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Quarterly Newsletter April - June 2020

P r i n t  |  R e p l i c a

The June median price for single-family homes was $770,000 (3.8% lower than June 2019) and for condos was $421,500 (2.5% lower than June 2019).  Demand for single-family homes dropped 7.6% compared to last year and for condos dropped 34.0% as Hawaii finished their third month of pandemic related restrictions.  The supply of single-family homes remained extremely tight as sellers hesitate to put their houses on the market.  There was only 2.5 months of single-family home supply while the supply of condos crept up to 4.1 months of inventory.  The demand for condos has been falling faster then the reduction of new inventory.

One of Hawaii’s leading economists, Paul Brewbaker, held a webinar for the Hawaii Association of Realtors on June 17th discussing housing trends in light of the Covid-19 pandemic.  In much of the presentation, he hinted that it is still a little too early to say what effect, if any; the pandemic has had on housing prices. He did point out that all the risk is currently on the downside and that condo inventory in terms of months of inventory is noticeably higher than single-family homes.  The change in supply actually started with the passing of Ordinance 19-18 on Oahu that made the advertising of unlicensed vacation rentals a fineable offense.  That inventory of divergence appears to have continued as a result of the Covid-19 pandemic.  Brewbaker currently anticipates that the pandemic will have a greater impact in the commercial real estate market with retail and food service feeling most of the pain.  He says that it is too early to tell if there will be a noticeable impact on Oahu’s residential condo market.

Tim & Tracey publish a monthly e-mail newsletter that provides more detailed local news with links to photos and videos.  Please e-mail Tim and Tracey at [email protected] if you would like to be added to the monthly newsletter.  You will continue to receive the mailed quarterly newsletter.

A Mixed Plate of Talk Story

Governor David Ige has extended his emergency proclamations nine times since issuing his first emergency proclamation concerning the Covid-19 pandemic back in March.  He was widely criticized in April for what many people considered excessive restrictions on the public’s activity.  On Friday, April 17th, Governor Ige issued a fifth emergency proclamation that further restricts Hawaii residents’ activity even though the number of new cases was twelve and existing restrictions appeared to be working.  The governor closed all of Hawaii beaches preventing residents from walking or exercising on the beach forcing more people to walk and run on sidewalks and streets.  Lt. Gov. Josh Green was providing daily Facebook updates on Covid-19 related stats and Honolulu Star-Advertiser columnist, Lee Cateluna, highlighted one of his updates.  In it Green writes the following on a white board:  Park OK, Ocean OK, Beaches WTF. Ige finally recognized that he might have gone too far when the local evening news was covering Green’s post.  The beach restrictions were relaxed on Saturday April 25th so that people could exercise on the beach while maintaining social distancing.  On April 27th, Governor Ige announced that florists would not be allowed to deliver flowers on Mother’s Day and that the mayors of each county must get his permission before making changes to the stay-at-home orders.  He retracted that restriction based on the resulting outcry from residents and florists who were about to be stuck with undelivered inventory.  The mayors expressed concern that Ige’s orders were reducing their flexibility in addressing issues impacting their counties while undermining their ability to lead during the crisis.

The governor continued to receive criticism of his handling of the crisis in May.  The front page of the Honolulu Advertiser on 5/28/2020 highlighted the tension as the state continued to order strict social distancing protocol while the number of infected continues to fall.  One article describes Lt. Governor Josh Green’s criticizing Governor Ige’s slow approach to reopening the Hawaii economy and allowing travel between the different islands.  Green stated, “We should have opened ten days ago (referring to interisland travel and reopening business).  That was a mistake.  From a medical standpoint, we would have been fine ten days ago.”  Green is a Hawaii Island emergency surgeon and has been highly critical of Governor Ige’s and his administration’s handling of the crisis caused by the pandemic.

Governor Ige finally started more aggressively opening the economy in June.  The fourteen-day quarantine requirement for interisland travel was lifted on June 16th.  Departing passengers must have their temperature checked and fill out a new form prior to getting on the airplane.  Those with temperatures above 100.4 are not allowed to fly.  On August 1, 2020 visitors will be able to avoid the fourteen-day quarantine by obtaining a negative Covid-19 test taken within 72 hours of their trip to Hawaii.  The state is currently working with CVS Pharmacy to launch a testing protocol and the state will accept any negative test result from a Clinical Laboratory Improvement Amendments (CLIA) certified lab.  Those passengers that do not arrive with a negative test must still complete the fourteen-day quarantine.

Governor Ige has extended the fourteen-day quarantine requirement for passengers on Trans-Pacific flights until July 31,2020 in his latest emergency proclamation.  People flying to Hawaii should think twice before thinking that they would be able to skirt the rules.  One Hawaii resident was recently arrested in the hallway of her condominium after neighbors reported seeing her sunbathing with her husband and walking her dog.  Hotel personnel recently reported that a couple was violating quarantine and were arrested at their Waikiki hotel.  One family recently spent one hour on Oahu before deciding to return home when they learned that the hotel was going to issue them a single-use room key and that they would not be able to open their room with the key for fourteen days.

Numbers provided by the Department of Labor and Industrial Relations (DLIR) highlighted the state’s failure to provide financial relief.  $2.9 million were paid out in the first three weeks, $4.1 million in the following two weeks, and $11.2 million paid out in the first two days of the week starting April 13th.  The $11.2 million figure equates to paying 17,000 claims at $648 per week per claim compared to the over 244,000 claims filed.  DLIR processed 82% (181,846) of the filings two weeks later (April 27th) yet had only paid claims for 27% of the claims (65,252).  DLIR still processes unemployment claims on a mainframe that was purchased in the early 1980s according to an article by Civil Beat.  The technology is so obsolete; the software predates the use of a mouse.  State workers must use the keyboard to manually move the cursor to the appropriate field.  Hawaii’s unemployment rate was 37% according to DLIR as of April 15th.  The director of the state Department of Labor and Industrial Relations (DLIR) took a leave of absence in June as the stress related to the state’s failure to provide timely unemployment relief had taken its toll.  Some frustrated members of the public have reached the breaking point financially and emotionally and DLIR employees have received death threats as a result.  The state’s antiquated server, commissioned in the 1980’s, cratered under the unprecedented demand for unemployment benefits and the department had paid only about one-half of the 250,000 claims as of June 6th and 25% of those claims had not yet been processed.  As of June 25th, DLIR has paid $1.7 billion in unemployment benefits to 145,684 valid claims.  Close to 70,000 claims have been deemed invalid for various reasons.  Roughly 11,000 people, some of whom filed in March, are still waiting for the first unemployment checks as of July 1st.

The Hawaii Supreme Court unanimously rebuked the state of Hawaii for mismanaging the Hawaii Homes land trust and failing roughly 2,700 Native Hawaiians who have been waiting decades for land leases on lands held by the trust.  The Hawaii Homes land trust was created nearly 100 years ago by the federal government to rehabilitate the Native Hawaiian race.  The state took over management of the land trust upon statehood in 1959.  People who are at least 50% Hawaiian are eligible to apply for 99-year land leases at $1 per year.  A lawsuit was filed in 1999 on behalf of 2,700 beneficiaries who alleged a breach of trust.  The wait list has since grown to over 28,000 applicants.  The justices wrote, “rather that placing beneficiaries on homestead lots, the state placed beneficiaries on a long waitlist.”  A significant number of plaintiffs have died while waiting.  The ruling allows the plaintiffs to seek monetary damages from the state of Hawaii.

“Auntie Blanche” McMillan has created permanent homes for 32 homeless people from Waimanalo on state land at the end of Hilu Street behind her home on Hawaiian Homestead Land.  McMillan, a long-time resident and former neighborhood board member, went to Waimanalo Beach Park in May and convinced 34 of the 350 homeless to follow her to the Department of Land and Natural Resources (DLNR) land and clear 15 acres of land of brush, abandoned cars, and other junk and construct tiny homes and plant gardens.  The project called “Hui Mahi’ai Aina,” loosely meaning the land of group farming, was originally part of Lt. Gov. Josh Greene’s plan for a statewide system of tiny homes to provide permanent housing for Hawaii’s homeless.  McMillan apparently grew tired of DLNR’s dithering and took things into her own hands.  Residents must pitch in to provide security, follow a 10:00 pm curfew, and pay $100 per month to help support utilities and maintenance.  Two of the original residents left because of the rules.  McMillan hopes to expand the housing by another 100 tiny homes while the state says the plans were never allowed.  We shall see what the state plans in response to McMillan’s initiative.

The City and County of Honolulu has introduced a sidewalk dining program that allows restaurant owners to extend their available seating to adjacent sidewalks in an effort to help deal with capacity constrains from the new social distancing requirements for inside dining.  The online application does not require any fees and the goal is to help restaurants survive the pandemic.

Mayor Kirk Caldwell announced plans aimed at revitalizing Chinatown with programs to make it cleaner and safer for businesses and their customers.  The initiatives include a $200,000 contract to power-wash and disinfect the sidewalks, step up police patrols, remove graffiti, enforce proper trash disposal, and engage the arts community.  Businesses and the public have complained for years about the problems associated with homelessness and this is the latest attempt to clean up Chinatown.  The city plans on blocking off Hotel Street to traffic from 5:00 pm to 9:00 pm and encourage people to walk, bike, dine and shop.  The mayor is encouraging restaurants to bring out tables and fill up the sidewalks with outdoor dining.  The city may hold additional events if the pilot “open street event” is considered a success.  Similar open street events have been held on Kalakaua Avenue in Waikiki and have been well attended.

Young Brothers, LLC, Hawaii’s only regulated interisland ocean cargo company, has notified the state Public Utilities Commission (PUC) that its financial situation has been devastated by the economic disruptions caused by the coronavirus pandemic and has requested $25 million from the state’s share of federal Covid-19 emergency funds.  Young Brothers, LLC’s parent company, Saltchuck Resources, Inc. has absorbed losses of $10 million last year and $11 million the year prior for Hawaii’s interisland shipping operations and expected a loss this year of $12.3 million before the pandemic.  While Matson also provides interisland cargo deliveries to other outer islands, Young Brothers, LLC is the only shipping company that delivers goods to Molokai and Lanai.  The company’s spokesman explained that the parent company can no longer absorb the losses and Young Brothers; LLC will no longer be able to pay its bills and operate if it does not receive the funds.  PUC has opened an emergency docket to evaluate Young Brothers, LLC’s financial distress.  The financially strapped company lost 21 shipping containers overboard off the coast of Hilo on June 22nd.  The company recently received approval from the state Public Utilities Commission (PUC) to reduce its twice-weekly shipments between Hon0lulu and Hilo to once a week.  The crew realized that the 21 containers were missing after mooring to the pier in Hilo and nine of the containers were spotted adrift eight miles north of Hilo.  An investigation is underway to determine if Young Brothers overloaded the barge resulting in the lost cargo.

Changes could be in store for natural treasures like Hanauma Bay.  A study that began during the shutdown describes “remarkable changes “ due to an absence of humans.  The researches have noticed larger fish feeding in the shallows, new coral growing on horizontal surfaces where they were likely to be previously kicked by snorkelers, and up to two Hawaii monk seals resting on the beach when one used to be a rare sight.  There seems to be a discussion about limiting the population of visitors at attractions like Hanauma Bay to help improve the balance between accessibility and allowing nature to recover.  Green sea turtles were nesting for the first time in documented history at Bellows Beach.  Thirteen nesting sites have been identified and the city will keep the Bellows Field Beach Park Campground closed through September 4th.  The Marine Corps has roped off areas and put up signs to keep people away from the nests.

Hawaiian musician Willie K passed away on May 18th at the age of 59 in his home on Maui after a two-year battle with small-cell lung cancer.  He continued to perform while being treated for his disease.  His versatility ranged from performing traditional Hawaiian songs to Jimi Hendrix and he entertained crowds for over 40 years.

The Ocean Voyages Institute arrived in Honolulu Harbor on June 23rd with 103 tons of trash pulled from Great Pacific Garbage Patch during the 48-day expedition.  It eclipsed last year’s haul of 42 tons of debris collected over 25 days.  The institute hopes that removing the debris from the gyre, a rotating current halfway between Hawaii and California, will spare coral reefs and wildlife from entanglements.    You can visit their website at:

https://www.oceanvoyagesinstitute.org/.

Warning Signs

Tim and Tracey have owned investment real estate for more than 20 years and Tim has lead Stott Property Management for the past 14 years.  During that time, they have learned the value of hiring competent licensed professionals to manage investment real estate owned from a distance.

 No Monthly Revenue:  Stott Property Management, LLC has taken over accounts where the owner did not receive any income for months.  In one extreme case, the owner had not received any income for almost a year without any communication from the property manager.  The reasons for the lack of income ranged from excessive vacancies, failure to collect rent from dead-beat tenants, allowing friends and relatives to live in a unit rent-free, to outright fraud.

Monthly Statements:  Your property manager should send you statements once per month at a minimum.  These monthly statements should show your account balance at the beginning of the month, the amount of rent collected, all of the expenses paid on your behalf including the property management fees, the amount of the proceeds that you should have received, and the ending balance.  Paid invoices for all the expenses that your property manager paid on your behalf should accompany the statements.

Communication:  Effective, two-way communication is the linchpin for any successful investor / manager relationship.  Communication comes in the form of financial statements, e-mail, phone calls, and face-to-face meetings.  Tim and Tracey think that effective communication is so important in their business, that both Stott Real Estate, Inc. and Stott Property Management, LLC have full-time receptionists whose primary responsibility is to answer the phones. There is nothing more frustrating that being a customer that has to traverse “voice-mail hell” during normal business hours.

There are property managers that do everything possible to avoid phone calls and meetings.  Uncomfortable and unpleasant conversations are part of the business since moving, money, and family issues are some of the most stressful situations that people deal with.  Communication should be even more of a priority during the pandemic crisis and there could be a real problem if you aren’t hearing from your property manager.

Constant Turnover:  Many larger property management companies have property managers that are independent contractors while centralizing their bookkeeping and maintenance services. One sign of potential problems in an office is a constant turnover of property managers resulting in someone new repeatedly taking over management of your property.   Constant turnover can result in a loss of knowledge regarding your property and your investment can suffer if inexperienced managers take over.

Mergers:  Some large companies on Oahu have merged over the past couple of years to consolidate operations and save money.  Poorly executed mergers can result in operational chaos that can negatively impact your investment.  You may want to consider a change if your company has been bought out or has merged several times and you are no longer receiving the level of service that you require.

Stott Property Management, LLC has taken over many accounts from property managers that raised one or more red flags.  Their client’s calls either went unanswered or the property manager would make excuses for failing to return phone calls and e-mails and to why the statements were not being delivered.  By the time Stott Property Management, LLC  took over, the affected owners lost thousands of dollars in lost income for various reasons including outright fraud.  Pay attention to the warning signs and start interviewing alternatives if your current property manager gives you reasons to be concerned.

Property Management Guidance

Background:  Stott Real Estate, Inc. sells residential real estate and its subsidiary, Stott Property Management, LLC, manages residential rental property.  The two companies have separate staffs and share the same office.  Tracey Stott Kelley is the principal broker of Stott Real Estate, Inc. and Tim Kelley is the principal broker of Stott Property Management, LLC.

There are many superb property managers (PMs) on Oahu.  Any negative comments made in this article are not directed at PMs as a group.  That being said, many of our clients had previously used another PM before hiring us.  The article discusses common errors made by owners and/or their PMs.  The article is designed to help owners increase their rental income by learning from the mistakes of others.

Absentee Owner Managing Property:  By far the biggest mistake that we witness on a regular basis is an owner trying to manage a rental property while living thousands of miles away.  The owner does not typically have a good understanding of the Landlord-Tenant Code (Hawaii’s laws governing residential real estate), must rely solely on the tenant to maintain the property, and does not have the time and resources to address problem tenants.  The attorney that we use for evictions states that most of the difficult and expensive legal problems that he is hired to help solve involve owners acting as a PM that are not familiar with the Landlord-Tenant Code and proper check-in/check-out procedures.  Tim Kelley and Tracey Stott Kelley have hired PMs to manage their Texas rental properties.

Additionally, The State of Hawaii requires an absentee owner to obtain an on-island representative to manage the property.  We have witnessed a number of knowledgeable tenants create expensive headaches for owners that have tried to manage a property themselves.

Poor or Inadequate Tenant Screening:  The best way to deal with problem tenants is refusing to allow problem tenants to move into a property.  Stott Property Management, LLC requires every adult applicant to fill out an application and then checks the following:  Credit Score, Employment, Previous Landlord References, and State of Hawaii Court Records.  By carefully screening tenants, Stott Property Management, LLC helps minimize tenant caused problems and protects their clients from arbitrary discrimination complaints.  Failure to properly screen tenants can result in several months of lost rent and thousands in legal fees to correct the situation.

Improper Check-ins and Check-outs:  The State of Hawaii requires a Tenant to return the property to the Landlord in the same condition that the property was in at the time the Tenant checked in minus normal wear and tear.  “Normal wear and tear” does not include dirt.  One common pet peeve of investment property owners involves being charged for cleaning when a property is being made ready for the next tenant.  If a property was clean at the time of check-in, then any cleaning required after the tenant checks out should be paid for by a portion of the tenants’ security deposit.  The only time an owner should pay a cleaning bill would be if make-ready repairs were conducted in a vacant property, or if a property was vacant for more than a month.

The Landlord-Tenant Code requires that the Landlord must obtain a signed Property Inventory and Condition Form from the tenant at the time of check-in in order to withhold any funds for tenant caused damage after the tenant checks out.  If the Landlord withholds all or a portion of the funds, then the Landlord must mail the prior Tenant a letter stating the charges, provide copies of estimates or bills from contractors, and provide a check for any remaining funds within 14 days of the check out.  Stott Property Management, LLC has witnessed the small claims court judge order a Landlord to return the security deposit in full for failure to have a signed Property Inventory and Condition Form or meet the 14-day requirement even though evidence of tenant caused damage was presented in court.

Failure to Conduct Routine Inspections:  A quote that is often used in leadership also applies to rental properties.  “It is not what you expect, it is what you inspect.”  Stott Property Management, LLC has taken over many rental properties that were not inspected because a “great tenant” was living there.  It appears that the definition of a “great tenant” to a few PMs and/or owners is a tenant that stays for an extremely long time and pays their rent.  The owner is then shocked to find out that these tenants trashed their property when they did finally move.

Landlords must regularly inspect properties in order to maintain the properties in good condition.  Over several years, normal wear and tear will turn a clean and desirable rental property into a run down looking home that fails to attract good tenants.  Failure to identify and address regular maintenance items like painting, replacing worn out flooring, and repairing small leaks can and will lead to lost rent and more expensive repairs in the future.

Failure to Charge Market Rent:  In general, rent will increase over time at the rate of inflation.  One common mistake that owners make is charging below market rent to friends and family.  One common misconception that some owners have is the thought that the tenant will be grateful for being able to rent a property for several hundreds of dollars below market rent every month.  These very same owners are then dismayed when their financial situation changes and they must either sell the property or ask the tenant to move and the tenant becomes a problem.  Instead of receiving gratitude for their charity, the owners receive scorn for taking away a rental subsidy.  If you feel compelled to help someone out, we recommend writing a friend or family member a check for an amount you are comfortable with.  You will enjoy the benefits of providing a gift without the liability of offering a subsidy for an indefinite period of time.

Another common mistake that some PMs and owners make involves failing to increase the rent that a long-term tenant pays when market rents have risen.  Stott Property Management, LLC has seen some tenants paying half the market rent for a property because a PM or owner has failed to raise the rent on a tenant that has lived in a property for ten years or more.  Stott Property Management, LLC compares the actual rent to the market rent every time a lease is about to expire and then makes recommendations to their clients when, in their opinion, a rent increase is warranted.

Tenant Repairs:  Asking or allowing a tenant to conduct repairs on a rental property in lieu of rent almost always ends up in failure.  The reasons behind the problems include failure to define and document the scope of the work for the agreed upon rent credit, the tenants lack of skill in completing the repair, failure to inspect the final work product, or a combination of these reasons.

We have witnessed some property managers make the same mistake as owners.  We have even spoken to one owner who allowed a “handyman” to move into his property to conduct repairs and then had to evict this same “handyman” who lived in the property without completing any work over the span of several months.  The Owner had to bear the costs of an eviction for a tenant that never paid any rent.

Befriending Tenants:  Some owners make it a point to become “personal friends” with their tenants.  As a result, they tend to stop treating their rental property as a business and end up losing money by failing to make difficult decisions that negatively impact their “friends.”

Asking Above Market Rent:  One of the biggest myths in investment real estate is the idea that a property will attract better tenants by simply raising the asking rent.  In most cases, the best-qualified tenant prospects are also the most informed tenant prospects.  In order to successfully compete for well-qualified tenants, a landlord must offer a competitive asking rent.

Instead of attracting the best tenants in a reasonable time frame, the landlord ends up with longer than normal vacancy rates, lower quality tenants, and typically higher turnover.  Since vacancy periods, problem tenants, and turnover expenses cost landlords more than standard repairs, overpricing a rental should be avoided.

Fully Furnished Apartments:  Unless an owner lives in a property for part of each year, or the property is located in a high-end tourist destination, furnishing an apartment makes it more difficult to attract quality long-term tenants.  Most people looking to rent long-term have their own furniture.  The additional costs and headaches involved with maintaining the furnishings typically result in lower cash flow.

Pets:  Some owners do not allow pets because they fear that the animals may cause excessive damage or ruin carpeting if the pet has an accident.  The State of Hawaii allows landlords to collect a refundable pet deposit in addition to the refundable security deposit.  State Law also allows tenants to move a “pet” into a rental that does not allow pets by obtaining a doctor’s note claiming that the “pet” is an Emotional Support Animal.

Stott Property Management, LLC recommends owners to allow a small pet (under 40 lbs.) due to the above mentioned changes in state law.  Most tenant prospects that have great credit and rental references are responsible pet owners.  The combined security deposit and pet deposit would usually be large enough to replace carpet and padding if the pet has an accident.  The higher demand helps raise the rent and reduce vacancy periods and some pet owners will look past flooring defects in order to move into a rental that allows a pet.

Remodeling:  Location and views have the largest impact on market rent.  In general, tenants look for clean and functional square footage in neighborhoods that meet their needs the best.  Installing granite countertops, high-end cabinetry, hard wood floors, high-end appliances and bathroom fixtures do not provide a sufficient return on investment unless your property is in a high end neighborhood or condominium complex.  Since the State of Hawaii limits a security deposit equal to one month’s rent, one careless tenant could end up causing thousands of dollars in damage to a high-end remodel.

If your property shows signs of wear and tear, a coat of fresh paint and decent rental grade carpeting should be sufficient to attract quality tenants.  If you don’t want to replace the carpet every five to seven years, then consider installing ceramic tile or vinyl planks.  Don’t replace “dated” cabinetry and countertops unless they exhibit major functional problems (i.e. stuck drawers, rotten wood, broken hinges that can’t be repaired).

Discrimination:  Federal and State Laws prohibit turning down a potential tenant due to race, color, national origin, religion, sex, familial status, or handicap.  Some owners of high-rise condos have voiced concerns over the safety of small children and the risks of falling.  Even though those concerns may be valid, turning down an applicant with small children for that specific reason violates the law.

Taxes:  The state does not accept ignorance as a valid reason for not paying taxes.  Hawaii requires investment owners to file and pay General Excise Tax (GET) on rent collected and the Transient Accommodation Tax (TAT) for short-term rentals.  Out-of-state owners also must file the state income tax return (Form N-15) every year even if they are losing money on their investment.

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