How to buy a vacation home

If you own a primary residence or commercial real estate, buying a vacation home will feel like a familiar process. However, buying a vacation home presents some key differences you need to be aware of. (And if you're still weighing whether to move forward with the purchase, read our top four reasons why you should buy a vacation home.)

Step 1: Begin your search for vacation home real estate

There are two sides to your home search: the location and the individual property. And thanks to today’s technology, you’re not limited to searching for a vacation property close to home.

Where to buy a vacation home

If you’re not wedded to an exact location, try thinking like an investor. True investors are often concerned most with income potential, so they expand their search to multiple towns or even multiple states. Even if you initially want to buy in a specific ski town two hours from where you live, with a little research you may find a better financial fit near a resort that’s six hours away.

Also make sure to familiarize yourself with cap rate—the rate of return on a real estate investment. This metric can help you compare and evaluate the income potential of rental properties in different locations. (For starters, check out our list of the 25 best places to buy a vacation home, which is already ranked by cap rate.)

What type of vacation home to buy

At the same time, consider different types of properties. Should you buy a cabin or a lakefront home? A beach house or a condo? Maybe you want an A-frame cabin, but will it fit enough guests to earn the rental income you’re hoping for? How does the ROI for a larger mountain home compare to the potential returns on a cluster of ski-in/ski-out condos nearby?

Your search may not end where you first imagined it would—so it can be rewarding to keep an open mind.

Step 2: Get pre-approved for buying a vacation home

Once you’re actively searching for vacation home real estate, you want to be pre-approved for any financing. In popular vacation markets, a pre-approval puts you in a position of strength because you can move on a property quickly. Your pre-approval also signals to sellers that you’ll be buying a vacation home based on a credible offer they can trust.

Here’s a list of items needed for pre-approval when buying a home:

• Proof of income
• Verification of employment
• Proof of assets
• Credit check
• Identification (Social Security number, driver's license, and proof of current address)

Different lenders may pre-approve you for different amounts or at different interest rates. Lenders are beginning to factor in historic rental income in their lending products, too. For example, if you already have a vacation home or another investment property that earns income and lowers your debt-to-income ratio, lenders should look upon that income favorably. That’s why it’s important to work with a real estate agent who can help you take as much data as possible to your lender.

Step 3: Estimate ROI on a vacation home investment property

When you find an investment property that appeals to you, run some numbers to calculate your potential return on investment (ROI). The experts at Vacasa Real Estate can also share an estimated monthly cash flow analysis for individual properties, plus estimates of their operating expenses and net income.

Once you get familiar with this data, you may be surprised to discover that vacation homes selling for the same price can have very different cash flow potentials as vacation rentals. When you factor in short-term rental data around location, square footage, bedrooms, bathrooms, HOA fees, property taxes, and more, you may find yourself more attracted to a specific type of property or a core location.

Step 4: Choose your vacation home and make an offer

You’ve chosen your home—now what?

1. Prepare and make an offer committing to a purchase price.
2. Define the terms and conditions for honoring that price in your offer.
3. Set a closing date.
4. Submit your earnest money as a bank check. (It will be held in escrow until the sale closes.)
5. Review the seller's disclosure documents. (Sellers are required to disclose certain facts about the property in writing.)

If you plan to finance, expect to put 1%–2% of the offered price down as earnest money, as it indicates good faith as a buyer. If you’re offering cash, some sellers may request as much as 10% in earnest money. Your agent can write your conditions to help protect your earnest money in the event your vacation home inspection (or other deal conditions) is unsatisfactory.

Step 5: Negotiate the sale and reach mutual agreement

The seller may come back with their acceptance or denial of your home offer price or conditions. You can counter their offer as well. Negotiations continue until both you and the seller reach a consensus, or until you decide to walk away should the seller not meet terms agreeable to you.

This negotiation stage is where having an agent with expertise in vacation home real estate can yield real value for you as a buyer. With your agent’s insights into the local vacation rental market and the home’s cash flow potential, you’re in a position to make a strong, fair offer to the seller. Plus, a good agent can help write your terms and conditions to protect your interests after your home inspection and appraisal.

Once both parties have agreed on the terms in the offer, you have mutual agreement, which determines your purchase price.

Step 6: Apply for your vacation home loan or arrange to pay in cash

If you’re planning on buying a vacation home with financing, your agent communicates mutual agreement to your lender. With that, you complete your full loan application (your pre-approval was based on a preliminary application), and your lender can start the underwriting process. Processing time for the full loan application can vary, but you can normally expect at least one week.

If you plan to pay in cash, make sure your funds are liquid and secure. You can start planning to deliver a cashier’s check once the final steps in the vacation home sale process are fulfilled.

Step 7: Schedule a home inspection

While some sellers will conduct a pre-inspection, it’s still a good idea to get your own home inspection, too. (In fact, many markets will require it.)

Depending on the inspection results, this may be the time where you renegotiate the property’s price, given any repair costs you’d assume after the close. You can request that the seller make concessions to address those repairs and/or lower the price.

Keep in mind that inspection results, and resulting seller concessions, can make or break your real estate deal. You can put your deal at risk by asking for too many minor repairs, even if they’re warranted (nobody likes to be nickel-and-dimed). Work with your agent to identify the items worth asking for. Then, based on the seller’s response, you have the choice to move forward with your vacation home purchase or walk away from the deal, often without losing your earnest money.

Tip: If the seller agrees to complete repairs, you or your agent will want to walk through the property to make sure the work was completed to expectations. Be sure to work with your agent and the seller to set that condition.

Step 8: Get a home appraisal

When you’re buying a vacation home, if you put up an all cash offer, you’re not required to have an appraisal. However, if you’re financing your home purchase, lenders will require an appraisal to ensure the vacation home is worth the amount you’re asking to borrow.

Your appraisal can also protect you from overpaying for your vacation property. Depending on the results of the appraisal, you may be able to renegotiate or walk away from the purchase if the appraisal results are less than the purchase price defined in the previous mutual agreement.

Tip: Work with your real estate agent to schedule your appraisal for a date after your inspection report comes back. If the inspection results lead you to back away from the deal, you can cancel your appraisal. Appraisal fees are non-refundable, and you don’t want to spend money on them if the inspection report turns out to be a deal killer.

Step 9: Close on your vacation home

If you and the seller come to final agreements, you move to close on the property.

Closing with a loan

Once your loan is approved, your lender will submit the loan documents to the title company. From there, the documents will be processed for signing and prepared for submission to the county. You will come to closing with your check for the down payment and all other closing costs. (The title company can help you know what that amount will be.)

After both you and the seller have signed the appropriate paperwork, the title company will ensure that the funds transfer from the lender’s bank account to the seller’s bank account. The title company will also submit the documents to the county for recording. Once the transaction is funded and recorded, you will get your keys on the aforementioned closing date.

Closing with cash

If you’re buying your second home with cash, a typical closing scenario would involve you bringing a cashier’s check to the title company at closing. Then, the title company will deposit the cashier’s check into their own bank account. After the seller signs their documents and the title company gets the transition of the deed recorded at the county, the title company wires the payment funds to the seller’s bank account.

Procedures may vary from state to state, but the system is typically set up to make it simple and easy for a buyer to pay in cash when buying a home.

And if you’re buying a home out of state? In some states, as the buyer, you may not need to appear at the closing. Title companies will either send a notary out for signing the documents at a location convenient to you, or the title company can arrange a “courtesy signing” at another title office that’s closer to where you are.

Step 10: Set up your vacation home as a vacation rental

Once the home is yours, it’s time to think about whether you intend to use your new vacation home as a short-term rental.

If you’re planning to rent your vacation home, you’ll want to secure trustworthy vacation rental property management. The right company can deliver significant income and allow you to enjoy your home more when you visit.

If you’re weighing your vacation rental management options, here are some questions to keep in mind:

• Do you want to manage the vacation rental yourself?
• How much freedom do you want to have to use the home for your personal vacations?
• Is it more important to you to have the vacation rental as a project or hobby, or would you rather visit and simply relax?
• Are you interested in earning passive income and helping your home pay for itself?
• Does your home need improvements or design upgrades to optimize your income and your guest experience?

Vacasa is the leading full-service vacation rental management company in North America, so we know firsthand the kind of income you can earn when your vacation home is truly working for you. Reach out to us for end-to-end help—from buying the right home to managing it effortlessly.