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Sunday, September 7, 2014

Vacation House for Free - Not Available in Key West!

I watched an episode of Vacation House for Free on HGTV yesterday afternoon. It was filmed at Marco Island, Florida earlier this year.  I was immediately skeptical of the show's premise because there are very few things in life that are free. I had never seen the show's host Matt Blashaw before so I knew nothing about him. Even with my preconceived skepticism, I was immediately taken by Matt's good looks, exuberance, and charm.

As I watched I said to myself this guy is doing kinda what I do in my blog when I write about what a potential buyer could do if he or she bought a fixer in Key West. Matt offered the buyer his concept of how the property could be renovated and presented a budget to complete the renovation. Matt told us the acquisition cost and construction budget which it seemed to me to be the total cost the buyer would pay. However, the budget  did not include cost of furnishing the house.

As the show progressed I came to understand that one of the houses would actually get fixed up during the hour program. The buyers selected what looked like a 1960s or 1970s vintage home on a golf course. Since the selected house had a slimy pool and some interior mold, I suspect the house was bank owned. The buyer got the property at a good price - a price you could never get in Key West.  As construction began old aluminum wiring was found which necessitated rewiring the house. (Not sure if the buyer or HGTV paid the tab for that unexpected problem.)  Matt's crew demolished and rebuilt the kitchen, updated the baths, painted the inside and exterior, and created a new front entry. The crew resurfaced the pool and deck, replaced an outdated spa with a new one, added a fire pit, and captured moved the fence to the rear lot line which dramatically enhanced the back yard. I think the design and execution on the inside and outside was spot on. Matt and his crew did a remarkable renovation.

But I have a problem with the program as a whole because of the show's premise that a buyer can purchase a fixer, do some renovations, and simply rent the property for 16 weeks a year after which will pay the annual mortgage and that the new owner will own a vacation house for free.  The show's website states:
 Matt Blashaw realizes couples' wishes to own a vacation home mortgage free. The secret? He helps them shop for and renovate a "diamond in the rough" home in their dream location to command top dollar as a vacation rental. The end result? The couple rents out the renovated home for maximum income part of the year, covering all their annual expenses. For the rest of the year they live in a Vacation House for Free!


It does not work that way  - at least it does not work that way in Key West. And here is why.

First, our housing prices for "fixers" are very high.  If you have read my blog for a few months, you will recognize the best areas to own a vacation rental house is Old Town, but not just any street in Old Town. Renters can be particular. Many may shy away or downright avoid locations with views of the cemetery or on busy streets like Eaton, Truman, Simonton, White,  or Whitehead.  Some people will avoid areas like Bahama Village, the Meadows, and even Casa Marina because they are not close enough to Duval Street or for other reasons.  It seems even in Old Town, proximity to Duval Street makes any property more appealing than a property that requires a long walk or a bike ride. That locational aversion may make some outlying properties less easy to sell as a potential vacation rental but it does not result in a similar price reduction. A typical "fixer" may cost more than $500,000 for starters. Renovations may cost an additional $250,000 or so. And it may take a year to get the project completed. If my estimate is correct, a new owner would have to add one year of no income but lots of money going out as the fixer gets fixed.

When looking at houses that they might want to rent as a vacation rental to put themselves in the shoes of the potential renter. I remind them some people save all year to have there annual one or two week vacation in Key West. I ask them to view the house and location the way a new renter would. A happy renter will come back year after year. An unhappy renter will let the world know about his experience on Trip Advisor.
Second, construction costs in Key West are very high.  I try to persuade buyers to look at  houses that meet their needs rather than take on a construction project. Getting a house renovated in Key West costs more money than it does up north in America. While you may be able to buy a Kenmore refrigerator for the same price in Peoria, I'll bet that you will pay more for an Anderson window, TREX decking, or a common nail in Key West. The merchants of Key West will tell you it costs more money to bring supplies down here.  It does. But once those big trucks are filled, the incremental cost is negligible. The fact is the companies can charge more for their wares and they get it.  Labor costs are very expensive here.  Many general contractors and architects are now quoting $300 to $400 per sq ft in renovation costs which is bare bones. Upgrades are always priced higher.  
Third, I listened for but did not hear Matt Blashaw discuss "insurance", "taxes", or property management, or operational costs.  All that I heard him say was "mortgage expense".  Now if the buyers' mortgage includes taxes and insurance, the better for that buyer.  Readers of my blog know that insurance costs in Key West usually include separate policies for wind insurance and often for flood insurance. These costs can be significant depending on the age, location, and condition of the property being purchased. Fixers in Key West are less likely to be located in the X Zone for flood insurance purposes and probably do not have new roofs, straps, and Dade County approved storm shutters which would provide mitigation credits to reduce the annual wind storm insurance costs. As a result, sometimes some buyers get big surprises when they learn how much it costs to insure event the simplest of structures.

Beyond insurance is the cost of putting heads in beds.  A new owner has to buy furniture and furnishings to outfit the new vacation rental. Those costs include dishes, linens, tvs, art, etc. Furniture from the old rumpus room may not exactly work in a Key West vacation rental.  (I had one buyer who was confident his mahogany dining room set would fit right in to the condo he planned on renting.)

But the real cost not mentioned by Matt Blashaw is property management. I listened for him to discuss property management. I am confident I did not hear him utter those words or anything like the concept. How does a new owner get their new house or condo rented?  Well, you could try VRBO or some similar site. You'd need to find someone to check-in and check-out the guests, clean the house, take care of problems, clean the pool, maintain the yard, etcetera.  More likely you would engage a property management company to do that service for you. Most companies charge about 20% as the management fee. But not all companies provide the same services for that fee. I sold a house to one man who called me up so mad I could see the steam rising through his hair. He signed a property management agreement with a company that charged him $25 to take the green trash can to the street and another $25 to return it to its storage place. The same company charged $25 to check-in a guest and $25 to check the guest out. The buyer found out there were a lot of miscellaneous fees that this company charged that he had not expected.  Not all companies do this. Read and question before you sign a property management contract. It might end up like buying a used car.

And that is why I think the premise of Vacation House for Free is faulty - at least in Key West. Once the house is renovated and furnished, the new owner has to put heads in beds. I think the real number potential vacation rental owners ought to consider is around 40% which will probably include all utilities, pool service, yard service, credit card and bank fees, housekeeping, supplies, repairs, maintenance, bookkeeping, and so forth. If Matt Blashaw included those real costs in his program, buyers would at least have a better sense of what they are getting themselves into.

There is no such thing as a free lunch and I really doubt there is any property anywhere that approaches being a vacation home for free. I wish it were so. My job would be so much easier.







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