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Financial Planning > Behavioral Finance

How to Stop Clients From Ruining a Vacation Home Purchase

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It’s an experience that many advisors don’t exactly relish: a client walks into the office and talks excitedly about how he or she is planning to buy a vacation home with friends.

The advisor faces the unenviable task of putting the client’s dream into perspective. The truth is, buying a vacation home with a friend is a business transaction, and so it’s the advisor’s job to point out the financial realities of making such a move.

“It comes down to planning, and it comes down to recognition that often times, as with any major purchase or decision, sometimes the perceived benefits can be very compelling upfront but you have to think through the decision, including the downside,” said Eleanor Blayney, a certified financial planner and CFP Board’s consumer advocate, in a phone interview.

Blayney pointed to the natural human desire to buy something now because we perceive its value to be greater today than what we think its value will be in the future.

“When you purchase anything, you’re saying that the perceived benefit outweighs the cost. That’s human behavior,” Blayney added. “Behavioral economists have studied how we tend to discount the future relative to today. A lot of times, what we want looks more valuable today than in the future. It’s why we enter into these ideas with such enthusiasm but overlook the future problems.”

Financial advisor Sarah Halpin of Wells Fargo Advisors in Portland, Maine, writes in a blog post for CFP Board’s Expert Corner about the financial-planning realities of buying a vacation home with friends, saying, “Unfortunately, owning real estate with people you like can become a major headache if you don’t share the same goals and take the time to do some upfront work.”

Read on for 5 financial-planning tips from Halpin and Blayney on what to tell clients who are considering buying a vacation home with friends.

It’s a Business Transaction

1)     It’s a Business Transaction. This can be the hardest pill for a client to swallow when planning to buy a vacation home with a friend. “In financial transactions between family and friends, we rely on goodwill, trust and love, and we don’t treat it like a business transaction,” says Eleanor Blayney, CFP Board’s consumer advocate. “You need to have things documented. It’s akin to writing a marriage prenup that anticipates its dissolution.”

Look Closely at the Finances

2)     Look Closely at the Finances. How well do you know your friends’ finances?, asks Sarah Halpin of Wells Fargo Advisors in her blog post for CFP Board’s Expert Corner. It’s essential to know about friends’ liquid assets, whether they require financing to own part of a vacation property, and how they plan to share expenses and maintenance, Halpin writes. “Before committing to buying a property with other individuals, it is important to gain assurance that all parties involved are making a financially sound decision.”

Decide How the Property Will Be Titled

3)     Decide How the Property Will Be Titled. Here’s where the lawyers should step in, Halpin says. Legal counsel can help the advisor’s client avoid potential issues resulting from a sale, divorce, death or transfer of ownership to other family members. “For instance, when property is held as ‘tenants in common,’ any owner can transfer his or her interest independent of the other owners,” she writes.

Set a Schedule

4)     Set a Schedule. Putting together a schedule of who gets to use the property and when can spare people headaches down the road, Halpin notes. Typically, friends assign certain weeks or months to each owner every year, with a rotating schedule for long holiday weekends. And owners should decide whether other friends or family can use the property. “You may not want your vacation home to become everyone’s ‘crash pad,’ so talk through expectations upfront,” Halpin writes.

Get It in Writing

5)     Get It in Writing. While a shared vacation property is ideally a fun escape from the real world, real-world issues such as pets, smoking and décor can—and probably will—rear their heads. So get an agreement in writing, Halpin advises. “For example, how are you going to resolve the issue of the pink flamingo mailbox that your friends think is quirky and you hate?”


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