Before buying that second home, take this final test
Two words I heard last week basically cast a new light on everything I have ever thought and done. “Confirmation bias.” “Whoa, wait a minute.” I am on the phone with Rich Arzaga, a certified financial planner, based in San Ramon, Calif. We’re talking about what to consider when buying a second home, and he just slips out those words like they’re everyday conversation: “When considering a second home, you have to beware of confirmation bias.”
“What exactly do you mean?” I asked, though the minute I heard the phrase I knew that he had pretty much just exposed my modus operandi.
“It is deciding what you want to do, and then systematically seeking information that confirms your decision while rejecting anything that opposes it.”
“Oh dang! There’s a term for that?” That’s my life in a nutshell. I am confirmation bias incarnate.
I begin to think of all the ways, starting from when I was 13 and my parents told me I couldn’t go to a multi-band rock concert, to all the clothes — shoes alone — I had no business buying, to the men I had no business dating, to the houses I had no business building, to the, oh, someone get me a glass of wine, or something stronger, quick.
I know myself too well. Whenever that compass needle in my stomach, that divining rod I rely on when making all important decisions, doesn’t like what it hears, together, my stomach and I simply banish the offending thought.
Now I’m finding that my honorary doctorate in selective hearing explains how I have been lured — seduced is not too strong a word here — into the notion of buying a second home. I had embraced the dream of a getaway like a warm puppy, and had been trying to backfill my desire with logic and warm anecdotes. When discussing it with the more level headed DC, I accentuated the pros, and marginalized the cons, until Arzaga delivered his reality ice bath: “The emotion behind deciding on a second home can absolutely trump a good financial decision. I’ve seen it happen many times.”
Financial types, they can be such a buzzkill.
On top of Arzaga’s financial council, which is hard to argue with, many second-home owners wrote to me with their front-line opinions. Again, if I must be objective, which pains me, the overarching takeaway is this: While many second homeowners have had good times and created fond memories at their getaways, those good times have often been more than offset by, oh, pesky nuisances, like vandals, burglars, fires, floods, egregious home association assessments, squatters (family members included), critters, so-called “friends” who wore out their welcomes, the double effort of furnishing and maintaining two places (caring for one home is hard enough,) and the ongoing financial drain.
So, before you let your confirmation bias talk you into a second home, heed this additional advice from Arzaga: Do your homework. Everyone likes to dream of the sandy beaches, the walk-up ski lifts and the neighboring golf course, but first do the math. (Aaach! The M word.) “Work up the numbers, and do cashflow projections through life expectancy,” Arzaga said. Run the numbers on your actual expenses with and without a second home. If you’re like me and can barely budget through the month let alone for the rest of your life, a financial planner can help you calculate cash flow into retirement; online programs are also available. “Don’t be shy about your life expectancy,” he said. “Today, if a couple reaches age 65, they have a 25 percent chance that one of them will live to age 97.” Don’t pick the property
first. That is so me. Before you even go out looking, first gather the information on the cost of acquiring a second home and see what you can honestly afford. Build in all expenses: mortgage, maintenance, taxes, association fees, insurance, furnishings, travel to and from. “You will do a better job of being objective if there is not a specific home you are considering,” he said. Create a decision tree. If yes, then this, and if no, then that. If, after you’ve created your base case (your expenses and cash flow without a second home), and you do not run out of money, move onto the next step. Add the new home’s debt and expenses. If after you factor in this new scenario, you do not
run out of money, and you have been honest about expenses and income, you could be a good candidate for a second home. Consider opportunity
cost. If the property costs $200,000, think what that money could earn somewhere else at a 6 percent, or consider the vacations that money could buy, and ask yourself if the investment is worth the tradeoff.
What to avoid. Don’t overextend yourself financially. “No one wants to run out of money and end up knocking on their kids’ doors,” Arzaga said. Also avoid family partnerships: “Though they can sound ideal at first, they often turn ugly.”
As I emerge from my four-week stupor, as if from a cloud bank, I ask Arzaga, my voice shaky, “Does it ever work out?”
“Sure,” Arzaga said. Among his clients who have second homes, he said, six or seven out of 10 find it works out well. “These are clients with a high net worth, between $2 million and $5 million dollars,” he said. Outside highpriced California, that converts to $1.5 million or higher. “Some make it work by modifying spending.”
“Two more words I loathe.”
“Maybe they eat out less, and don’t get season tickets to the Sharks’ games,” he said.
“So, basically,” I say in concluding the interview, “second homes can be great, if you can afford one.” “Exactly.” “Would you do it if you could?” I asked. “I would not.” Case closed. Now excuse me while I go back to believing what I want to.