January – March 2010 Quarterly Newsletter

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It appears we may have turned the corner on sales. Comparing the first quarter of 2010 to the same period in 2009, sales of houses were up 36.6% (608 compared to 445) while sales of condos were up 48.7% (837 compared to 563).  Median sales prices over the three-month period went from $565,000 in 2009 to $590,000 in 2010 (up 4.4%) while condos went from $299,000 to 301,500 (up 0.8%) What is unknown is the impact of the $8,000 homebuyers tax credit originally set to expire on 11/1/09 and now set to run out 4/30/10. To qualify for the credit, buyers have until April 30^th to sign purchase agreements and until June 30^th to close. There is also a $6,500 credit for repeat buyers, who have been in their existing home for more than five years. Some analysts believe that the program is similar to the “Cash for Clunkers” that got people buying autos while others believe the improvement is a cyclic result of an improving housing market. A couple of months from now we’ll have much better information. http://tinyurl.com/ydb39zx is a link to an applicable article in the April 8^th Honolulu Advertiser.

We manage over 400 rentals island-wide on Oahu. The three-page article on pages #2 though #4 provides property management guidance and is designed to help owners increase their net rental income by learning from the mistakes made by others. For additional information, contact my son-in-law, Tim Kelley, toll-free at 1-800-922-6811, locally at 808-254-1515 or by e-mail at tim@stott.com . . . Note the article on page #7 concerning lead-based paint. The rules will change April 22^nd and will apply to anyone that is paid to perform work that disturbs lead-based paint including non-licensed handymen.

We are very involved working with short sales. If a short sale is something you’re considering, we recommend you start the process as soon as practical. By waiting, you may limit your options; e.g., if you have gotten too far behind on your monthly payments, you may not be able to forestall a foreclosure action by the mortgage company.

Property Management Guidance

Background: Stott Real Estate, Inc. conducts business as The Stott Team for listings & sales of real estate and as Stott Property Management for managing rentals. We have two adjacent but separate offices for these two divisions. Our marketing area is the island of Oahu; we refer business on the neighboring islands to agents who live and work on the island where the property is located. My son-in-law, Tim Kelley, supervises our PM Division. His primary assistant, Karen Texeira, has been with us for over 17 years. We manage over 400 rental units, making us one of the largest PM companies on Oahu. Most of our clients are absentee owners; however, we also handle rentals for several owners that live on Oahu. Tim has personal experience as an absentee owner, as he and my daughter, Tracey, use PM’s to manage several investment properties they own on the Mainland.

There are many superb PM’s on Oahu; any negative comments made by me towards PM’s in this article are not indicative of Oahu PM’s as a group. Having said that, many of our accounts were listed with another PM and then shifted to us. This article will discuss some common errors made by PM’s and/or owners. The article is designed to help owners increase their net rental income by learning from mistakes made by others.

1. Absentee Owner Acting as a PM: Hawaii law requires that an absentee owner have a representative living on the island where their rental property is located. It does not need to be a licensed real estate agent; i.e., it can be a friend of the absentee owner providing the friend does not represent more than one owner. Some absentee owners, knowingly or unknowingly, violate this law and manage their rental property themselves. This can create problems if a dispute arises that ends up in small claims court and the absentee owner cannot document that they have an on-island representative; i.e., the absentee owner is found to be violating the law.

The purpose of the on-island representative is to have someone immediately available to the tenant in case problems arise. Therefore, the on-island representative should be more than a mere figurehead. The tenant should be advised to contact the representative for problems and emergencies. We recommend that the representative’s name and telephone number be written on the rental agreement with any future changes also being in writing and dated.

Oahu General Excise Tax (GET) @ 4.5% is owed on all gross rental income. An owner acting as a PM should obtain a GET license for payment of this tax. The owner’s GET number is required on some sales forms used when an absentee owner sells a rental property. Plus, the city may be actively searching for owners that are currently violating the law. Last year I was erroneously billed for several years of GET on a property I own in Gulfport, MS. The bill would have been sizable, several years of back GET plus a penalty of 50% plus interest at 8%.

2. The Economy & Evictions: Job layoffs, cutbacks, forced furloughs, etc. are having a major impact upon the rental market. Tenants with financial problems are often individuals who had good credit during tenant screening with a secure job like working for the city or state. However, with forced furloughs and job cutbacks, they find that they no longer can afford their rental payments. In most cases, they advise us that they are vacating and agree to forfeit their rental deposit. However, in some cases the tenants merely stop making payments.

Evictions are an unfortunate but necessary part of the business. With a normal economy and 400 rentals, we normally would expect to average about one eviction in progress at any given time. We’re now averaging three to four evictions. Compounding the problem, the courts are backed-up as a result of the increased number of evictions coupled with forced furloughs for court personnel. Therefore, the eviction process takes longer. Some PM’s and/or owners avoid evictions like the plague. When we take over a delinquent account, it is not unusual for the tenant to be at least three months delinquent without an eviction having been initiated. There are an endless number of excuses delinquent tenants create for failing to pay their rent. They always seem to need just one more month to work things out. Then one day, you discover that they have flown the coop with no forwarding address and left the property in poor condition. Barring unusual circumstances, tenants that get behind on their rent by more than one full month are usually unable to get caught up despite all their many promises and excuses.

An eviction action is initiated in Hawaii by sending the tenant a five-day demand letter. This letter states that the tenant has five business days from receipt of the letter to pay all overdue funds or their lease will be terminated. The five-day demand letter usually forces the tenant to negotiate in a meaningful manner. However, the owner must be prepared at this stage to spend money on an eviction attorney if the tenant doesn’t pay their overdue rent or agree to negotiate. A voluntary vacancy is usually less costly than an actual eviction, particularly if the property is left in good condition. The eviction process usually costs $1-2 thousand dollars. We have used the same eviction attorney for years; his cost for our clients runs about $750. If a previous month’s rent has not been paid by the 10th of the following month and no special payment plan has been approved, we normally recommend that a five-day demand letter be sent to the tenant.

3. Changing Market: Some owners and PM’s do not realize that the rental market has changed. As a result, they are slow to lower an asking rent to new market values causing their property to remain vacant. A sound strategy these days for owners who may still be receiving a prime-rent is to accommodate their existing tenants, if practical, by making desired repairs and/or minor upgrades. In some cases, rent decreases might even be considered to prevent prime-rent tenants from vacating. We encourage all owners to conduct their own independent research as to what constitutes a fair rental rate. Two good sources of information are Craigslist Honolulu (http://honolulu.craigslist.org/apa/) and classified advertisements of The Honolulu Advertiser (honoluluadvertiser.com).

4. Communications: The most common problem that arises between owners and their PM’s is poor communications. In almost every case where we obtain an account from another PM, there has been a period of poor communications between the owner and their PM. Larger companies, like ours, have in-office staff personnel and toll-free telephone numbers to assist absentee owners in addressing issues. Smaller companies usually have to rely on telephone messages. You should discuss communications with your PM including how soon you can expect them to get back to you if you have left a message for them to call. The PM should also provide you a list of applicable personnel for you to contact if the PM is unavailable.

5. Long Leases: Tenant leases should normally be written for a maximum period of one year thereby enabling rents to be increased annually if warranted. A one-year lease also enables the owner/PM to have far more control over a problem tenant. Merely threatening that the lease will not be renewed often works wonders. Lengthy leases can create problems in a rising housing market, as some owners may want to try to sell at the height of the housing market. A lease has priority over a sale i.e., the tenant can stay in the property until the end of their lease even though the owner sells the property.

6. Internal Inspections: Periodic internal inspections of a property are essential to ensure there are no major problems and the tenant is maintaining the property properly. We’ve taken over properties that were in horrible condition requiring major renovations by the owner as neither the owner nor the PM had inspected the inside of the property for a number of years. Our policy is to conduct an internal inspection of every property we manage at least once a year by a member of our staff with photos and/or a video available to the owner.

7. Inventory & Condition Report: An Inventory & Condition Report establishes the move-in condition of the property. It is approved by the tenant and establishes the basis for damages should the property not be maintained properly. Without this form, Hawaii law states that the condition of the property when the tenant vacates is the same as what existed when the property was rented.

One of the most common problems we encounter with absentee owners that have been acting as their own PM is their failure to have proper tenant check-ins. Sometimes, their property has been re-rented several times with each new tenant taking the home without any paperwork establishing the actual move-in condition. If you are an owner/manager, you might want to consider having someone video your property to establish current condition. We routinely video properties on our tenant check-ins, as we have found tenants tend to take far better care of a property when they know video exists of the move-in condition.

8. Unsupervised Repairs: Absentee owners acting as a PM sometimes will authorize work to be done by their tenant who is then compensated by a reduced rent. Such agreements sound marvelous in the discussion stage. However, the discussion is usually verbal, without a clear definition of the exact scope of the work to be done, and without any direct supervision. Disputes may arise over the quality and/or amount of work done by the tenant. The tenant, believing they were not compensated fairly, may then stop paying rent and/or initiate an action against the owner in small claims court creating a problem for an absentee owner that is violating the law. We suggest that you not authorize repairs or improvements by your tenant unless they are very minor like fixing a leaking toilet.

9. Good Tenants: Sometimes, owners will deliberately provide their tenant an under-market rent because they are such good tenants. Tenants should not be provided a large discounted rent merely because they pay their rent on time and take reasonable care of the property. That is what an owner has a right to expect.  We’ve taken over properties where a tenant had been paying the same rent for over ten years merely because they were considered to be a good tenant that the owner didn’t want to lose.

10. Befriending Tenants: Some owners make it a point to become personal friends with their tenant. They then tend to stop treating the rental as a business and end up losing money, usually because they are reluctant to make rent increases to existing market rent or reluctant to enforce terms of the lease.

11. Kid Gloves Syndrome: Some owners treat a tenant with kid gloves because they believe the tenant might be a future buyer for the property. Perhaps, the tenant has said something like, if you ever consider selling, please let me know. Less than 1% of the sales on Oahu involve tenants buying properties they are renting. However, some tenants are aware if they act like potential buyers for the property, they may be able to forestall any rent increases.

12. Pets: Allowing pets will increase the number of prospective tenants and often enables an owner to get a higher rent while retaining carpeting that otherwise might need to be replaced. If your carpeting is not in good condition, consider allowing pets. Tenants with pets will almost always agree to pay a higher rent and elect to retain older carpeting (in lieu of having it replaced) if the owner will allow pets.

13. “For Rent” & “For Sale” Simultaneously: We have had considerable success listing homes “for sale” and “for rent” at the same time. Usually the owner prefers one to the other but only if they achieve a specific price; e.g., they’ll continue to rent the property if they can get $2,500/mo rent otherwise they want to sell it. Or, they want to sell it if they can get $750,000 otherwise they want to continue to rent it. So, we try both simultaneously and take the first that is acceptable. If the owner is realistic concerning both the rent and the sales price, our experience is that it tends to be a toss-up as to which will come first.

New Lead-Based Paint Requirements

The rules regarding lead-based paint will change as of April 22, 2010. The new rules require that contractors performing work that disturbs lead-based paint in homes, child care facilities, and schools built before 1978 must be certified by the Environmental Protection Agency (EPA) and follow specific work practices to prevent lead contamination. Before beginning renovation, repair and/or painting projects that may involve lead-based paint, contractors performing the work must have EPA Certification.

Lead-based paint was used in more than 38 million homes before it was banned for residential use in 1978. Lead can affect childrens’ brains and developing nervous systems, causing reduced IQ, learning disabilities, and behavioral problems. Lead is also harmful to adults, however, the greatest concern is to children under six years of age. Visible or invisible lead in dust is the most common way people are exposed to lead in homes. People can also get lead in their bodies from contaminated soil or paint chips. Lead-based paint was frequently used in wood framing for windows and doors. Small children may be exposed to the lead if they chew or gnaw on the wood framing.

Property owners have the ultimate responsibility for the safety of their family, tenants, or children in their care.  As of April 22, 2010, they are responsible for ensuring that activities in pre-1978 housing that disturbs paint including remodeling and repair maintenance, electrical work, plumbing, painting, carpentry and window replacement is performed by an individual or firm that has been certified by the EPA. Certified Renovators are trained to use a test kit to determine if lead-based paint is present.

NOTE: The new law applies to anyone that is paid to perform work that disturbs paint in housing and child occupied facilities built before 1978 regardless at to whether they are a licensed contractor or not; therefore, it applies to unlicensed handymen.

NOTE: The training, certification and work practice requirements do not apply where the firm obtained a signed statement from the owner that all of the following are met:

The renovation will occur in the owner’s residence;

No child under age 6 resides there;

No woman who is pregnant resides there;

The housing is not a child-occupied facility; and

The owner acknowledges that the renovation firm will not be required to use the work practices contained in the rule.

To become licensed as a Certified Renovator, an individual must successfully complete an eight-hour accreditation-training program. Once a firm has a Certified Renovator on their staff, the firm is approved for lead renovation work. Larger firms will likely have at least one staff member that is approved by the EPA. Smaller firms may find it more cost and time effective to hire a licensed subcontractor to conform to EPA requirements.

Hawaii is located in EPA Region Nine: Regional Lead Contact

U.S. Region Nine

75 Hawthorne St.

San Francisco, CA  94105

(415) 947-8021

A Mixed Plate of Talk Story

Hawaii made national news the end of February with a tsunami warning created by a magnitude 8.8 earthquake off the coast of Chile. Shortly after midnight, a tsunami warning was issued for Hawaii. The “coconut wireless” became activated with calls from the Mainland to family/friends living in Hawaii. I received my first Mainland call at 3:00 a.m. We live on the beach, so Mary Lou and I made arrangements to go to Tim and Tracey’s house with our two dogs and two birds. Their house is also in Kailua but at a much higher elevation. By 3:45 a.m. a large 24-hour Safeway in Kailua began running out of supplies like bottled water, size D flashlight batteries, etc. People were actually waiting in line at the grocery store for shopping carts.  By about 6:00 a.m., gas stations began running out of gasoline. Sirens were frequently sounded along with trucks driving along shoreline streets playing messages for occupants to evacuate. Various estimates were made as to the expected wave height ranging from about 8 ft. in Hilo to about 3 ft. for Oahu. With a tsunami, there are usually a series of waves over a several hour period. The latter waves often create more damage than the initial wave. At about 11:45 a.m. waves at Kahului rose 3.2 ft., which turned out to be the highest wave activity for Hawaii. Sunday front-page headlines in both the Advertiser and Star Bulletin consisted of only one word: “Exhale” and “Whew!”

Two recent local deaths are noteworthy. Honolulu’s six-time mayor, Frank Fasi (1920-2010), passed away in early February. Fasi served as mayor of Honolulu for 22 years. He started out as a Democrat and along the way formed his own Independent Democratic Party, then became a Republican, then formed his own independent Best Party ticket, then became a Republican again. The former Marine officer dominated city politics from 1968 to 1996. He was much less successful statewide where he lost gubernatorial races five times. In the statewide races, Fasi did well on Oahu but couldn’t offset losses on the neighbor islands. Politics were always a spectacle for Fasi. “Hizzoner” was truly one of a kind, usually casting himself as a sole force battling the establishment on behalf of the everyday person. Even when opponents disagreed with him, they usually had to admit that he had a special panache. “Da Mayah” was a visionary and got things done his way despite his critics. From current mayor Mufi Hannemann . . . “When you look around city hall or the city of Honolulu, everything good about our city Frank Fasi had a hand in it.”

Mosi Tatupu (1955 – 2010) passed away in late February at age 54. Tatupu was the first Samoan to achieve widespread recognition in the NFL. Born in American Samoa, Tatupu moved to Hawaii where he became a record-setting running back at Punahou, setting a Hawaii high school rushing record. He then went on to a standout career at USC that included playing in two Rose Bowls and being a member of USC’s 1974 national championship team. The New England Patriots in the NFL drafted Tatupu where he played for 15 years including the 1986 Super Bowl. Tatupu was a marvelous special teams player, a position that enabled him to be selected for the Pro Bowl as well as being able to extend his NFL career by several years. At one stage in his NFL career, Tatupu had played in 169 consecutive NFL games.

The owner of the Honolulu Star Bulletin has agreed to purchase The Honolulu Advertiser in a deal that will likely leave Honolulu with only one daily newspaper. The acquisition is scheduled to be completed over the next six to eight weeks. The Star Bulletin is being offered for sale separately but is unlikely to be sold given the state of the economy and the newspaper business in general with its competition from the Internet. Honolulu is one the nation’s last cities with two daily newspapers. If the Star-Bulletin is not sold by the completion of the sale of the Advertiser, the Star-Bulletin will be shut down. The Advertiser is profitable with a weekday circulation of about 130,000. The Star Bulletin is not profitable and has a weekday circulation of about 69,000. The Advertiser has a very modern printing facility in Kapolei that is part of the sale. So, the smaller, non-profitable paper is buying the larger, profitable paper with its modern printing facility.

Daniel Dae Kim, who plays Jin on ABC’s “Lost,” was the first actor cast for the remake of “Hawaii Five-O.” Kim will play police detective Chin Ho Kelly in the remake. Australian actor and “Moonlight” star Alex O’Loughlin has been selected to play Steve McGarrett, Jack Lord’s role in the original series . . . Lawmakers introduced over a dozen bills to legalize gambling. However, opposition from law enforcement, business leaders, social service providers and religious leaders made it difficult for any of the bills to be passed. Hawaii remains one of only two states (Utah is the other) that prohibits gambling . . . Some Hawaii residents may not see their state income tax refund checks until the end of August even though they filed their returns on time. Delaying the refund checks is allowed by state law and is being used to ease the shortfall in the fiscal year that ends June 30^th.

Patti’s Chinese Kitchen closed its last fast food restaurant in Hawaii at the Pearl Ridge Center’s Uptown food court the end of February. Patti’s closed its space in the Ala Moana Center food court in January 2008 after 40 years of being in the Shopping Center . . . For the second time in six years UH will open its football season on national TV and once again the opponent will be Southern California. The Warriors September 2 opener against the USC Trojans will be on a Thursday with kickoff at Aloha Stadium at 5:00 pm. The game will be televised by ESPN . . . Recently, Forbes Magazine bestowed a major honor on the Bank of Hawaii. After reviewing the financial performance of America’s top 100 banks, Forbes named Bank of Hawaii “America’s Best Bank.” Bank of Hawaii has 2,500 employees and over 500,000 customers including Stott Real Estate, Inc. since we were incorporated in 1978.

Honolulu was ranked the second-most expensive city in the world to do business among 112 cities studied in a recent global survey. The 2010 study measured 26 cost components including labor, taxes, real estate and utilities. Los Angeles, New York and San Francisco also fared badly in the survey, ranking within the top ten globally thanks to high labor costs . . . Hilton believes the future is timeshare. The global resort company is planning a two-tower, 550-room expansion at the Hilton Hawaiian Village devoted entirely to timeshares. Hotel companies have been shifting their room mix to include more timeshare units in recent years. Because they are prepaid, timeshare memberships provide hotels with higher occupancy rates and a steadier revenue streams when the visitor industry is slumping. An example is the Disney resort being built at Ko Olina that will have a mix of 480 timeshare units and 350 traditional hotel rooms.

One of the most well-liked and respected sports figures in Hawaii has been basketball player/coach Bob Nash who was the school’s first All-American and a 1972 NBA first-round draft pick. He played professional basketball for several years before returning to UH as an assistant coach to Riley Wallace for 20 years whom he eventually succeeded. Unfortunately, Nash’s record as a head coach has led to his replacement. His overall record was 34-56, 15-33 in the WAC. This past year his team went 10-20 and 3-13 in the WAC. An argument could be made that his recruiting efforts were handicapped by lack of support from the UH Athletic Director but still 3-13 in conference doesn’t get it done. Replacing Nash will be Gib Arnold (41) whose father, Frank Arnold, was the UH coach for two years in the 1980’s with a record of 11-45. Gib Arnold was a star basketball player at Punahou. For the past five years, he has been an assistant coach at USC. His selection has generated a fair amount of controversy.

The television hit “Lost” is planning a two-hour finale on Sunday, May 23^rd that will follow a one-hour review. The show is winding down after generating huge viewership during its six seasons on the air. With reruns, more than 10 million people see “Lost” each week . . . Recently, two bills were passed to reduce the homeless population in city parks. The first bill requires permits before people can erect tents in the parks while the second prohibits the use of shopping carts in the parks. A couple of weeks ago, I had occasion to drive up the Makaha Coast and was very pleasantly surprised to see a major reduction in homeless tents.

Red Hill Underground Fuel Storage

The Red Hill Underground Fuel Storage Facility is located about three miles northeast of Pearl Harbor in a ridge of volcanic rock in an area that provides its name. The storage was built between 1940 and 1943 and is still in use today. In June 1995, the Facility was designated a Civil Engineering Landmark by the American Society of Civil Engineers and referred as the eighth great wonder of the world. There are a number of applicable articles available on the Internet. I used Google and searched for Red Hill Fuel Storage. There is a lengthy article written by J. David Rogers, Ph.D. that contains a number of interesting sketches. An excellent overview was written by CAPT George Sullivan, USN (Ret) for the May 2007 issue of Pau Hana Koa, a monthly newsletter for members of the Hawaii Chapter of the Military Officers Association of America (MOAA).

Several years before the Japanese attacked Pearl Harbor in 1941, the Navy recognized that the existing aboveground fuel storage tanks near the harbor presented a vulnerable enemy target. All of the fuel was stored in unprotected tanks next to the Submarine Base. Standard practice at that time for storage protection was to dig a trench and bury fuel tanks; however, this was impractical for the amount of fuel oil needed to be stored at Pearl Harbor. The Navy came up with a plan to dig a series of tunnels and insert tanks vertically. Finding a suitable site presented problems in view of the porous volcanic rock near Pearl Harbor. The Navy finally settled on Red Hill. At that time, Red Hill was under cultivation for sugar cane and pineapple plantations. The Navy leased the land, cleared and leveled it. Eventually the Navy acquired the property through condemnation.

The Navy’s plan to excavate huge vertical tank chambers instead of horizontal tunnels had never been attempted previously. There are twenty subterranean vertical vaults (cylindrical steel tanks) hollowed out of rock. Each tank has a height of 150 feet and a diameter of 100 feet. At the top and bottom of each cylinder is a hemispherical dome that adds 100 feet to the height, providing total tank height of 250 feet; i.e., each tank equals a 20-story building. Reinforced concrete surrounds each tank varying in thickness from about three feet to eight feet with the lower dome resting on a huge plug 20 feet thick. Surrounding the cement is rock. To determine the depth necessary to protect the tanks from an aerial attack, the engineers gathered information from the Army Air Corps, multiplied it four-fold and rounded the figure upwards to 100 feet of rock cover. The 20 tanks are located 200 feet apart in two straight rows. They can hold over 250 million gallons of fuel and are in use today.

Centered between the two rows are two tunnels, one above the other, connected by an elevator. The upper tunnel near the top of the tanks is approximately 2,300 feet in length with a width of almost 13 feet and a height of 11 feet. The lower tunnel is located below the tanks and contains three large fuel lines as well as a narrow tract on which a battery-driven locomotive operates to haul personnel and supplies. The lower tunnel is 3.4 miles in length, running between the tanks and a receiving pump house at Pearl Harbor. It takes the batter-driven locomotive 30 minutes to make the run.

Construction began at Christmas 1940; cavities were constructed by blasting out the surrounding volcanic rock. Then steel quarter-inch tanks were welded together to form the tanks. Most of the work was done in secrecy. Fuel piers were built at Pearl Harbor as well as roads, tunnels, pumps, etc. The number of men on the project reached a peak of 3,400 in June 1942 and remained at that level until October 1942 when the first two tanks were completed and turned over to the Navy for operation. By February 1943, the Navy had assumed operation of ten completed tanks. The remaining ten tanks were completed by July 1943 with a final cost in 1942 dollars of $43 million along with the loss of 17 lives.