January to March 2016 Quarterly Newsletter

The median price in March for Oahu single family homes was $725,000 (compared to $700,000 in March 2015) and for Oahu condos was $385,000 (compared to $380,000 in March 2015). Demand for both houses and condos grew about 20% compared to last year and supply shrunk by around 25%. As a result, there is only 2.1 months of remaining inventory of single family homes and 2.3 months of remaining inventory of condos. Additionally, the prices of active listings are skewed to the higher end of the market. Currently only 31% of the available Oahu houses are priced under $800,000 while only 41% of the Oahu condos are priced under $375,000. Competition for “modestly” priced homes appears to be heating up for the busy spring and summer season.

Hawaii economists predict steady economic growth of 2 to 2.5 percent in 2016 but there are risks on the horizon. The shrinking military (currently 46,000, down from a high of 51,000 in 2014), slowing construction (fewer building permit applications), and lower visitor spending pose risks to continued expansion. Paul Brewbaker, one of Hawaii’s leading economists, thinks that lower spending by tourists is the single most important strategic economic development for Hawaii. Real visitor spending has dropped 0.7% per year on average from 1997 to 2014 when inflation is taken into account. Hawaii has been unsuccessful in finding an industry that would diversify the local economy beyond tourism.

Please take the time to visit our upgraded company website and new property management website when you get a chance (www.stott.com and www.stottpropertymanagement.com). Our goal is to provide customers and clients a platform that allows them to quickly and efficiently review the content that they want to see. The new websites are the product of three months of hard work and collaboration by the staffs of Stott Real Estate, Inc. and Wind on Water Communications.

A Mixed Plate of Talk Story

Monstrous waves pounded the North Shore prompting the closure of 11.5 miles of roads on Monday, February 22, 2016 as waves with 60-foot faces slammed into Waimea Bay. The large surf ripped surfboards from contestants of The Quiksilver in Memory of Eddie Aikau as the surf contest was held for only the ninth time in 30 years. The waves in Waimea Bay must have a sustained face height of 30 to 40 feet for eight hours in order to hold the event. Some wave faces that reached 60 feet in height intimidated seasoned professional big wave surfers. Haleiwa’s own John John Florence won the event and took home the $75,000 check. 66-year old Clyde Aikau, Eddie’s brother, competed in his last “Eddie.”

Some participants in one of Hawaii’s largest annual hula completion, the Merrie Monarch Festival, won’t use the ohia lehua tree blossoms in their costumes to help prevent the spread of the ohia lehua blight. There is no current cure for the fungal disease that has infected about 34,000 acres of forest on the Big Island. The state is trying to contain the spread by prohibiting the transport of ohia products and plant parts without a permit from the Big Island. The Big Island is currently the only island affected by the fungal disease. Stopping the spread can be tricky because a tree can be infected months before showing any signs of the disease. Ohia is important to Hawaii’s water supply because it is very effective at soaking rain-water into the ground and replenishing the water shed. The tree’s nectar is a critical food source for many native birds and animals.

One of the most popular attractions on Oahu, Hanauma Bay, is struggling to find the right balance between visitor satisfaction and protecting the environment. Approximately 384,000 people visited Hanauma Bay in 1975. That number grew to over three million in 1988 and the onslaught of visitors was damaging the reef, polluting the water, and creating unnatural fish behavior. Several rules have been put in place to help protect the bay’s fragile ecosystem. In 1990, the city banned tour buses from dropping off beachgoers resulting in about 2 million fewer visitors. The ban, along with a ticket window, and requirement to watch a video that emphasizes the need to stay off the reef and not feed the fish has helped turn things around. Hanauma Bay helps limit the number of visitors in the park by allowing only 125 visitors to watch the video every 15 minutes. While this helps with crowds in the park, long lines regularly occur causing widespread frustration. Gone are the days that Tracey fondly remembers as a kid back in the day. She would often go to Hanauma Bay without waiting in line and fed the fish with a bag of frozen corn or peas. Tracey often jumped in the "toilet bowl" which has been closed to the public.

The National Oceanic and Atmospheric Administration (NOAA) is preparing to propose rules to help protect spinner dolphins while they sleep in shallow waters off the Hawaii coast. The dolphins are nocturnal and spend the night hunting fish and they need their rest after foraging all night. During sleep, half the dolphins’ brain shuts down while the other half stays awake to surface and breathe. The dolphins appear to be awake because they continue to move. One indication that the dolphins are sleeping is the synchronization of the dolphin pods’ dives and swims. The dolphins are a popular attraction for tourists and several tour operators take people to the shallow waters so they can swim with the dolphins. NOAAs concern is that the tour operations are disturbing the dolphins’ sleep, which could cause long-term health issues. Their goal is to allow people to observe the dolphins in their natural habitat while allowing the dolphins to get their sleep through education and regulation.

A team at the Oceanic Institute of Hawaii Pacific University (HPU) has successfully bred a batch of yellow tangs after a decade of trying. The state currently sustains its $2 million aquarium industry by harvesting hundreds of thousands of fish from reefs each year. The yellow tang is one of the most recognized of all Hawaii reef fishes and one of the world’s most popular saltwater aquarium fishes. HPU’s success could be a boon for reef conservation efforts. Tim and Tracey recently marveled at dozens of yellow tang and other reef fish while snorkeling during a recent Big Island vacation.

Hawaii’s Department of Land and Natural Resources has established a new coral nursery on Sand Island to help restore damaged reefs and serve as a bank for Hawaii’s native corals. Nursery staff members are using techniques designed to double the growth rate of coral in its natural setting from a rate of one to two centimeters per year to almost three centimeters per year. The staff harvests coral from Hawaii harbors and places small fragments of the coral into tanks filled with water that includes minerals to maximize survival and exposed to lighting to optimize growth. The growing fragments are later placed in large outdoor seawater tanks where they naturally fuse together. The larger the coral, the less likely that it will be affected by sediment and invasive species when introduced back into the wild.

The Third Circuit Court completely vacated the Thirty Meter Telescope project’s conservation district use permit on February 22, 2016. The Board of Land and Natural Resources must hold a new contested hearing before the permitting process can begin. TMT hopes to secure a new conservation district use permit by early 2017 and target construction for April 2018. TMT may consider other sites if they are not granted access to Mauna Kea later next year. The court action has negatively affected Hawaii’s business reputation as the arbitrary ruling by the courts has placed TMTs investment at risk. TMT has already invested $170 million to date for construction and manufacturing.

Both the University of Hawaii’s men’s and women’s basketball teams completed a very successful year by winning their respective conference tournaments and qualifying for the NCAA tournament. The men’s team won its first ever NCAA tournament game over the University of California – Berkeley before losing to Tracey’s alma mater, University of Maryland in the second round. The men’s team finished the year with a record 28 wins. Hawaii men’s coach, Eran Ganot, won the UH rookie coach of the year award for the men’s basketball team’s historic run. The women’s team lost to University of California – Los Angeles (UCLA) in the first round. The women finished the season with a 21 – 11 record.

In January, University of Hawaii (UH) President, David Lassner, presented a request for $16.2 million in budget add-ons, including support for the struggling UH Cancer Center and money losing athletic program, despite pulling back on planned tuition increases for the next two years. The money would be added to the already approved $428 million in general funds over the next two years. Not surprisingly, several legislators are protesting the use of taxpayer funds to fill a hole from UH’s failure to execute the planned tuition increases. Apparently, in response to the negative feedback, Lassner announced in late February that UH will propose a two-percent tuition increase every year for three years beginning in 2017 to help address a $505 million backlog in deferred maintenance. UH must hold 11 public hearings prior to submitting the proposal to the board for approval.

Plans to build a $50 million center on the University of Hawaii-Manoa campus to honor the late U.S. Senator Daniel K. Inouye have been shelved indefinitely due to criticism of the growing UH repair backlog. Some lawmakers have sensibly questioned the pursuit of new building projects when the university has done such a poor job of maintaining its existing facilities.

The New York Times recently chimed in on HART’s struggle with ballooning construction costs in an article titled “Hawaii struggles to keep rail project from becoming a boondoggle.” The article presented concerns about the 20-mile elevated train line, its design, delays, and escalating costs. HART’s chairman responded that the cost overruns have been addressed by extending the General Excise Tax surcharge and that operational costs savings will be achieved “by utilizing new synergies with TheBus and other City services including the introduction of a systemwide Smartcard.” He added that federal funding will pay for a projected operational loss of $71 million for the first full year of rail operations. The Honolulu Star Advertiser ran an article not a week later highlighting that the recent General Excise Tax extension may not cover the most recent cost versus revenue projections. The budget deficits won’t end with construction. In January, rail officials stated that property taxes will have to increase 9% just to cover the projected operating hole every year once the over-budget construction project reaches completion. The Honolulu Authority for Rapid Transportation (HART) projects that the operations will be in the red to the tune of about $1 billion every decade. HART officials initial budget plans to have fares cover only about 30% of the cost of operations (similar to TheBus operations).

Federal Regulators approved a planned $1.6 billion offshore wind farm that will be located about ten miles southeast of Barbers Point in West Oahu. The project still needs a power purchase agreement with Hawaiian Electric Company (HECO) in order to provide electricity to Oahu’s grid at an expected price below 20 cents per kilowatt-hour. While that rate is expensive in most states, it still represents a modest savings over what HECO’s customers currently pay (about 24 cents per kilowatt-hour). HECO needs to find new sources of renewable energy since it recently cancelled several purchase agreements from renewable sources last month.

Hawaii’s High Technology Development Corp. (HTDC) has sponsored a demonstration of the Air Force’s $6.8 million investment in a waste to energy generating system. The project demonstration will show how ten tons of waste per day can be converted to electricity through gasification technology. Applications of the system include solid waste, animal and crop waste, cellulosic biomass, tires, non-recyclable plastics, and industrial waste. The system was installed at Joint Base Pearl Harbor-Hickam late last year and is currently going through initial testing. The system will soon run specific programs to collect data and then eventually will be used to produce liquid jet fuel from waste. The demonstration will run through summer 2016.

Mari’s Garden, one of the nation’s largest aquaponics farms in the nation has removed itself from the electric grid with the help of Wisconsin-based EnSync Energy Systems. The Mililani farm uses 25 kilowatts of photovoltaic (PV) solar panels and a 25-kilowatt battery storage system to power the farm’s pumps. Tim and Tracey should visit the farm to see how it is done. Tim and Tracey set up an aquaponics garden with their daughter Ashley, five years ago. They are great at growing salad greens and tilapia but absolutely terrible at harvesting anything. Tim goes out to the garden every morning to feed the fish. It may be a matter of time when Tim names all the fish, officially making them pets. At this time, there is still a small possibility that the fish may make the dinner table.

One of the most interesting visitors to Pearl Harbor is the Sea-Based X-Band (SBX) Radar platform, a powerful part of America’s Ballistic Missile Defense System. It comes to Pearl Harbor for routine maintenance and calibration between operations off the Aleutian Islands. The vessel looks like a giant white egg on stilts and can be seen from many places on Oahu when it is in port. The self-propelled platform is about the size of two football fields and is operated by a crew of 86 when underway.

Odds & Ends

Clutter: Tim observed that Tracey often watches the show “Hoarders: Buried Alive” on weekends and recently asked why she watches the show. Her response was quite interesting. Tracey replied, “the show helps me understand some of my clients and their tenants when I list properties that have a lot of stuff and it helps me come up with solutions to help the property sell while preserving the individuals dignity.” A huge reason why Tracey helps people sell their homes, and Tim does not, is due to her patience and her ability (both natural and honed over years of experience) to empathize with her clients and residents whose lives are experiencing some stress and turmoil.

We started thinking about how clutter can complicate the lives of homeowners, tenants, and managers and negatively impact their finances. The clutter can take many forms and the root causes are just as numerous. Some common types of clutter and suggested solutions will be discussed in this article.

The most common form of clutter comes from the accumulation of belongings as people live in their homes over long periods of time. Pictures, knick-knacks, artwork, furnishings, tools, utensils, and paperwork start collecting to the point that the house runs out of room. Some people build a shed and store the excess items there, some people rent out storage spaces, and some people just let their belongings pile up on every horizontal surface in the house until family members must follow paths to get from one room to the next. While hoarding is a mental condition that requires treatment, spring-cleaning by the family can prevent many issues from getting out of control. Tim and Tracey periodically go through their closets, bookcases, and shed together (with their kids when they used to live at home) and donate or throw away items that are in poor condition, broken, or have not been used in the past year or two. It usually only takes a couple of hours to identify and remove the items and it gives them a sense of accomplishment.

Families in the process of moving should take a hard look at what they should move and what items are better off left behind. We often observe buyers who will buy a home that is not necessarily the right fit for their living circumstances to accommodate existing furniture and belongings. There are some pieces that one should not part with due to their sentimental value or because they are valuable and irreplaceable antiques or artwork. However, there are more cases where buyers don’t want to part with run of the mill furnishings that just don’t fit in a great property under consideration. We recommend doing the hard work and making the tough decisions when it comes to identifying, selling, throwing away, or donating furnishings that can be easily replaced and don’t fit in a new home. We observe families tripping over poor fitting furniture, commuting unnecessarily, paying more they need to for a home, spending more than they need to move their stuff, and spending thousands each year storing items that never get used again.

Tim and Tracey often see rental properties where owners store tools so that they can work on their homes when they visit, or store furniture and personal items in locked rooms that they will use when they return to the islands even though they have no concrete plans on returning. Stott Property Management manages some properties that owners have accepted hundreds of dollars in lower monthly rents over many years because tenants don’t have access to the entire property. In the end, the stored belongings are often destroyed by Hawaii's elements and Stott Property Management ends up hiring handymen to throw them away. In some cases, the owners have passed away and their children have to clean out the rooms and storage areas. In rare cases, storage areas have been broken into and owners have wrongly accused tenants of stealing or destroying their belongings. If you are going to move and rent your previous home, then do yourself a favor and take all of your tools, vehicles, and belongings that you need and sell or donate the rest.

Capital Gains versus Equity: Capital gains and Equity are two important financial measurements that homeowners and investment property owners should estimate before deciding to sell a property in order to successfully plan for and complete a transaction. The capital gain from selling a property is important for estimating a potential tax bill and the equity helps determine how much money the seller will receive or have to pay when selling a home. There are cases where a seller will have to write a check to the title company to sell a home and still have to pay federal and state capital gains taxes.

The capital gain from selling a home is determined by subtracting the buying basis from the selling basis. The buying basis equals the price that a buyer paid for the home plus any closing fees associated with purchasing the property. The selling basis equals the sales price of the home minus realtor fees, closing fees, and the cost of any capital improvements on the home. If the resulting figure is negative, then the seller suffered a capital loss.

An owner’s equity in a property represents the difference between the market value of the property and any loans taken out against that property (mortgage, home equity line of credit, etc.). The seller will have to write a check to sell a home if there is negative equity in the property and the lender won’t forgive a portion of the debt owed (short sale).

There are occasions when a seller will have a capital loss on the property and still receive money from the sale of a home. This scenario can result when a seller makes a large down payment when buying and the market falls making the property less valuable at the time of the sale. It can also result from a seller being unable to recoup the costs of a major remodel when it comes time to sell. Likewise, a seller can have capital gains and still write a check to sell a home. A common scenario that played out in 2009 and 2010 involved homeowners who took out a home equity line of credit or refinanced a home and took cash out. The following market downturn left many of these owners underwater and they either wrote a check or received loan forgiveness even though they had to report a capital gain on the sale.

Recasting a Mortgage: Recasting a mortgage is a little known option available to some homeowners that want lower monthly mortgage payments, have paid off extra principal or have a large lump sum of cash available, and don’t want to refinance their mortgage.

Normally, if you pay off extra principal on a mortgage, the monthly payment remains the same and you simply end up paying off the mortgage sooner. While this strategy will save you interest paid over the life of the loan, it won’t shrink your monthly payments.

Recasting, or re-amortization, involves reducing your monthly payment by paying off a sizeable chunk of the principal on the loan, and then requesting the lender to recalculate the principal and interest owed using the same interest rate and time remaining to pay off the loan. The end result is that you pay a lower monthly amount, make your final loan payment on the date specified in the loan documentation, and save some interest over the life of the loan. The added principal could have been paid off over time or the borrower could have a large lump sum available from savings, a recent bonus, or asset sale. We recommend contacting your lender first before paying off a large chunk of your mortgage if your goal is to recast your loan. Not all lenders will offer the option and some lenders may charge an administrative fee. Bank of Hawaii for instance, will allow a borrower to recast their mortgage once for certain mortgages over the life of the loan.

Mortgage Pay-offs: Let us be the first to congratulate you if you recently paid off a mortgage on your home or an investment property. We recommend that you verify your mortgage company recorded your pay-off in addition to basking in some well-earned glory. If your lender failed to record your pay-off, then you will have a problem when you sell that property because the property still shows that it has a mortgage on paper. It is much easier to get hold of your past lender if you discover this problem before many years have passed because loans are sold between lenders, lenders get sold, lenders go out of business, and paperwork gets misplaced.

Tracey recently helped two sellers with paid off mortgages that were not recorded by switching from one title company to another while in escrow. One title company would not provide title insurance because the mortgage payoffs were not recorded while another company reviewed the circumstances and agreed. In one case, we were able to track down the lender and get the mortgage release recorded after the closing.

Accessory Dwelling Unit (ADU): Mayor Kirk Caldwell signed an ordinance on September 14, 2015 allowing homeowners to build and rent out a separate living space with a full kitchen, bedroom, and bathroom to help defer the high cost of home ownership on Oahu and to help add sorely needed rental inventory to help satisfy unmet demand.

The City and County of Honolulu have placed some important restrictions on ADUs:

1)         An ADU can be no larger than 400 square feet on lots between 3,500 and 4,999 square feet and no larger than 800 square feet on lots larger than 5,000 square feet.

2)         Only one additional dwelling unit is allowed. An ADU can’t be added to a lot with multiple units already present.

3)         An owner or designated representative must live on the property. Hiring a property manager is not sufficient in meeting the requirements.

4)         The lease may be no less than six months in length.

5)         There must be one off-street parking space available.

The requirement that a designated representative must live on the property does make renting an ADU using a property manager a little more complicated. A client of ours recently filed the paperwork to convert an existing attached unit into an ADU so that they could provide a full kitchen versus a wet-bar. Even though Stott Property Management manages the property, the City and County required that the owners designate one of the tenants as the designated representative.

http://www.honoluludpp.org/ contains more information if you are interested in adding an ADU to your property.

Marketing versus Selling: The American Marketing Association most recently defined Marketing as “the activity, set of institutions, and processes for creating, communicating, delivering, and exchanging offerings that have value for customers, clients, partners, and society at large.” Selling is the final stage in marketing that essentially involves closing the deal. Marketing and selling are often used interchangeably because both have the same goal. However, understanding the differences can be the key between success and failure.

How does marketing apply to real estate? Many people have heard the real estate phrase, “location, location, location.” The largest component of real estate marketing actually occurs when a buyer purchases a home or investment property. Location makes up the largest component of positioning the product, in this case, a home. Architecture, interior design, amenities, and condition of the home play an important but smaller role. You can have the best of all worlds when it comes to the features of a home, however, if the property is located in a poor location, then the homeowner or investor has simply over-improved the property. That is the reason that regardless of size and condition, a house will sell within a certain range in a specific location and a condo will sell within a certain range in a specific complex regardless of what the interior and exterior look like. For example, the same exact house located in Kahala will be worth more and cater to a different clientele than the house located in Mililani. Is there anything right or wrong with Kahala over Mililani? The answer lies in the eyes of the beholder. That being said, a homeowner may not be able to sell a luxury home in Mililani for several million dollars to a movie star or mogul regardless of how much money is spent on the construction, decorations, and advertising.

Maintenance does play an important role in a rental properties market campaign. In general, tenants look for clean, functional, square footage in the neighborhoods that they have interest.   Maintaining a rental property is critical in attracting qualified tenants. Most of the tenant issues that Stott Property Management has to deal with (late rent, tenant damage, etc.) occur in rental properties located in less desireable neighborhoods and in properties that suffer from deferred maintenance.

Choosing the right agent or property manager to sell or rent your home is the final piece of the puzzle. A well maintained home in a great neighborhood can still sit empty for longer than necessary if the home is not priced properly or if the ads don’t contain quality photos and enough detail. A well-advertised property will interest more prospects, generate more showings, provide better market feedback, and increase the chances of a quicker sale or quicker lease signing. Since people have differing tastes, markets change, and determining market prices are not an exact science, asking for and adjusting to feedback may be critical in successfully selling or renting a home. A great agent or property manager can help identify the things that you can’t control (location, traffic, local economy) with the things that you can control in an economically efficient manner. It is interesting how modest price changes and minor cosmetic repairs often result in much greater demand for a particular home.

The sale or tenant check-in is the ultimate goal in a successful real estate marketing campaign. In the end, the property must sell itself. Prospective buyers or tenants will make their own judgment about how a property looks, feels, sounds, and smells once they walk through the front door. Ultimately, that is why economists state that a willing and able buyer or renter will help determine the market price for a property.

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