in 1990 and an increase from 1.7 million in 1980. Other Census data show there are 9.2 million homes held by owners in addition to their primary residences.

The increase in second-home sales coincides with tax law changes, effective in 1997, which allow most sellers to exclude up to $500,000 in capital gains from taxation. In essence, this has done away with the capital gains tax penalty for most buyers wishing to trade down to a smaller primary residence, and also use some of their equity to purchase a second home.

For tax purposes, the definition of a second home is surprisingly broad. A second home is any home other than your main home, and can be a house, condominium, cooperative, mobile home, house trailer, or boat that has sleeping, cooking and toilet facilities. Even a recreational vehicle can qualify as a second home. If you own more than two homes, you must choose which home other than your main home to treat as the second home. However, you do not have to choose the same home each year.

Nearly 78 percent of second homes are vacation homes as opposed to investment homes or land, and over half of all second-home owners think of their second home as a family retreat.

A second home’s mortgage interest and property taxes are deductible. In general, if a place is rented fewer than 15 days a year, rental income is not reported to the Internal Revenue Service. After the 15-day limit, though, the rules get complicated as tax treatment depends on the mix of rental and personal use. Seek tax advice. -- Lisa Towle