Dan's Papers - July 18, 2008 - Mortgages, and other Details, of Owning on the Water

For years the standard for a luxury home was its waterfront status. Many developers in Florida actually created man made lakes to build clusters of new homes around and charge a premium because the new homes were on the waterfront. The idea of owning your own dock, beach or serene view had value.

While this perception is still a strong reality, a host of recent hurricanes, both on the Gulf of Mexico and in Florida, have started a whole new process of rethinking the proximity of your home to tidal water. Island Dunes, a condo complex on Hutchinson Island in south central Florida, was hit with two hurricanes a few years back, piling up sand three stories high within the building. Just now, more than seven years later are living conditions getting back to normal, with disputes still in the courts about who's responsible for the huge costs. Suddenly, the cost of flood insurance and hurricane or wind insurance is becoming a factor for high-end homes. Not everyone can walk away from a $15 million loss and rebuild.

Today, the trend seems to be to still build near the water, but at a higher elevation and safer distance. Melissa Cohn, founder of Manhattan Mortgage, stressed that none of the above factors affect the rates that homes are given for mortgages because it's the borrower and his credit worthiness that are considered when loans and preferred rates are being evaluated. "One, banks do not discriminate rate wise on waterfront homes versus a home off the water," Cohn said. "They base their rates on the current rates offered by the lender and their standard loan to value and qualifying guidelines. The difference for waterfront homes is the need for additional insurance, such as flood insurance and, in certain parts of the country, wind insurance. A bank may require more flood insurance if the house is in a flood zone and can be costly. But note, not all? Homes are in a flood zone if they are on the waterfront.

"Most banks don't have restrictions on homes in flood zones as long as the borrower can get adequate flood insurance. There are some banks, however, that do shy away from flood zone properties, but most don't. There are no different qualifications for a buyer or owner of a waterfront home other than the need for adequate flood insurance. I see no trend in lenders backing away from waterfront homes at all."

With the recent slump in the real estate market nationally, agents vary on their perception about the value of waterfront properties. One seasoned agent said all the record sales on Shelter Island, the North Fork and the South Fork have been waterfront properties over the last 12 months. But he also stated that none went for or above the suggested price. Instead, they fell below it, where just four years ago almost every deal was for the asking price or more.

When asked, a homeowner who owned a second home on the ocean explained some of the factors of maintaining such a home. The proximity to the salt mist of the ocean affects what kind of roof you must have and how often you must replace it. Slate roofs are very costly, but are desirable in combating the ocean's eroding effects. Premium paints must be used on treated shingles and must be painted every two years, instead of three. Driveways and walkways must be watered down on a regular basis to prevent a salt buildup and gutters and windows, no matter how high the quality, must be replaced at a higher rate due to the corrosion caused by the heavy salt air and mist. It's almost imperative to board up the windows in the off season to protect the home from winter nor'easter winds that can cause tremendous damage to a home's structure and interior if they break just one window pane. Homes located away from tidal water do not have these problems. It's important to know that homes on the ocean are much more expensive to keep open all year round, for the reasons mentioned, as well as the heating bills.

Also, cars seem to age quicker when exposed to salty ocean air. Chrome areas rust, and the paint seems to be affected by the salt. Engines are also affected by the salt mist that settles under the hood every night.

Lastly, the whole issue of flood and wind insurance can reach over $25,000 a year for mega homes, whereas, if the home was located inland a quarter of a mile away, on higher, elevated ground, it would cost only fractions of that number.

So, waterfront homes are more desirable by those who truly can afford them, and maintain them. People who are cost conscious, though, are being squeezed out by the growing expenses of living close to tidal waters.