The beach bounces back Resort real estate is riding a rising tide of demand

THE BALTIMORE SUN

The boom that became a bust is now apparently popping again.

Have any doubts, just listen to Mark Fritschle, who has been selling resort real estate for 24 years.

"I've never seen it like this," said Fritschle, of Keller Williams Resort Realty in Ocean City, who is president of the Coastal Association of Realtors.

"There seems to be security in the beach market," he said. "The city has proven it is a year-round town, the convention center, a forward-looking city council, people taking money out of the stock market." All of that, Fritschle said, is making for the best beach market in years.

Memorial Day weekend marks the start of another seasonal rite of passage with thousands of families throughout the region heading toward a thin ribbon of beach, bays and rivers stretching northward from Assateague Island into Delaware.

Ocean City. Bethany. Rehoboth. Lewes. They all seem to have their own faithful following of vacationers.

For many, it's a quick day-trip or weekend getaway, for others, a long-awaited vacation measured in weeks or even months.

And every year, it seems, there are some for whom the lure of the beach grows a little stronger. Individuals who find themselves dreaming how great it would be to own a second home close to the beach and wondering if it is financially feasible.

Most leave their dreams on the beach or fairway or fishing boat, but a surprising number realize their goal. And this vacation season, it seems that more people are taking a look at buying.

Market observers said 1997 produced double-digit sales increases in many brokerage offices, but the 1998 market is off to a sizzling start.

"It certainly rivals '81, '82, '83 -- those years when we had all that stuff propping up the market the savings and loan money was out there and really good tax benefits," said Peter Copenhaver, Delaware regional manager for O'Conor, Piper & Flynn-ERA and president of the 700-member Sussex County (Del.) Association of Realtors.

'It sure feels good'

"I would say it is a very good market. Is it as good as that one? I don't know. But it sure feels good."

For example, O'Conor, Piper & Flynn-ERA reported that for the first quarter of 1997 it recorded $82 million in sales volume in the Ocean City and Ocean Pines resort areas. For the same period this year, the volume jumped to $111 million, up 35 percent.

Further, as inventory continues to drop in the face of strong demand, properties seem poised for some of the most positive appreciation experienced in more than a decade -- more reassuring news to buyer and seller alike.

"It has been a long time since we have been in a seller's market, but I sense we are headed in that direction if we are not there already," Copenhaver said.

He said the average price of a two-bedroom, two-bath in the Golden Sands high-rise on 109th Street in Ocean City was $135,500 in 1996. In 1997 it rose to $142,900 and this year has jumped to $155,000.

"I can't say to you that we have strong inventory in any category. We need listings," said Copenhaver, who has been selling resort real estate for 17 years. "And if a buyer is coming down and they find a property that they like, they should buy it, because it will be sold in the market that we are currently enjoying."

It wasn't always this good. A decade ago a combination of factors -- including the tax reform act of 1986 and the fallout from the savings and loan crises -- produced economic uncertainty, depressed coastal real estate values and a burgeoning inventory of unsold properties.

But the market, say knowledgeable observers, bottomed out in 1990 and the next year found buyers returning to the market in greater numbers, inventory levels beginning a downward trend and prices stabilizing.

"Our market has steadily gained since 1991," said Fritschle. "That doesn't mean prices are going up like they were in the 1980s, but demand certainly has caught up with supply from both a sales and rental standpoint."

Are boom times back?

Hal Glick, a broker and principal in the Ocean City-based firm of Moore Warfield Glick, quietly ticks off a number of reasons why his firm posted a 37 percent sales increase last year and expects to do even better in 1998.

They include very favorable interest rates for buyers, continuing consumer confidence, stock market gains that are being cashed in and spent on resort real estate, the beneficial effect (for both buyers and sellers) of recent tax changes, and mild weather that has produced a steady stream of prospective buyers. Other Realtors are quick to elaborate.

The recently lowered capital gains tax has freed up dollars of first-time buyers, particularly the baby boomers who increasingly have paid for first homes, educated their children and are ready for the benefits of a vacation home.

Owners of existing beach properties are trading up with confidence from bayside apartments and smaller oceanside condos to larger units or ones closer to the oceanfront.

Soon-to-be-retirees are increasingly purchasing second homes in the area in anticipation of a permanent future relocation, or, like Martin and Mary Louise Mahon, are trading in a city lifestyle after retirement and moving to the beach. Comfortably ensconced in an oceanfront condominium at the Pyramid in Ocean City, the Mahons are among many retirees residing full time in Ocean City, Ocean Pines and other resort areas.

"Right now, we have qualified buyers in the market and sellers are in a position -- if they price their property right -- to obtain several offers," Copenhaver said. "We just don't see any negatives on the horizon."

"Demand is up," he added, "from inlet to inlet, oceanfront to bayside."

Where are the buyers coming from?

Geographically, most come from within a 185-mile radius -- less than a tank of gas away. Marylanders and Pennsylvanians tend to gravitate toward Ocean City and the surrounding in-state resort area; residents of New Jersey and the Washington-Northern Virginia area seem a bit more inclined to ,, vacation in Delaware.

"People who might have by-passed Ocean City years ago to drive down Interstate 95 to Myrtle Beach [S.C.] are finding oceanfront and bayside prices very affordable here," said Fritschle.

Unlike some hard-core investors who controlled multiple properties before the 1986 tax changes that narrowed deductions, today's buyers are in the market for pleasure as well as future profit.

"There are a lot of different people coming here for different reasons," said Bill Warrington, a broker in Moore Warfield Glick's office in Bethany Beach, Del. "But the overriding reason is that people have more leisure time today and they are finding more here than ever before -- golf, fishing, boating, entertainment and fine dining and, of course, always the beach."

They are also finding a diverse housing stock from condominium units to multifamily and single-family homes; mobile homes to manufactured housing -- even a houseboat or two for those who look hard enough.

Still, while the appeal of golf, fishing, boating and other year-round recreational activities finds many buyers opting for the less hectic -- and sometimes less expensive -- living style found away from the oceanfront, the beach remains the thing.

"Oceanfront properties always kind of lead the parade," Glick said.

Glick's observation underscores a key point -- many property owners at the beach are individuals who get into the market by buying something in a low-price range, rent to offset expenses and limit out-of-pocket costs, build income and equity, and trade up.

Often, trading some personal use for rental income means being able to buy closer to the beach, buying something that offers desired amenities, or a bit more budgetary freedom.

Rising rental income

Copenhaver of OPF-ERA gave an example showing the gross income rental a particular three-bedroom, two-bathroom oceanfront home in South Bethany could command. He said in 1996 that home would generate $14,100; the next year, $18,900; and this summer season the same home has been booked for $22,500. "Pretty nice increases in rental income opportunity," he said.

"If you put enough down, you can find a property that will have enough cash flow," Copenhaver said. "It just depends on the individual and what they want out of the property. There are some people that will come down and put enough down to where the rental will cover everything.

"There are some people who come down who say they want to rent it, but then they will hold back eight weeks. They are not going to get as much rental income as the person who doesn't, obviously; that is their choice. They are enjoying their property differently than someone who is renting their property every single week.

Owning a beach property can bring some significant tax breaks from Uncle Sam.

Owners who rent are able to not only take mortgage interest and real estate tax deductions, but also can depreciate their home (less value attributed to the land the property sits on) and deduct the cost of repairs, maintenance, utilities, insurance, management fees, etc., from their income -- even mileage for trips to the beach when the purpose is management or maintenance-related.

Many such owners rely on property rentals to offset a significant portion, sometimes all, of the annual costs associated with owning a property. Doing so, however, as one property owner said, is sort of like making that proverbial bargain with the devil.

In other words, if someone wants to take full advantage of the law, the IRS restricts their personal use of the property to a maximum of 14 days per year, not including time spent in the property on maintenance and repairs.

Most resort property owners who rent find that burden onerous. They settle instead for renting their property part of the time but also use it for personal pleasure more than 14 days a year. Here the IRS rules become a bit more sticky, but with the help of an accountant, most are able to take advantage of an IRS vacation home category that permits owners to pro-rate allowable expense deductions on the basis of a formula that factors in days rented and days used (over the allowable 14) for personal purposes.

Those who buy a second home and maintain it for personal use will generally find their tax deductions are restricted to mortgage interest and real estate taxes.

The big plus for them, of course, is knowing that the place is theirs and theirs alone, to use as they please and when they please.

In what may seem a radical break from its tight-fisted image, the IRS also gives such owners one additional break, allowing them to rent their home for up to two weeks each year and not report the income -- a gift that can mean several thousand dollars of untaxed income for new furnishings, a mortgage payment, etc.

But the granddaddy of them all, in terms of tax and financial planning, is an IRS proviso -- fittingly provided under the so-called Taxpayer's Relief Act of 1997 -- which allows property owners to avoid paying capital gains tax on profit up to $500,000 ($250,00 for a single person) from the sale of a second home used as a principal residence for periods aggregating two years in any five years prior to its sale.

Nor do sellers meeting the law's requirements have to roll over the profits into the purchase of another piece of real estate to avoid taxes. "The way the law reads presently is great," says Edwin A. Rommell III, of the Salisbury-based public accounting firm of Twilley, Rommel & Moore.

For example, a person could reap thousands of dollars by selling his permanent residence, moving into his vacation home and establishing two years of residence, and then selling that property. In that way, he is avoiding capital gains taxes on both properties.

And Realtors are saying that strategy is becoming more commonplace. Certainly there is little doubt that such tax incentives and other economic factors are contributing to the present surge in coastal real estate sales, particularly at the higher end of the market.

Copenhaver noted that a high-end development called the Retreat in North Bethany, which began selling beachfront lots in 1996, has seen brisk sales and rapid appreciation.

Of 16 unimproved lots available for public sale, the least expensive sold in 1996 for $625,000, and with each successive sale the developers raised the price, with the most expensive going for $895,000. Ten of the 16 have sold.

In fact, Lauren Alberti, the OPF-ERA agent for the development, told of a Florida buyer who desired a beachfront lot when none was available in the Retreat. Alberti said she was told by the

buyer to find someone who might want to sell. Alberti did, getting the person who bought a beachfront lot for $725,000 in July 1997 to resell it for $1.2 million in November.

Dollars and sense

Here is an example of a three-bedroom high-rise condominium in Ocean City and what it would cost to buy and what kind of rental income it would produce.

Purchase price, $215,000

Down payment, $43,000 (20 percent)

Amount to be financed, $172,000

Interest rate, 7.25%

Points, 0

Closing costs, $4,300

Cash needed for settlement, $47,300

Income

Summer rental, $27,000

Expenses .................... Monthly ..... Yearly

Principal & interest ........ $1,173 ...... $14,080

Condo fees .................. $200 ........ $2,400

Taxes ....................... $180 ........ $2,160

Utilities ................... $100 ........ $1,200

Maid service ................ ............. $460

Management fee .............. ............. $3,780

Miscellaneous ............... ............. $500

Total expenses .............. ............. $24,580

Source: Mark Fritschle, Keller Williams Resort Realty in Ocean City

Don't get burned

Here is common-sense advice from resort-area Realtors, accountants and attorneys to use when considering purchasing a second home at the beach:

* Do your tax and financial planning ahead of time.

* Get pre-qualified by a lending institution before you start

looking.

* Focus your options in terms of expectations, planned use and trade-offs you are willing to make between cost, size, type, location, etc.

L * Stay close to the beach if you plan to rent your property.

* Remember, bayside properties may generate only half the rental income of something oceanside, but acquisition costs are proportionately lower, too.

* Don't be afraid to think small. Double beds in a bedroom and sleep sofas in the living room are very acceptable trade-offs between cost and convenience when vacationing.

* Familiarize yourself with your market. Check out the Web sites, sales literature.

* Ask about agency relationships and be sure you are receiving buyer representation if you use a Realtor.

* If you plan to rent, check with local rental management firms for realistic rental income projections, maintenance cost details, fees, etc.

* Consider resort-area professionals. Lenders, settlement attorneys, etc. are familiar with local products and may offer certain advantages.

* Be prepared to act quickly. Demand is strong for well-priced products.

* Do the math -- again.

Pub Date: 5/24/98

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