Tropical storms tend to hit the Caribbean before they reach the mainland. The economic storm that hit the global housing market continues to blow over the Caribbean even as the U.S. sees signs of recovery.
"People stopped [buying] in the Bahamas in mid-2010 because they did not know what would happen," says Patricia (Patty) Birch, president of the Bahamas Real Estate Assn.
The global recession badly hit second-home markets across the Caribbean. Residential prices fell in the Bahamas, Turks and Caicos, and the U.S. Virgin Islands, according to reports on globalpropertyguide.com.
With only a tepid recovery underway, many Americans are still questioning the value of buying a primary residence, let alone a second home on a distant island. Still, some big price reductions for beachfront homes—and a thirst for a more relaxed lifestyle—could tempt the most cautious investors.
Real GDP in the Bahamas contracted 3.9 percent in 2009 and an estimated 0.5 percent last year, according to the CIA World Factbook.
National data on home sales and price are not collected, and the region's multiple listing service (created just a few years ago) covers only a portion of real estate sold in the Bahamas, but 2010 was clearly a bad year for home sales, says Chris Gouthro, a real estate attorney in Freeport, Grand Bahama.
Many good deals can be found now in Paradise Island, the Abacos, and Freeport, Grand Bahama, according to Birch. "The summer and fall [of 2010] were dead, and around Christmas, people started looking again." She says prices on some properties fell 20 percent to 30 percent last year, depending on location.
Activity may have improved, but buyers are not yet flocking in huge numbers to buy island homes. In fact, in a snapshot study Coldwell Banker shared with Businessweek.com, searches for Caribbean island homes by U.S. consumers on coldwellbanker.com dropped about 20 percent in the December/January period from July/August. (As this is a new feature, year-on-year comparisons were not available.) By contrast, search traffic to France and Italy was essentially flat during that period.
Flat Trend in the U.S.
Even vacation home sales in the U.S. generally have yet to recover. Data for 2010 will not be released until Mar. 30, but preliminary estimates show that about 18 percent of U.S. transactions last year were investment sales, and National Association of Realtors spokesman Walter Molony tells Businessweek.com that no significant changes are expected for vacation home sales. In 2009, investment homes represented 17 percent of U.S. home sales, and one in 10 home buyers purchased a vacation home, according to the NAR.
"I think  will be a lot like 2010. There will be bright spots, but it will be tough going for the most part," says Jonathan Morris, an agent for Damianos Sotheby's International Realty in Eleuthera (the longest island, at 110 miles, in the Bahamas).
As new developments are now underway, including the new Baha Mar resort and casino on Nassau's Cable Beach, scheduled to begin construction later this month, Birch expects demand to pick up slowly.
Don't Ignore Tax Angles
Buyers may find escaping from the snow-covered mainland reason enough to invest in an island home. For those who are willing to take the plunge, there can be financial benefits as well.
Mortgage interest and property tax are tax-deductible for owners who use the property as a second home—and do not rent it out. For owners who rent out their homes to cover costs, certain expenses may be deductible, but rental income is usually reported depending on how often the owner uses and rents out the home. According to Edward Mermelstein, a real estate attorney in New York, there is no restriction that the home must be on U.S. soil.
If the rental market is strong, the owner's expenses can be low. Nearly two-thirds of second homeowners are able to cover at least half their mortgage by renting out their vacation home to travelers, according to Victor Wang, public relations manager for HomeAway.com.
Be Wary of Local Differences
The main challenge for home buyers looking for an island getaway is understanding local markets, as well as their laws. Although the Caribbean is only a short flight from the U.S., the islands have their own procedures and rules. Local laws in Aruba and Sint Maarten, for example, are similar to Dutch law. To make things even more confusing, Sint Maarten shares the island with Saint Martin, an overseas collectivité of France, which makes it subject to French law.
Bahamian real estate law is still young, says Gouthro, and until 1996, no statutory regulation of real estate agents existed. Even today, it is limited, and enforcement is weak against agents misrepresenting properties to buyers, he says.
Damianos Realty's Morris says that relatively high closing costs are usually the biggest shock to U.S. buyers (though there's no capital gains tax, he adds). The stamp tax for homes sold for $250,000 or more is 12 percent, typically split between the buyer and seller. Both sides must have legal representation by a Bahamian attorney, and legal fees are around 2.5 percent of the sale price, although they can be negotiated lower. All together, closing costs can amount to more than 20 percent of the sale price, says Gouthro, compared with about 3 percent in the U.S.
Also, loans are likely harder to obtain than in the U.S., as the Bahamas has fairly strict lending standards, Morris says. Many overseas banks do not provide mortgages.
Do Your Research
Anyone buying a home for the first time in the Bahamas must register the investment with the government, which requires a police record and character and financial references, among other things. U.S. visitors do not require a visa to enter, but if they plan to stay longer than eight months, they should obtain and renew an annual homeowners card, which allows them to stay for one year, or an annual residency card if they are retiring in the Bahamas and no longer own a home in the U.S., says Gouthro. Other permits are required for work and business.
Even buying a home in Hawaii requires some research. There are rules on pet quarantine and auto shipping, for example. Also, on Hawaii's Big Island, because there are 12 climate zones, according to hawaii.com, location really determines lifestyle, says Stacy Hasegawa, executive assistant for MacArthur & Co. Sotheby's International Realty.
Potential home buyers need to be aware of other challenges as well. Not only are island homes vulnerable to dramatic hurricane seasons, but the cost of many staples, ranging from gasoline to food, can also be more than on the mainland, because most of them usually have to be shipped in. On some islands a prospective home buyer can encounter safety concerns, and local services and infrastructure, such as roads or wireless service, may leave much to be desired.
Such trade-offs may be worth it, however. Whether in the market for a second-home or a permanent residence, adventurous buyers can find island life to be a healthier, more laid back, and certainly warmer alternative. And now is the best time to buy in years. Unless of course you like digging yourself out of snow drifts.