The Inman community will come together virtually for Connect, June 15-17. This is a range of powerful speakers, and our focus is on the new normal: what business looks like on the other side of the pandemic. Let this conversation with one of our June Connect speakers serve as an aperitif and get your ticket to June’s Inman Connect before the prices go up.
While the pandemic has touched millions of people in heartbreaking ways, it has also provided unique opportunities for others in the form of remote work and the freedom to move outside increasingly expensive coastal centers and overcrowded.
For some homeowners, that meant finding a new main home in cheaper and closer suburbs. For others, it meant finding the perfect second home to escape the stresses of everyday life. However, second home buyers have found their journey more difficult than ever, with booming demand and inventory shortages hitting second home markets harder than the average US city.
Even with these challenges, Pacaso co-founder and CEO Austin Allison believes there are plenty of opportunities in the second home market, thanks to alternative financing and ownership models like the one Pacaso is helping facilitate.
Here’s what he had to say about the impact of the pandemic on second home buyers and condominium misunderstandings and what it means for consumers.
Inman: The pandemic triggered what we have come to call, at least in Inman, “The Great Reshuffling.” How has this reshuffle affected the demand for second homes?
Allison: At a high level, the pandemic has introduced a lot of flexibility into people’s lives, more than there was before. It makes families rethink how and where they live and work. And for many families who now have the freedom to work remotely on a permanent or semi-permanent basis, that means the idea of being able to use a second home is more achievable than it ever was.
As a result, we are seeing a greater interest in secondary ownership in general. And by more interest, what I mean really is more heightened interest because the desire for second homes existed long before the pandemic. Before the pandemic, we surveyed our target consumers and 75% of families aspired to own a second home.
What about the supply side? Do second home buyers face the same level of competition as buyers looking for a primary residence?
We have seen a reduction in inventory, and this trend is more pronounced in the second home markets. We were already in a state of low stocks before the pandemic, but after the pandemic, stock levels have declined significantly.
Nationally, the number of active listings is down about 50% year over year, which is huge, especially when we were already in a state of low inventory. It’s tough, and it drives up the prices and makes it harder for people to realize their dream of owning a second home.
Apart from price, what are the other impacts that the pandemic has had on the second home market? What buying trends are you noticing with your customers?
I want to highlight the migration that is happening in the second home markets. There are two things going on. One is that more people are moving permanently into second home markets.
For example, I live in Napa Valley. I lived in San Francisco and moved to Napa Valley about three years ago. Back then, it was a pretty unconventional thing for a San Francisco tech to live full time in Napa Valley. I was an outlier in this regard.
Now I’m no longer an outlier there. There are a lot of people moving into some of these markets that have always been second home markets.
The other thing that happens with the classic second home buyer is that there are a lot more. In parts of Napa Valley, where we operate, for example, it is not uncommon to see over 50% of homes purchased in the area by second home owners.
Also, classic second home buyers want proximity to their main home. About 70 percent of people looking for a second home through Pacaso are looking for a second home within a reasonable drive, which typically means 200 to 300 miles, at least on the West Coast. Meanwhile, the driving habits are a little different as you head east and people are comfortable driving a little further.
Another thing that we anticipate and start to see is that as things start to open up and people become more comfortable with traveling, we expect to see some kind of push and a increased interest in air markets. An example of this would be Hawaii, which is a place you obviously can’t drive.
We are also seeing new types of secondary markets which may be relevant locally, but not known nationally, which are also seeing a sharp increase in interest. People are now looking everywhere to find that special place that they can call a second home.
What about financial barriers to second home ownership? Home buyers have had to deal with stricter lending standards just to buy a primary home. It is not hard to imagine that this struggle is more intense for buyers of second homes.
Most people above a certain level of household income have always aspired to own a second home. It’s almost primitive in nature, after food and primary shelter, to think of a second home.
But historically, most families have not been able to make this dream come true. Owning a second home is very expensive and justifies owning 100% of something that you only use 10% of the time.
I think [this justification issue] This is why we are seeing a strong demand for condominiums as a second home because it makes the dream of a second home accessible at a lower price. It’s also easier to justify owning an eighth of a second home, which is more in line with your actual use of it.
Can you give us an overview of how the condominium works? I’ve read Inman’s stories on Pacaso and the main criticism is that it looks a lot like timeshares. How can agents walk their clients through the co-ownership process and help them decide if this is the right decision?
This is an excellent question. [Co-ownership] is actually quite different from a timeshare. It is very similar to do it yourself condominium where a group of friends or family decide to own a house together. This practice is quite common and has been around for decades and decades, especially in second home markets where you have friends buying together or multigenerational families inheriting a property.
Our model is no different. This is real property, unlike a timeshare, which is actually the right to use a hotel room or condo for a period of time. Imagine if you own the Marriott Vacation Club and the Marriott goes bankrupt. You and 15,000 other people would only have a piece of paper saying that you own the right to use the Marriott. There is no underlying intrinsic value.
If you had to snap your fingers to get Pacaso out as a co-owner, you still own a house. You and your other co-owners could simply sell your property independently of Pacaso.
For real estate agents, this is a new tool that allows more people on the buy side to realize their dream of owning a second home. And on the listing side, it’s a new tool that allows sellers to sell part of their home. There are many second home owners who own 100 percent of their homes and only use 10 percent of the time.
They don’t want to sell the house because they like it, but they don’t have to own it all either. So, Pacaso is a tool that helps real estate agents gain more listings and is treated like a normal real estate transaction. We take care of all the details associated with the condominium model. We constitute the LLC that owns the property [and] we handle all the details. We also have a proprietary app with scheduling software that allows homeowners to share the house and all that good stuff.
Again, for the realtor, working with Pacaso is like giving a recommendation, except you get a full commission. Pacaso pays 3% on all transactions, even in a market like Southern California, where the standard for a cooperative agent commission would be 2-2.5%.
Beyond Pacaso, there has been a lot of talk about alternative financing models and all these different ways of owning and profiting from a home. What do you think of the future of this part of the industry? What solutions still need to be found?
There are many possibilities for alternative financing. There are a lot of really innovative things going on right now for alternative primary residence financing, and I think innovation will continue on the second home financing front.
What makes second homes so unaffordable, and this is effectively what alternative financing seeks to address, is that these homes are expensive. Supply is limited and demand high, making them even more expensive and severely underutilized. So condominium is a bit like alternative financing in the sense that it allows people to put less money into owning a second home.
For example, let’s say you wanted to buy a $ 2 million second home. If you are thinking of a traditional second home purchase, you will need to put in $ 600,000. With condominiums, you could buy a $ 2 million house for $ 250,000 in total. With our 50 percent funding, that’s about $ 100,000 down payment, compared to $ 600,000 down payment.
I’m sure there will be one more innovation happening in space [and] there’s already a lot going on around creative ways to finance homes, sharing equity as homes appreciate, and split-deposit concepts that allow new buyers to sort of become co-owners of homes. with their parents.
In the area of second homes, I think the biggest thing we can do right now to make homes more affordable is to make better use of the housing stock. And the way to do it is through the condominium.
Email Marian McPherson