October – December 2009 Quarterly Newsletter

Click here to download the PDF version of the newsletter.

Welcome to the Year of the Tiger. According to the Chinese Zodiac, it begins 2/14/10 and ends 2/2/11. The Tiger is the 3rd of 12 animal signs and is a sign of courage. This fearless and fiery fighter is revered by the ancient Chinese as the sign that wards off the three main disasters of a household: fire, thieves and ghosts. The Year of the Tiger is 2010, 1998, 1986, etc. People born in the Year of the Tiger are generally well liked with a charming personality. They tend to be very competitive and take pride in being different from others. Their two main features, though, are rashness and hesitation, a pair of contradictions.

The city mailed real property tax assessment notices in December. Island wide land values fell 6.7%, a drop that is likely to trigger an increase in the property tax rate for the second year in a row.  Here is a link to a front-page article in the 12/16/09 Honolulu Star Bulletin discussing the decrease in property values. Included is a map showing the reduction in various areas of Oahu. The assessed value for taxes is based upon June–June, while the calendar year data is Jan–Dec. Total sales for calendar year 2009 were down 9.3% from 2008 . . . houses were down 5.7% while condos were down 11.8%. The median (mid-way) sales price for houses was down 7.9% ($575,000 compared to $624,000) while the median sales price for condos was down 7.1% ($302,000 compared to $325,000).

President Obama and his family vacationed in a Kailua beachfront house about a mile from our house. Fortunately, we were far enough away to avoid almost all of the additional security . . . The senior economic advisors for both the Bank of Hawaii and First Hawaiian Bank both agreed this past quarter that it will be 2011 before any sustained economic recovery is established in Hawaii.

The Stott Team Revised Website (stott.com)

Over Halloween weekend, we activated the new website for The Stott Team, something we had been working on for months. The new website is located at stott.com and is similar in format to what we previously had but with many new articles along with a host of changes. It is divided into six major sections:

1. Home Search: We are using a different outside service to provide us input for Home Search with many new features making it much easier to search for Oahu listings. Moreover, a variety of maps are now available.

2. For Buyers: This section discusses purchasing a home or investment property on Oahu. There are 11 articles addressing items such as a description of the different types of homes on Oahu, affording an Oahu home, pro’s & con’s of leasehold land, why use The Stott Team, testimonials from past clients, etc.

3. For Sellers: This section discusses selling real estate on Oahu. There are 12 articles addressing items such as avoiding taxes, common myths when selling a home, how to change your principal residence, 1031 exchanges, HARPTA, why use The Stott Team, testimonials from past clients, etc.

4. Hawaii Information: This section includes the Quarterly Newsletters and E-Mail Updates. It also includes the following articles: Hotel & Short Term-Rentals, Oahu Schools, Pet Quarantine and a long list of useful links.

5. Property Management: This section is divided into three parts: one for owners, one for prospective tenants and a third, general in nature:

a. For Owners: The articles are: Why Use Stott, Owner Handbook, Tenant Handbook, Property    Management Agreement and Testimonials from past clients.

b. For Prospective Tenants: Upcoming & Available Rentals, Finding a Rental, Rental Guide and Rental Application.

c. General: The general item provides assistance on finding a hotel or short-term (vacation) rental on Oahu.

6. Meet the Team: This has three sections: Meet the Family, Family Pictures and Meet our Staff

Located at the bottom of the Homepage as well as on the left-hand side of the frame are links to ten items we believe will be of use to many Buyers and Sellers. One of our objectives in revising our website was to improve our site navigation by making these items very easy to find; e.g., if a reader is interested in information concerning HARPTA, they no longer have to search through various pages of our site. The items are:

1031 Exchanges – Extensive information on 1031 exchanges.

HI Real Property Tax Law (HARPTA) – Extensive information on HARPTA.

Available Rentals – This is new; we now place our rentals on our website to make it easier for prospective tenants to find them.

Hotels & Short-Term Rentals – Advice on locating a place to stay.

Useful Newsletter Articles – This is new; about 24 key articles from our newsletter are chronologically listed in one location to make them easy to find. They cover a wide variety of topics. Each includes the date of the applicable newsletter. We encourage     visitors to our website to open this section and review the type of information that is immediately available.

Mixed Plates of Talk Story – This is new; many readers have told us that the Talk Story is their favorite section of the newsletter. Recent ones are now in one location.

Mortgage Calculator – This is new and makes it easy to match monthly payments to various interest rates.

Value of Your Oahu Home – What is the current market value of your home?

Useful Links – We now provide an extensive list of links to topics applicable to Hawaii.

Contact Us

We invite you to visit our new website at stott.com.

Beware of Reverse Mortgages:

The following article appeared in the October 25, 2009 issue of the Parade Magazine Sunday Newspaper Supplement:

Increasingly, strapped U.S. homeowners are opting to take out a “reverse mortgage,” a loan against a house’s value that is repaid when the borrower dies or sells the property. The number of federally insured reverse mortgages issued to senior citizens in the past three years alone—nearly 335,000—is more than the total from 1990 through 2006. Consumer advocates have long cautioned that reverse mortgages should be used as a last resort because of their high fees. Now, those warnings are growing louder due to a spate of fraud.

The National Consumer Law Center says seniors are facing the same kind of aggressive tactics that were common during the subprime-lending boom. And according to a recent report from the FBI and the U.S. Department of Housing and Urban Development (HUD), a host of “unscrupulous loan officers, mortgage companies, and loan counselors” are defrauding desperate Americans. In one scheme, people facing foreclosure are told that a reverse mortgage can save their homes, then “rejected” for the mortgage and steered into a deal that transfers title of their property to “ investors.” The end result: They lose their homes anyway.

Other scam artists sell loans that appear to be HUD-insured reverse mortgages but are not, according to the AARP, the nonprofit advocacy group for Americans 50 and over. Still others, billing themselves as “investment advisers,” persuade consumers to invest the proceeds of reverse mortgages in other financial products that come saddled with extra costs. And in some cases, the FBI report says, the proceeds of investment schemes are not invested—they’re simply stolen.

Homeowners should turn down any pitch that uses reverse-mortgage funds to purchase financial products. In fact, they should think twice before signing up for this type of loan at all. Other options—like taking a home-equity line of credit or even moving to a smaller place—may be able to meet your needs at a lower cost, according to the AARP.

Thoughts on Buying a Home

The American Dream has long been ownership of your own home. This continues even with all the foreclosures and bankruptcy problems that are taking place in late-2009 as this article is being written. In fact, a marvelous window of opportunity now exists with attractive sales prices coupled with low interest rates. Eventually, home prices on Oahu will stabilize and begin to rise again with mortgage rates likely to be higher than they are today.

The question for many families, particularly first-time homebuyers on Oahu is whether it is better for them to rent or to buy. Many people make such a decision based upon a comparison of monthly payments. If their rent is less than their monthly payment on a home, they may decide that it is cheaper to rent than to buy. This approach, though, fails to take into consideration a number of other factors that influence the total costs of homeownership.

It is important for anyone considering buying a home to understand the tax savings involved in owning a home. The interest on the mortgage and property taxes are both deductible for federal and state taxes. Typical savings are 25% to 35% of the mortgage payment (principal & interest) depending upon the type and amount of the mortgage, the interest rate and the buyer’s tax bracket. If the mortgage payment were $3,000 per month, the tax saving for most homebuyers would be in the range of $750 (25%) to $1,050 (35%). The savings can be obtained each month by adjusting your withholding allowances by filing an amended W-4 form with your employer. This is perfectly legal; in fact the second page of the W-4 form is a worksheet to assist the taxpayer in calculating the additional withholding allowances they should claim.

Two compelling reasons to buy rather than to rent are: first, it enables you to lock-in a permanent monthly principal & interest payment at today’s rates. If you purchase using a 30-year fixed mortgage rate, your principal & interest payment 10 or 20 years from now will be the same as they are today. In contrast, rent payments are likely to be increased every year or two by the landlord so that they keep pace with inflation. Second, it enables you to use a mortgage to increase the profit you will make on the home. Assume a $500,000 property is purchased with a $100,000 down payment and a $400,000 mortgage and the home increases in value by 10%, the owner makes $10,000 on their $100,000 down payment and $40,000 on their $400,000 mortgage. Investors refer to this as using other people’s money (OPM).

Nationally, the average annual inflation rate over the past 15 years has been 2.90%, which is relatively low historically; e.g., the average inflation rate over the past 30 years was 4.35%. So, the cost of living has increased by about 4.35% a year over the past 30 years. Many economists believe that inflation will increase over the next few years to enable the government to be able to pay its debts. This analysis will use 3%, which is considered to be very conservative. At an inflation rate of 3% per year, a $1,000 per month initial rent payment would be about $300 or 30% higher in ten years. Compounding the 3% per year increases the percentage to about 34.4% over ten years. And, if the property value keeps pace with inflation, the home will be worth about 34.4% more in ten years than it’s worth today.

If you look at sales prices of homes on Oahu since statehood, prices have risen at about 3% to 4% a year or very close to the inflation rate. However, it has not been a gradual increase. The Oahu Housing Market has experienced soaring appreciation once each decade of about 30% with the exception of the 1990’s when our local economy tanked. The 1960’s, 1970’s, 1980’s and most recently, the 2000’s all had periods of soaring appreciation. In between the periods of soaring appreciation, the housing market has usually been relatively flat.

The following example assumes a 3-4 bdrm, 2-bath, fee simple house in a reasonably nice neighborhood with a value today of $500,000 that is available for either sale or rent. Property taxes are $120; insurance is $80. The property would rent for $2,000 per month. I’m going to assume an FHA mortgage is used at 5½%; which is a little high as this is being written, however, mortgage rates are going to increase. For simplicity, I’m going to round many of the numbers; I’m also going to assume that property taxes and insurance remain constant

There are two clients; the first decides to rent the home and will be referred to as the “Renter.” The second decides to purchase the home and will be referred to as the “Buyer.” The Buyer purchases the property using a 3½% down payment ($17,500), which is the minimum on an FHA purchase. The FHA loan amount is $482,500. The analysis does not include the return the Renter could achieve by investing the $17,500 down payment that is not being used to buy the home. The analysis also does not include any federal programs to stimulate home sales such as the $8,000 tax credit for first-time homebuyers.

The Renter pays $2,000 per month initially that will increase at 3% a year to keep up with inflation. The Buyer’s monthly payments are $2,740 for principal and interest, plus an FHA mortgage insurance premium (MIP) of $220, plus $120 for property taxes, plus $80 for insurance for a total of $3,160. The Buyer’s tax savings (refer to the bottom of the page) is about 28% or $770, reducing the out-of-pocket monthly cost to $2,390 ($3,160 minus $770).

So, the first year the Renter would seem to be far better off paying $2,000/mo compared to the Buyer’s out-of-pocket cost of $2,390. At first glance, the Renter would appear to be ahead by $4,680 (12 x $390). However, the Buyer will have paid the mortgage down by $6,500 to $476,000 by the end of the first year, plus the value of the home will have increased by 3% or about $15,000 to $515,000. So, the Buyer’s equity that started with their down payment of $17,500 has increased by $21,500 to $39,000 ($515,000 less $476,000).

The Renter’s monthly payment does not match the Buyer’s cost until the end of year #6. At that time, the mortgage balance has been reduced by $44,930 from $482,500 to $437,570 while the property has increased in value from $500,000 to  $579,640 for equity of $142,070 ($579,640 less $437,570). I acknowledge that property taxes are likely to increase over the years and there will be both repairs and fix-up costs to improve the home that are not included in the analysis.

At the end of year #10, the Renter is paying monthly rent of about $2,690 while the Buyer’s payment remains constant at 2,390 for a difference of plus $300 per month. At the end of ten years, the mortgage balance has been reduced by $84,240 from $482,500 to $398,260 while the property has increased in value from $500,000 to  $671,960 for equity of $213,700 ($671,960 less $398,260). Eventually the FHA MIP will end; for simplicity, I’ve assumed it is a fixed expense.

Tax Savings: You need to use a calculator that will amortize. Assume the Buyer is married with $80,000 of taxable income and uses a $482,500 FHA mortgage @ 5½% with a $17,500 down payment. Further assume property taxes are $120/mo:

$482,500 @ 5½% = $2740/mo. for principal & interest
End of first year balance (PV) using 348 (360 minus 12) months for (n) = $476,000
Initial balance ($482,500) minus $476,000 = $6,500 to principal the first year
$6,500 divided by 12 months = $542/mo. average principal payment the first year
$2,740 monthly payment minus $542 =  $2198/mo. average interest payment the first year
$2198 interest payment + $120/mo. property taxes = $2318/mo. deductible the first year
$80,000 income = 25% federal tax bracket & 8.25% HI tax bracket for calendar year 2009
25% federal + 8,25% HI = 33.25% combined bracket
33.25% of $2,318 deductible = $770 tax savings using 5½% as the interest rate
The tax savings thumb-rule for an FHA mortgage @ 5½% is about 28% of the principal & interest for most buyers; 28% of $2,740 = $767 compared to $770

A Mixed Plate of Talk Story

Making national news were the large waves that hit Hawaii in early-December, qualifying Waimea Bay for the “Quicksilver In Memory of Eddie Aikau” big wave surfing contest for the first time since 2004 and only the 8th time in 25-year history of the event. Eddie Aikau (1946-1978) was a well-known lifeguard and surfer. He was the first lifeguard assigned to Waimea Bay on Oahu where he saved several lives. As a surfer, he became famous for surfing in the high waves off the North Shore where he won numerous surfing contests. In 1978, Aikau was a crewmember on the Polynesian canoe Hokule’a for a journey between Hawaii and Tahiti. The double-hulled voyaging canoe developed a leak in one of the hulls shortly after departing and subsequently capsized about 12 miles south of Molokai. To obtain help, Aikau went into the water with his surfboard and paddled towards Lanai. The Coast Guard rescued the remainder of the crew; however, Aikau was never seen again. The ensuing search was the largest air-sea search that had ever been conducted in Hawaii.

A bumper sticker sometimes seen in Hawaii is “Eddie Would Go.” The famed surfer is also honored by a high-wave surfing contest named the “Quicksilver In Memory of Eddie Aikau” that can only be held with a wave-face height of at least 40 feet at Waimea Bay. Is an honor merely to be able to compete in the event as only 28 big-wave surfers from around the world are invited to compete each year (with alternates). There was plenty of notice this year as high waves were predicted about ten days before the event. A crowd of about 25,000 people braved the bumper-to-bumper traffic on the North Shore; some of the attendees came in the wee hours of the morning with blankets to sleep on the beach. Others brought bicycles with them and were able to park some distance from the event. The $55,000 winner was a surfer from San Clemente, CA who was a decided long shot, as he was participating in his first Aikau.

School furloughs continue to be a huge local issue. Gov Linda Lingle has proposed plans to eliminate 27 Furlough Fridays at Hawaii public schools in 2010-11 by using $50 million from the so-called “rainy day” fund and converting teachers’ non-instructional time to class time. This proposal is being debated at this time. Using the rainy day fund would require approval from the Legislature. If they decide to use the rainy day funds, it eliminates those funds from being available for some future emergency. Hawaii is the only state with a single school district that receives revenue from a state’s income tax. More than 14,500 school districts in the nation are operated mostly at the county level with revenue from property taxes, which are more adjustable than income taxes. GOP Governor Linda Lingle came into office with the stated objective of reducing the centralized school bureaucracy so that each major island/county would be a separate school system. She believed that Hawaii should join the rest of the USA, particularly since Hawaii public school system students continually test near the bottom nationwide. However, with almost two terms completed she has been unable to get the Legislature and unions to support any significant changes.

Over 600 pilgrims from Hawaii attended the canonization of Saint Damien by Pope Benedict XVI in St. Peter’s Basilica on Sunday October 11, 2009. Included was Audrey Toguchi, the soft-spoken, 81-year-old, retired high school teacher from Aiea whose cure from an aggressive form of lung cancer after praying to Damien 11 years ago was the second miracle attributed to the priest, which enabled his elevation to sainthood. In September 1998 a chest x-ray revealed three cancerous tumors in her lungs. Rather than chemotherapy, Toguchi prayed to Father Damien. In October 1998 the tumors started to shrink and by May 1999 tests showed the tumors had disappeared. Doctors were astounded at her cure.

The Hawaii Prepaid Health Care Act requires businesses (like Stott Real Estate, Inc.) to provide health insurance to employees who work more than 20 hours a week. The nationwide proposals currently before Congress do not have any mandates for employer coverage and instead make individuals responsible for buying their own health insurance. Surveys by the Chamber of Commerce and the Pacific Business News have shown that the majority of respondents want Hawaii to be exempt from the national health-care legislation. U.S. Senators Daniel Inouye and Daniel Akaka have stated that they will request an exemption for Hawaii be included in the final draft of the health-care reform bill.

Navy head football coach, Ken Niumatalolo must have had some interesting thoughts when he brought Navy to Hawaii to play UH in football in December, a game UH won 24-17. Ken Niumatalolo grew up in Hawaii and used to sell game-day newspapers at Aloha Stadium. He went to Radford High School and graduated from UH in 1989 where he was a backup quarterback. Following his graduation, he became a graduate assistant at UH and then an assistant coach before moving on. He is the first Samoan collegiate head coach at any level and is doing very well thank you. His eight wins at Navy last year were the most by a rookie Navy coach since 1934. As some of you are aware, I have mixed emotions when Navy plays UH having attended both schools with an undergraduate BS degree from the Naval Academy and a graduate MBA degree from UH after I retired from the Navy.

UH experienced an unusual football season with numerous injuries; e.g., they’ve played much of the season with a 4th string, walk-on quarterback. Five different players played middle linebacker. UH started the season with two consecutive wins. They then had six consecutive losses playing very poorly in several of the games. A strange thing then happened, they started playing much better and racked up four consecutive wins including an upset victory over 8-4 Navy, a bowl bound 9-point favorite. So, they were 6-6 going into a season ending game with Wisconsin, a 12-point favorite. Unfortunately, UH lost. If they had won, they would have played SMU in the Christmas Eve Sheraton Hawaii Bowl with former UH head coach June Jones now the SMU coach. It might have been a marvelous match.

The third-ranked 28-2 Rainbow Wahine volleyball team were seeded 12th in the NCAA postseason in view of the fact that their end-of-season wins were in the very weak Western Athletic Conference (WAC). Even though they had beaten several top teams, those wins came at the beginning of their season. The fact that they had won 28 straight matches after two early losses was discounted by the NCAA in seeding them 12th without a home game. The Wahine didn’t let that faze them as they swept New Mexico and then topped host USC in four in the sub-regional. Then in the regional, they defeated Illinois in four and swept Michigan in the final. That put them into the final four against two-time defending national champion Penn State with their NCAA-record 100 consecutive wins. Penn State is considered to be the Goliath in women’s volleyball. The Wahine played well but with their height disadvantage, lost the very important blocking stat by an unbelievable 15-0 margin. UH managed to win one set but still lost in four to eventual three-time consecutive national champion Penn State 3-1.

In my last newsletter, I discussed the erroneous assumption by a Hawaii tax auditor that investment property I owned in Mississippi was located in Hawaii and that I had failed to pay General Excise Tax (GET) for the past two years on the gross rental receipts. Copies of my Schedule E’s resolved the matter; however, since Hawaii is desperately in need of tax dollars, increased attention may now exist towards auditing GET taxes. In this regard, another owner who had an experience similar to mine recently contacted us.

We are incorporated as Stott Real Estate, Inc. and do business as The Stott Team for listings and sales and as Stott Property Management for handling rentals. We manage over 400 rental properties Island-wide, with over 100 of them being in Kailua. For additional information on property management, contact my son-in-law, Tim Kelley. For information on selling a property, contact my daughter, Tracey Stott Kelley. Either of them can also be reached by phone toll-free at 1-800-922-6811 or locally at 808-254-1515.

Department of Defense – Homeowners’ Assistance Program (HAP)

Congress created HAP (Homeowners’ Assistance Program) in 1966 to compensate eligible military and civilian Federal employees when the real estate market where they owned a home was negatively impacted by base closures or reduced operations. In 2009, HAP was extended to assist service members and DOD employees who are wounded, injured or become ill when deployed, surviving spouses of service members or DOD employees killed or died of wounds while deployed, service member and civilian employees assigned to Base Realignment and closure (BRAC) 2005 organizations, and military personnel required to make a Permanent Change of Station (PCS move) during the home mortgage crisis.

HAP is administered by the U.S. Army Corps of Engineers. Most of this article is taken directly from the DOD-HAP website located here. It is strongly recommended that anyone interested in this program thoroughly review this website as there appear to be various exceptions to the rules as well as ten pages of frequently asked questions and answers. This article does not address all the various rules and exceptions. It is designed merely to provide an overview of HAP with emphasis on military personnel required to make a PCS move since 2006. The information herein is subject to change and not guaranteed to be accurate.

Military Personnel Permanently Reassigned During the Mortgage Crisis

1. Permanent reassignment requires a move of more than 50 miles.

2. Reassignment ordered between 1 February 2006 and 30 September 2012.

3. Property purchased (or contract to purchase signed) before 1 July 2006.

4. Property was the primary residence of the owner.

5. Owner has not previously received these benefit payments

6. If you are a member of the Armed Forces who is or will be making a PCS, download the application packet and complete the application. Carefully read all instructions and mail your completed application to the USACE district responsible for the area in which your home is located. Once DOD implementing guidance is received the district will contact you concerning your eligibility and benefits.

HAP Private Sale Benefits: Eligible applicants may be compensated for the difference between 95% of the appraised fair market value of the property prior to the announcement date, and the appraised value of the property at the time of sale, or the sales price, whichever is greater. Closing costs are reimbursed for private sales.

HAP Government Purchase Benefits: An eligible applicant may elect to sell the property to the government and receive, as the purchase price, an amount not to exceed 75% of the appraised fair market value prior to the date of the announcement or the current total amount of outstanding mortgages whichever is greater.

HAP Foreclosure Assistance Benefits: If foreclosure proceedings have commenced, an applicant may elect to receive foreclosure benefits or private sale benefits. Foreclosure benefits may be paid directly to the applicant to reimburse for foreclosure costs paid by the applicant, or paid to third parties on the applicant’s behalf.