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Quarterly Newsletter April - June 2023

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The June median price for single-family homes was $1,050,000 (4.5% less than June 2022) and for condos was $470,000 (4.5% less than June 2022).  Demand continues to drop significantly prior with 30.5% fewer single-family homes selling and 24.9% fewer condos selling than in June 2022.  High interest rates keep people in their current to keep their low fixed interest rates.  17.1% fewer single-family home listings and 22% fewer condo listings were added to the market in June.  Total inventory has crept up further with 14.8% more single-family homes and 16.1% more condos available as property takes longer to sell in this high mortgage rate environment.

 

The national median price for existing home sales posted its biggest year-to-year decline since December 2011.  The May 2023 median price was 3.1% lower than the previous year as rising mortgage rates have slowed the housing market.  Existing home prices have dropped year-to-year for the fourth straight month and were expected to be larger but more homeowners with low fixed mortgage rates are staying put keeping the supply of homes low.  Bidding wars still exist in certain locations.

 

The Wall Street Journal describes what Stott Property Management, LLC has seen over the past two months with some of its rentals.  Tenants are gaining the upper hand as the COVID fueled rent increases have faded.  Asking rents have declined 0.6% in May compared to the same month one year ago resulting in the first decrease since 2008 other than a brief drop during the pandemic shutdowns in early 2020.  One landlord recently refused to negotiate when a tenant balked at an 11% rent increase resulting in an unnecessary vacancy.  The tenants noticed that the advertised rate was lower after they moved, and they would have stayed had they been offered that rent while they were still living there.  Stott Property Management, LLC has recommended keeping the rent that same when offering one-year lease extensions for many rental properties in this market environment.

A Mixed Plate of Talk Story

 

The Civil Beat recently published an article, “Is the Deck Stacked Against Hawaii Condo Owners,” and provided two examples of the Department of Commerce and Consumer Affairs (DCCA) failures.  The DCCA allowed one major player, Associa Hawaii, whose president serves as a DCCA director, to run the organization for months without an active broker’s license.  Associa should have forfeited all commissions illegally collected from associations and residential clients.  In a second case, another director, Chris Porter, was fined $475,000 in actual and punitive damages for violating state and federal debt collection and privacy laws in a dispute with a condo owner about his dog. The DCCA recently chose a lobbying firm for condo associations and their management companies to provide “training” for condo owners informing them of their rights.  The meeting dubbed “Condorama,” was essentially aimed at the association board members and their support staff.  The lobbying firm, Community Associations Institute, recently argued against a bill that would be able to file claims against the association’s insurance policy for leaks outside their unit causing damage.  This bill, having passed, would have helped one of Stott Property Management’s clients who has had unmitigated water damage to her unit for nine months with no action or compensation from the upstairs owner or association.  Tim recently started a Regulated Industries Complaint Office process by sending a letter to the principal broker managing the association for failing to respond to the owner or to Tim.  Tim received a letter from the association’s attorney explaining why the principal broker could ignore the emails and fail to provide access to determine if the leak had been fixed.

 

The Honolulu City Council approved a reduction in property tax rates for Residential A properties from $4.5 per $1,000 of value to $4 per $1,000 of value starting June 2024, saving property owners who have not filed for a residential property tax exemption $500 per year in taxes.

 

The City and County of Honolulu reopened its rent and utility relief program to 2,000 applicants on June 13th and closed the site just two hours later after reaching capacity.  The program is being funded by $25 million in state and city recovery funds.

 

The Hawaii Authority For Rapid Transportation started service on Skyline (the train service’s new name) on Friday, 6/30/2023, four years later and $5.5 billion more expensive than advertised in 2004 by then Mayor Mufi Hanneman.  The project confounded four mayors and was probably the nail in the coffin of Kirk Caldwell’s failed campaign for governor. Tim and Tracey joined 71,000 others in riding the train system from rusted out Halawa stadium to Kapolei and back.  The views were inspiring and the absence of development around the stations was evident.  Most stations were blocks away from any shopping and restaurants.  HART’s woes with the rail project continue as an eminent domain dispute with Ward Village developer Howard Hughes Corp. proceeds to court and $100 million spent on moving utilities will go to waste since the rail will end before reaching that area.

 

The state Department of Health approved the Joint Task Force-Red Hill defueling plan which will take place with the following steps.

•          Repairs to Red Hill facility and pipelines.

•          Operational plan to drain surge tanks at Joint Base Pearl Harbor-Hickam (separate of Red Hill Fuel Tanks).

•          Fill repaired pipeline with fuel to prepare for tank draining.

•          Operational plan to drain main Red Hill tanks and tank bottoms.

•          Removal of fuel from pipelines using gravity drainage.

•          Operation plan to remove final 100,000 to 400,000 gallons of fuel remaining in pipelines and surge tanks following gravity drainage.

 

The Honolulu Planning Commission reviewed the city’s request for a two-year extension to find a replacement site for the Waimanalo Gulch Sanitary Landfill in Kapolei.  The city is focusing its search for a new landfill on federally owned property under purview of the military.  Development costs for the new site are expected to range between $60 million and $80 million.

 

U.S. Marines stationed at Kaneohe Marine Corps Base are cleared to operate their new Reaper drones, MQ-9A remotely piloted aircraft, and received its first two Reapers in April.  The new drones replace the RQ-21A Blackjack drones the Marines previously used and can fly much higher, for longer distances, and can be refueled in the air by tanker planes.  The Marines are transitioning from desert warfare and returning to their Naval roots with an emphasis of island and coastal operations.  Marines train to disrupt supply lines and use missile batteries to attack enemy ships with an emphasis on the South China Sea.

 

The Hawaiian Humane Society is participating in the “Empty the Shelters” initiative as shelters on Oahu, Maui, the Big Island, and Kauai suffer from overcapacity.  More families are surrendering their pets due to economic hardship and finding pet-friendly housing.  A second humane society shelter opened in Ewa Beach on May 20th helping alleviate some of the overcrowding at the Moiliili campus.  D.R. Horton donated $30 million to build the Hoopili campus which includes three dog pavilions, two cat pavilions, a small-animal pavilion, and a spay and neuter clinic.  Each shelter has the capacity to house 350 to 400 animals waiting for adoption.  Stott Property Management, LLC has encouraged their clients to allow small pets since it results in higher rents and shorter vacancy periods.  The easiest way to make a property pet friendly is to replace carpeting with vinyl plank flooring.  Experience shows that allowing pets is the easiest way to boost revenue followed by adding air conditioning.  

 

The Honolulu Star Advertiser caught up with the River of Life Mission one year after it closed its Chinatown feeding program that became the bane of the Chinatown neighborhood.  The mission used to serve 600 to 700 meals per day at the Chinatown location and now delivers meals to forty locations on Oahu.  River of Life’s executive director spoke to 320 missions in Orlando, FL to talk about their new model and how other missions throughout the country can replicate it.  The mission also partners with fifty-three churches, fifty-four social service agencies, and one hundred volunteer veterinarians, barbers, manicurists, and other professionals to help the homeless obtain health checkups, haircuts, and assistance getting government benefits and housing.  Seventy-seven homeless people have checked into a detox or shelter with the mission’s help over the past year.  River of Life has shown that an organization can be a good neighbor and help those who desperately need it.

 

Kamaaina, Hawaii residents, will now be able to visit Hanauma Bay Nature preserve from 6:45 am to 1:30 pm without having a walk-in ticket or making an online reservation.  The previous rule allowed residents to visit the park without a ticket or on-line reservation until 9:00 am.  Active-duty military still get free admission with ID but must make an on-line reservation.

 

Heavy rains and an ancient wastewater treatment plant have created higher than allowable bacterial levels in Kailua Bay.  The Kailua Wastewater Treatment Plant’s effluent empties into Kailua Bay and the facility has continuous violated the levels set by the Clean Water Act this spring resulting in daily warnings stretching for months.  Bacterial levels exceeding six times the allowable limit was measured in Kailua Bay from April 28th to May 1st.  The state of Hawaii fined Honolulu $434,350 for repeatedly failing to contain the sewage for leaking into the bay.

 

Crowds packed Hilo’s Kanaka’ole Multi-Purpose Stadium to watch the world’s most talented Hula dancers compete in the 60th Merry Monarch Festival.  Hilo residents basked in the return of the event after several years of pandemic restrictions.  One craftsman selling his wood jewelry stated, “It’s back, the spirit of Merrie Monarch.  Everywhere there’s more aloha.  It’s more friendly.”  Agnes Renee Leihiwahiwaikapolionamakua Thronas Brown from Kaneohe won the Miss Aloha Title.  The 21-year-old Brown has danced for the same halau (or troupe) since the age of nine.

Authorities are asking the public to keep their distance from Kaiwi, a Hawaiian monk seal, who is nursing her pup on Kaimana beach.  Wildlife experts installed temporary fencing around the pair and have asked people to keep the noise down to avoid disturbing the seals.  Mother seals are very protective of the pups and experts recommend the public avoid swimming at Kaimana beach and choose somewhere else to swim.  A swimmer was attacked last year by a mother seal protecting her pup.

 

Officials have closed Bellows Field Beach Park for the summer to protect honu nests.  The Hawaii green sea turtles were found nesting for the first time in documented history in 2020 and have returned every year since to nest, incubate, and hatch baby sea turtles.  The area will remain open for beachgoing activities on the weekend during the nesting season.

 

Arizona State University is dedicating $25 million to build a new facility in Kailua-Kona (on the Big Island) to house 300,000 coral colonies and help restore a 120-mile stretch of coral reef on the western side of the Big Island.  The new facility will have the capacity to grow one million coral colonies per year.  Scientists from Asner labs created detailed maps of nearshore coral reefs of the main Hawaiian Islands taking pictures with a laser-guided imaging spectroscopy camera to a depth of 50 feet.  The study documented vast areas of coral decline and degradation from overfishing and rising ocean temperatures.  Hawaii reefs have lost over two-thirds of its reef fish over the past fifteen years.

 

Disney’s Aulani Resort has been working with the Oceanic Institute of Hawaii Pacific University to breed reef fish in captivity.  Until recently, researchers have had little success in breeding reef fish.  The hotel’s efforts to collect eggs and deliver them to HPU’s Waimanalo lab has resulted in the first successful breeding of the milletseed butterflyfish, potter’s angelfish, Hawaiian cleaner wrasse, yellowtail coris, and yellowtail longnose butterflyfish.  Tim and Tracey see several of these species during their swims in Lanikai and in Waimanalo near the research center.

 

A Division of State Parks and the Napali Coast Ohana are partnering to head a seabird restoration project at Nu’alolo Kai, a Hawaiian fishing village that existed 800 years ago.  The project aims to remove invasive species, restore native plants, and protect nests from predators like the barn owl, rats, and cats.  Three species of seabirds have recently started breeding in the area again, ao (Newell’s shearwater), akeake (band-rumped storm petrel), and ou (Bulwer’s petrel).  The seabirds’ guano is an important fertilizer that promotes plant life resulting in cleaner freshwater flowing from the forest to the coral reefs.

 

Kaena Point Natural Area Reserve celebrated its 40th anniversary with a thriving albatross colony.  An estimated 30,000 seabirds nest in the reserve and 98 albatross had nests this year.  No seabirds nested in the area 40 years ago when the reserve was created, and the number of nests returned as vegetation returned.  The area is the only protected place in the world that the public can walk un-escorted on a trail next to nesting albatrosses.

 

Hawaii Housing Factbook:  The University of Hawaii Economic Research Organization (UHERO) released its first Hawaii Housing Factbook, providing detailed housing data for the state, counties, and by Zip Code.  Hawaii has the highest housing costs in the nation and UHERO hopes the data will lead to informed discussions on improving the Hawaii housing situation.

 

The median sales price for a Hawaii single-family home over the past twelve months was $852,000, 2.7 times the national single-family home price.  On Oahu, the median sales price was $1,055,000 for the same time period.  Hawaii home prices have tripled since the mid 1990s.  The 35% rise in home prices during the pandemic and the surge in mortgage interest rates have drastically reduced housing affordability in the state.  In 2012, a household needed to earn 120% more than the median income to afford a mortgage.  In 2022, a household needed to earn 180% more than the median income to afford the same house.  As a result, fewer than one-third of the households can currently afford the average local house and less than half the households can afford a condo.

 

Attempting to accurately make an apples-to-apples comparison of home prices, UHERO used the Repeat Sales Index since median prices can vary based on the mix of homes from one month to the next.  Since most people concern themselves with how much more it costs to purchase the same home over time, the Repeat Sales Index is more relevant to relevant conversations.  If the median price increase is used, a house purchased in 2022 would increase 260% than in 2000 yet it is 22 years older and in worse condition.  If a person would want to build the exact same home in 2022, it would be 340% more expensive.  Therefore, the Repeat Sales Index more accurately reflects the worsening housing crisis.

 

Hawaii currently has about 557,000 housing units with Oahu having 66% of the housing stock.  Hawaii has issued only 27,000 housing permits over the past five years and most were located (24,000) in Honolulu.  In the past five years, only 4,700 permits for single-family homes were issued and only 400 multi-family projects.

 

UHERO returns to the Wharton Residential Land Use Regulatory Index to emphasize that Hawaii has the most restrictive land use regulations on the books.  Long permit delays, limits on land use, legislative and judicial hurdles, and affordable housing requirements make it much more difficult to build new housing.  The state currently has only 4% of the total land zoned for housing and only 7.5% of that zoned land allows multi-family housing.  In summary, only 0.3% of the available land in Hawaii is zoned for multi-family development.

 

UHERO’s initial edition of its Hawaii Housing Factbook paints a grim picture for Hawaii residents.  One can only hope that future leaders will use this information to build Hawaii’s housing stock to provide a sufficient number of homes for the people.

 

Home Inheritance:  A June 1st Wall Street Journal article, “The New Math on Inheriting Your Parents House,” highlights the changes in the real estate market after 2021 due to inflation and rising interest rates.  Rising maintenance expenses, renovation costs, property taxes, and utilities are making it harder for heirs to hold onto inherited real estate and high interest rates make it impractical for one heir to buy out the remaining siblings.  Leaving real estate is still a common method of passing along wealth and heirs are more often selling their parents’ home for the following reasons:

•          The stepped-up basis helps avoid capital gains taxes from selling a home.

•          The parents’ furniture is undesirable to younger generations.

•          Renovations are too costly to make the parent’s home fit the child’s taste.

 

Property Management Guidance

 

Background:  Stott Real Estate, Inc. sells residential real estate and its subsidiary, Stott Property Management, LLC (Stott PM), 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 PM.  Stott PM currently manages approximately 440 rental units on the island of Oahu.

 

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 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 we use for evictions states that most of the difficult and expensive legal problems 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 do not even attempt to manage their mainland rental properties despite their years of experience.  They have two PMs managing their investment real estate portfolio.

 

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 PM requires every adult applicant to fill out an application and then checks the following:  Credit Score, Employment, and Previous Landlord References.  By carefully screening tenants, Stott PM 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 light cleaning was required because maintenance was 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 have a signed Property Inventory and Condition Form from the tenant at the time of check-in 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 PM 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 PM has taken over many rental properties that were not inspected because a “great tenant” was living there.  It appears 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.  A misconception 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 MM 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 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.  Typically speaking, the only tenant prospects that apply for a rental charging over market rent are those people who have limited options due to poor credit and/or poor rental references.

 

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 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, and they are less likely to move since they will have to take their furnishings with them.  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 the “pet” is an Emotional Support Animal.

 

Stott PM 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, expensive cabinetry, hard wood floors, high-end appliances and bathroom fixtures do not provide a sufficient return on investment unless the property is in a high-end neighborhood.  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 do not 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.

 

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