In Honolulu County - entire island of Oahu - the fiscal year for property taxes runs from July 1 - June 30 of the following year and are paid in 2 even installments: 1) Installment 1 is due August 20 (payment for July 1 - Dec 31 taxes) and 2) installment 2 is due February 20 (payment for January 1 - June 30 taxes of the following year).
Assessed Value
Property taxes are based on assessed value, which is a value the tax office’s appraisal team determines a property is worth, which is different from market value (what a Buyer is willing to pay).
Existing Properties
An appraiser at the tax office will typically review and analyze 5 comparable properties that have sold prior to July 1 of a given year (without actually visiting the property) and ideally not too many months prior to July 1 to determine what the value may be of a given property. The appraised value is the value on October 1 and since the appraiser only looks at sold data prior to July 1, the appraiser will also assess how much the market may have moved up or down in the 3 month period from July 1 to October 1 and use that as well in determining the property’s value on October 1. The assessed value on October 1 is used to calculate property taxes due the following fiscal year. Example: October 1, 2017 assessed value is the value used to determine property taxes for fiscal year 2018, which runs July 1, 2018 - June 30, 2019. An owner can contest and appeal the assessed value in case an owner believes the assessed value is too high. However, make sure to have actual recent sold data to back your claim. Feelings about market directions and properties listed for sale is irrelevant. Appeals can be filed online From Dec 15 of a given year through Jan 15th of the following year from this site: https://www.realpropertyhonolulu.com/ - and click “File an Appeal”.
New Construction
For new construction, not completed yet, the appraiser will typically look at the costs of the building permits the developer takes out at Honolulu’s Department of Planning & Permitting, which is normally a fraction of actual market value and a major reason why new construction oftentimes have 1 year or longer with property taxes that are substantially below where property taxes should be, based on market value. Example: If a new condo project is completed May 2017 the property taxes for fiscal year 2017 (July 1, 2017 - June 30, 2018) will be based on assessed value on October 1, 2016, which is a date prior to the project being completed, and there is a good chance property taxes will be low, relatively to market value, since the assessed value is determined in great part based on the costs of the developer’s building permits. Come October 1, 2017 there will be sales data (at the least May 2017 original sales prices) and it is likely the assessed value for fiscal 2018 (July 1, 2018 - June 30, 2019) will be much closer to the condo’s market value.
Property Tax Rates
For residential properties we have 3 major tax categories:
A) Residential = 0.35% of assessed value. This rate applies to any property where an owner claims the homeowner’s exemption (only possible if it is the owner’s primary residence) irrespective of assessed value. Also, if a property is assessed at less than $1,000,000 this tax rate applies, irrespective of the assessed value.
B) Residential A = 0.45% of assessed value up to $1,000,000 and any portion assessed above $1,000,000 is taxed at 1.05% of assessed value. This rate applies to properties assessed at $1,000,000 and up for owners who can’t claim the homeowner’s exemption.
C) Hotel & Resort = 1.39% of assessed valye. This is the property tax rate for owners who run short-term vacation rentals where units are classfied as Hotel Resort (examples: Ritz-Carlton, Ilikai, Ala Moana Hotel Condo).
Rental Tax Rates
On any rental, irrespective of how many days the rental period is, an owner has to pay the a 4.5% tax on rental income, which is called GET (General Excise Tax) - similar to Japanese consumption tax. Additionally, any rentals less than 180 days an owner will in addition to the 4.5% GET also have to pay TAT (transient accommodation tax), which is 11.25%. Typically for rentals less than 180 days an owner will have the tenant pay the GET and TAT (just like you would pay these taxes when you stay in a hotel), so net there is no costs to the owner (charge tenant and following pay the State’s tax office).
Review Property Assessed Values & Property Taxes
You can anytime review assessed value of any property in Honolulu County here:
http://www.qpublic.net/hi/honolulu/search.html. Select “Yes, I accept the above statement” and then click “Search by Site Address” and you can enter Street Number, Street Name and Unit Information. However, for “Stret Name” do not include street suffix such as “Boulevard”, “Street”, “Avenue” etc. Example: If you want to search “1118 Ala Moana Boulevard” you would enter “1118” under “Street Number” but under “Street Name” you would only enter “Ala Moana” - do not include “Boulevard”.
Fee Simple (aka Free Hold) is the most complete form of ownership and most common throughout the United States and the Hawaiian Islands. Fee Simple ownership includes the land and the buildings thereon. A Fee Simple condominium includes the actual condominium unit, and the proportionate interest in the land underneath plus the proportionate interest in the common and limited common elements of the project. Common elements could include the lobby, elevator, walkways, swimming pool, etc.
Fee Simple owners are responsible for their property taxes and sometimes association dues and or maintenance fees in case of a condominium. The vast majority of all Honolulu properties are Fee Simple, however a few Leasehold properties remain.
Leasehold ownership only includes the buildings, but not ownership of the land! A Leasehold condominium includes the actual condominium unit and the proportionate interest in the common and limited common elements of the project but not the ownership of the land. Someone else (the fee owner) owns the land and the Leasehold owner only leases (rents) the land at terms defined in the lease document. Leasehold properties at first sight may appear very affordable, but remember, the value of the land is not included.
There is considerable risk not owning the land underneath: Leasehold owners pay a monthly lease rent to the land owner. Per the terms of the lease the lease rent could increase over time and is payable above and beyond the property taxes and any possible association dues or maintenance fees. Per the terms of the Lease there may be restrictions on property usage, alterations and maintenance.
Financing for Leasehold properties could be more difficult depending on how short the remaining lease term is. The terms and details of the Lease can vary for different properties and the risks of ‘Step-Up Lease Rent’, ‘Lease Renegotiation’ and ‘Lease Expiration’ need to be carefully considered. On occasion the land owner may offer the land for sale (Leased Fee Interest), but often at a high ‘take it or leave it’ price. On occasion a Lease may get extended but sometimes at less favorable modified terms.
Leasehold ownership could be more of a lifestyle choice. The investment aspect is speculative at best with many unpredictable variables. Make sure you understand the terms of the Lease before signing on the dotted line. Depending on the surrender provision in the Lease, at time of lease expiration the land owner may take back the improvements and buildings on the land (reversion). Leasehold owners need to be prepared for this worst case scenario of surrendering their interest in the building or condominium. In short, ‘move out and give it all up!’ Remember, Leasehold after all means you are just renting the land.
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Tax Assessed Value
The tax assessor establishes an assessed value for the purpose of collecting the appropriate property taxes. For Oahu properties the new tax assessed values are established only once every year on October 1 based on ‘comparable sales’ (similar size & location) that recorded prior to July 1st of a given year while also considering any market movements up until October 1.
The assessed value on October 1 determines taxes for the following fiscal year, which begins the following year on July 1. That means tax assessed values lag behind the real market value by a year or more! Keep in mind the tax assessor rarely gets to inspect the inside / condition of the property. That means the tax assessor may not have knowledge to consider expensive upgrades versus original or even tear down condition. Furthermore, the tax assessor does not adjust for gorgeous ocean views, tropical level yard vs steep slope terrain or property frontage. For example, an oceanfront property in Hawaii with 100 feet of beach frontage might have the same tax assessed value as a similar property just two lots away located on a busy highway, without ocean view or beach access. While both properties might have the same tax assessed value, the true market value for both properties could differ by Millions! You can see that assessed value is far from an 'accurate' or reliable indicator of the real market value.
Appraised Value
The appraised value (aka appraisal) is a professional value opinion completed for a fee by a licensed appraiser, often hired by mortgage lenders, or anybody else that needs a professional value opinion. A licensed appraiser determines the appraised value by researching and comparing most recent (during the last few months) comparable sales (similar size & location) and uses certain predetermined detailed criteria to make adjustments for condition, upgrades, functionality, layout, etc. While appraisers have to be very detailed and follow specific formulas, 10 different appraisers still might come up with 10 different value opinions!
Real Market Value
The real market value is the price that a willing and able buyer pays for a property at that time. This could be affected by several market dynamics. For example, if two or more buyers are interested in the same property at the same time, it is possible that the property could sell at a higher price than otherwise. In Hawaii being surrounded by ocean we have a real estate market that has very limited supply. Hawaii real estate is considered a global commodity and attracts buyers from all over the world. Sometimes just a small number of sales could affect the market dynamics supply / demand / velocity, which could change real market values in a very short amount of time.
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While a homeowner is allowed to rent out their home or any portion of their home, there are certain restrictions that need to be addressed. Honolulu's residential zoned neighborhoods are limited to minimum rental terms of 30 days. Means, a homeowner is not supposed to rent out on a short term basis - less than 30 consecutive days. However, some homeowners do, to maximize their rental income. They pay the appropriate General Excise Tax (GET) and Transient Accommodation Tax (TAT) on the short term rents received. Please be aware that there could be fines for short term vacation renting. It is ok to rent out your house for 30 consecutive days or longer.
A few condos and co op buildings restrict even further to 60, 90 or even 180 consecutive day minimum rentals per house rules in order to reduce occupant turnover and wear & tear from moving.
There is, however, a small group of condos, almost exclusively in Waikiki, which are exempt from this 30 day minimum rental rule. You can learn all about those condos and the rules & regulations from our
Guide to Condotels & Short-Term Vacation Rentals.
There was a time when foreign investors bought Hawaii properties, held them for a few years and then sold at substantial gains, without ever paying the required capital gains tax. To protect the State and the Federal government from the loss of capital gains tax revenue, HARPTA and FIRPTA laws were established. While there are no restrictions on who in the world can buy Hawaii Real Estate, it is important to consider the HARPTA and FIRPTA withholding laws for every seller of Hawaii real estate that does not reside in Hawaii during the time of the sale.
HARPTA is an acronym for Hawaii Real Property Tax Act, a Hawaii State law that requires a withholding of 7.25% of the sales price (not the gains) from the seller, when the seller is an out-of-State resident. Sellers may recoup some of the withholdings beyond the applicable capital gains tax by filing the appropriate form.
FIRPTA is an acronym for Foreign Investment in Real Property Tax Act, a federal law that requires a withholding of 15% of the sales price (not the gains) from the seller, when the seller is an out-of-country resident. If the buyer intends to occupy the property as their residence, the required withholding is reduced as follows:
a) 10% of the sales price for properties sold between $300,001 to $1Mill.
b) 0% of sales price for properties sold up to $300,000.
Sellers may recoup some of the withholdings beyond the applicable capital gains tax by filing the appropriate form.
Sellers need to know that the sale of an investment property may also raise questions by the Dept of Taxation regarding rental income received and if the appropriate GE and TA taxes (if applicable) have been paid.
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The time between the Purchase Contract acceptance date and the date when the buyer takes ownership of the property (recordation date) is called the escrow time period. The length of the escrow time period is often in the 30 to 60 days range depending on if it is a cash transaction or if the transaction is subject to financing. However, some cash transactions could close as quickly as 1 week! Some other transactions involving brand new development projects under construction could take as long as 2 years, or longer, until the completion of the project.
Once the Purchase Contract is accepted (signed by buyer and seller) ‘escrow is opened’ and the fully executed contract together with the buyer’s Earnest Money Deposit gets deposited with the escrow company. The escrow company is an independent third party that will, among other things, order a title search, prepare and record the conveyance document (deed) as well as disburse the proceeds of the sale at time of closing aka recordation.
Purchase Contracts can vary but most have a number of ‘contingencies’ (conditions that must be satisfied, or, events that must occur before a party is obligated to proceed). Some important contingencies include the home inspection contingency (J-1), financing contingency (H-3), title review contingency (G-2), review of Seller’s Disclosure (I-1), survey review contingency (K-2, K-3), termite inspection contingency (L-2), association and or condominium document review contingency (M-1), just to name a few.
Sometimes while in escrow as a result of a discovery during inspection, buyer and seller may negotiate repairs or credits before the inspection contingency (J-1) time period expires. The buyer may terminate the contract and receive a refund of his deposit, as long as the buyer cancels prior to the inspection contingency (J-1) time period expiration, per the cancellation provisions in the contract. Keep in mind that in the State of Hawaii, sellers are not automatically obligated to repair defects unless otherwise agreed in the contract. Once all inspections are completed, the loan application has been approved, all documents and reports have been reviewed and approved and all other contingencies have been removed, escrow will have the conveyance documents (deed) prepared. Both buyer and seller will sign the deed and other escrow closing documents. In addition, the buyer may sign the mortgage loan documents. Signing could be done out of State, as long as the original signed and notarized documents are returned to escrow for proper recordation.
All signed and notarized conveyance documents and loan documents together with all funds (cash and loan) need to be received by escrow no later than 2-business days prior to recordation. Conveyance documents will be stamped and recorded at the Bureau of Conveyances in the morning of the closing date aka recordation date. Escrow will also pay off any existing loans on the property, balance the file, pay any remaining bills, disburse funds and documents and close escrow. Closing escrow for most transactions means the buyer receives ownership rights along with the keys to the property and the seller receives the proceeds of the sale. Congratulations on the successful purchase or sale of your home!
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A contingency is a condition that must be satisfied or an event that must take place before a party is obligated to proceed with the contract. Often a contingency will be deemed waived if a party fails to act in a timely manner.
Hawaii real estate Purchase Contracts have several contingencies, most of them to protect the buyer. Some of the contingencies could include the home inspection contingency, termite inspection contingency, financing contingency, buyer’s review of the seller’s disclosure statement, buyer’s review of the preliminary title report, contingency of obtaining cash funds, buyer’s review of discovered encroachments, buyer’s review of condominium / subdivision / cooperative and or other association documents & more. Each contingency may have different time frames and are governed by different cancellation provisions, as outlined in the Purchase Contract paragraphs O-1, O-2 and O-3.
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Prior to 1978 it was common to use lead-based paint in residential construction. The federal form “Disclosure of Information on Lead-Based Paint and / or Lead-Based Paint Hazards”, aka Lead Paint Addendum will need to be attached with Hawaii Real Estate Purchase Contracts for any properties built prior to 1978. The addendum requires the seller to disclose any knowledge or reports pertaining to the presence of lead paint in the property. This disclosure portion needs to be completed by the seller prior to the buyer signing the addendum. Once completed by the seller, the buyer will sign and also acknowledge the receipt of the government disclosure pamphlet “Protect Your Family from Lead in Your Home”, which usually the buyer’s agent provides.
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Hawaii’s Real Estate Purchase Contract does not specify any seller’s obligation to do repairs to the property for sale. Unless specified in the purchase contract, sellers of Hawaii real estate are off the hook. Sellers often like to stress that point by adding the “AS IS” Condition Addendum to the Purchase Contract. The addendum does not diminish the seller’s disclosure obligation. The addendum also does not diminish the buyer’s right to thoroughly inspect the property, and, if buyer desires, to make a request for remedies if the inspection results are not satisfactory. If seller’s response to the request for remedies is not satisfactory, the buyer’s recourse is to cancel the contract within the inspection time period, just as it would be without the addendum.
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The Land Use Ordinance (LUO) defines the different zoning districts and each respective use restrictions, building restrictions, set-back requirements, height limits, etc. The different zoning districts include, residential, apartment, resort, business, industrial, agricultural, and preservation. Each have their own subcategories with respective requirements and limitations.
The residential subcategories are R-3.5, R-5, R-7.5, R-10 and R-20. R stands for residential and the number stands for the minimum square foot lot size within the respective category. R-5 means, it is a residential lot with at least 5,000 sq ft. On an R-5 zoned property you can build one house with one kitchen per 5,000 sq ft lot. Some lots may be substandard size (e.g. zoned R-5 but less than 5,000 sq ft), but you can still build 1 house with 1 kitchen. If the lot is zoned R-5 and has a minimum of 7,500 sq ft, you may be able to build a duplex (2 attached homes). If the lot is zoned R-5 and has a minimum of 10,000 sq ft you may be able to build 2 detached homes.
If you plan to buy a vacant lot and build a brand new home or plan to remodel and extend a home, we encourage you to first check with a qualified licensed architect on what you are allowed to do. Other considerations are existing city sewer line capacity issues, utility hook-up, driveway access, fire protection, topography and additional neighborhood specific Covenants, Conditions and Restrictions (CC&R’s).
Some owners extend their house with an additional wet bar (sink and fridge) on the building plans. After the final city inspection is completed, the owner turns the legal wet bar into an illegal second full kitchen by adding a stove/oven and turning the extension into a separate rental unit. This could become an issue for the appraiser when the property sells the next time. The stove may have to be removed to turn the kitchen into a wet bar again.
Zoning laws can also change over time, e.g. during the mid 1980’s oceanfront set back requirements have been increased to 40 ft. Many homes that had been built prior to the change are now considered non-conforming, but grandfathered. You would not be able to add on to these homes within the new setback. Things can change and in doubt, always check with a qualified professional before making any big purchase decisions with grand plans to build or remodel.
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Once we receive recordation clearance shortly after recordation on the morning of the recordation date, aka closing date, the keys can be delivered to the buyer, not before, unless otherwise agreed by the seller. Sometimes the recordation clearance does not come until about 10 am that morning. Therefore, it might be best for the buyer to schedule any move-in after 10am that day or better yet, after the keys have been received.
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In Hawaii the escrow company will need to have ‘Good Funds’ in order to record a real estate transaction. That means that all funds, cash (cashiers check) or wire as well as the bank loan, need to be received by escrow no later than 2 business days prior to recordation. Also, all escrow closing documents and loan documents will need to be signed and notarized no later than 2 business days prior to recordation. By that time buyer and seller will need to have fulfilled all conditions of the contract.
Once all escrow closing documents are signed and funds are deposited with escrow, escrow will take the file to the Bureau of Conveyances for their final review 1 day prior to recordation. On the actual date of recordation the conveyance document gets time stamped 8:01am with the date, and recorded at the Bureau of Conveyances. Shortly after 8:01am we will receive recordation clearance, usually a phone call from the escrow company that the transaction has successfully recorded aka closed. Escrow will disburse the funds and close the file. The buyer is entitled to the keys and the seller is entitled to his share of the sales proceeds.
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The home inspection contingency gives the buyer the right to personally (or by a qualified expert, professional or other representative of buyer’s choice at buyer’s cost), inspect the property in detail.
We strongly recommend that a buyer should use a qualified professional home inspector and or additional specialized qualified professionals to inspect any and all aspects of the property including the electrical systems, plumbing systems, appliances, foundation, walls, doors, windows, ceilings, roof, structural issues, drainage issues, and other that would be prudent to assess. Any and all inspections and reviews of findings should be completed within the inspection contingency time period, usually between 10 to 15 days as of the acceptance date, as outlined in paragraph J-1 of the Purchase Contract. If the buyer is not satisfied with the inspection results, buyer may terminate the contract. However, the buyer must elect in writing to terminate the contract within the specified time period, otherwise the buyer will have waived this contingency. It is best to schedule the home inspection immediately after the contract acceptance. Home inspectors get booked up some days in advance and it is best to have the inspection results / report several days before the inspection contingency time period expiration, in order to have sufficient time to obtain repair quotes if necessary.
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A Foreclosure is when the lienholder (in most cases the bank) files legal documents to take possession of the property because the homeowner defaulted on their payment obligation. The process takes time and is costly for the lienholder.
A Short Sale is when the lien holder will approve a sale even though the proceeds of the sale are not enough to pay off the balance owed to the lienholder.
Banks will often prefer a Short Sale, where the bank (or lienholder) will accept less than the balance owed in order to avoid having to foreclose on the property. The homeowner will need to qualify for the Short Sale approval, by showing evidence of true financial hardship that, a.) make it difficult to continue with the payment obligation for the property (job loss, income loss, etc), and, b.) the homeowner does not have the funds to make up the shortfall for the amount owed. The lienholder will usually order an appraisal to determine the true market value and carefully scrutinize the homeowner’s financial hardship before approving the short sale.
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Sellers sometimes appreciate the increased certainty of closing associated with a cash offer by not having to wait for a loan approval. If you are a buyer and need to obtain a loan, we strongly recommend to get pre-approved before submitting an offer. A pre-approval letter, together with proof of funds, a well written cover letter and excellent communication and negotiation skills by your agent could help increase your chances of acceptance. If you are a buyer and have the ability to buy with cash, you could increase the chances of acceptance by shortening the closing time frame on your offer, provided the seller is in a hurry to sell.
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Hawaii’s real estate market tends to be cyclical with some years of sizable price appreciation followed by periods of no appreciation. In 1990 the median sales price for an Oahu home moved up an incredible record 30.4%, while in 2009 the median sales price also dropped by a record 7.9% as the result of the financial crisis. Over the long run the median sales price for an Oahu home has increased annually 5.08% between 1985 and 2011, or a total of 262.5% over 26 years, roughly doubling every 10 years.
Although there are times when the market favors buyers or sellers based on supply / demand ratios and other factors, we do not recommend trying to time the market. Instead, while considering your family plans, your career and your finances, here is the rule of thumb: A good time to buy is when you need a home, you can afford it, and you see something that fits your needs and lifestyle for at least a few years and a good time to sell is when you don’t need the home any more, or you need the money for something else.
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There is no law in Hawaii that obligates sellers to do repairs to the property for sale. Unless specified in the purchase contract, sellers of Hawaii real estate are off the hook. However, that does not prevent the buyer to make a request for remedy of certain defects that may have been discovered during the inspection.
The buyer may request repairs, or ask for a credit in lieu of repairs. The seller could agree, or not agree, counter with a compromise, or not respond at all, depending on many different factors, including the nature and extent of the remedy request as well as the seller’s motivation to close the sale. If the buyer is not satisfied with the seller’s response to the remedy request, the buyer’s recourse is to terminate the contract.
However, the buyer must elect in writing to terminate the contract within the J-1 inspection contingency period, otherwise the buyer will have waived the inspection contingency.
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The mandatory Seller’s Real Property Disclosure Statement (SRPDS) is a written statement that must be completed by the seller, to the best of the seller’s knowledge, and must fully and accurately disclose all material facts relating to the property for sale. ‘Material facts’ means any fact, condition or defect, past or present, that could measurably affect the value of the property for sale to a reasonable person. Sellers should not take their obligation to disclose lightly. We strongly recommend for sellers to be as detailed and thorough as possible in their disclosure. A real estate purchase is a huge financial commitment for any buyer. The seller’s attention to detail in completing the disclosure will be appreciated by most buyers and more importantly is the best way to minimize risk for potential complaints. The seller is also obligated to amend the SRPDS with any later discovered information during the escrow time period.
If the buyer is not satisfied with the SRPDS, or the amended SRPDS, the buyer may terminate the contract. However, the buyer must elect in writing to terminate the contract within the specified time period of receipt, otherwise the buyer will have waived this contingency.
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When the seller has no underlying mortgage, or only a very small balance that could be paid off, then the seller could extend financing to the buyer. In this case the seller acts as the mortgage bank for the buyer and allows the buyer to make monthly mortgage payments to the seller.
However, there is considerable risk for the seller to finance the buyer. Most sellers prefer to get the proceeds of the sale and move on, instead of dealing with the risk. In our experience in today’s low interest rate environment, only few sellers are open to the idea of seller financing.
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Depending on the nature of the property, additional inspections might be prudent. Such inspections could include professional opinions from qualified professionals such as, electricians, plumbers, appliance repair services, roofers, mold inspectors, structural engineers, soils engineers, chemical labs, cesspool professionals, and others. We have had transactions involving tap water testing, lead paint testing, asbestos testing, sewer line video inspections, and more. There are many issues to consider when purchasing a property, old or new. But remember, all inspections need to be completed and reviewed within the home inspection contingency (J-1) time period. The buyer must elect in writing to terminate the contract within the specified time period, otherwise the buyer will have waived the home inspection contingency.
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A termite inspection is a common contingency in Hawaii's real estate transactions. With most Purchase Contracts the buyer has the right to select a professional termite inspector to complete a termite inspection and review the written report within a specific time period. Often the seller will pay for the cost up to a certain amount, per the terms of the contract. If the termite inspection report reveals live termite infestation, the seller will be responsible for the treatment of the live infestation (but not the repair of the damage) within a certain time period. The buyer’s purchase of the property is contingent on the delivery of the termite inspection report to the buyer within the specified time period stating there is no visible evidence of live termite infestation, or the treatment of the live termite infestation within a certain time period. If neither occurs within the time periods specified, the buyer may elect to terminate the contract. However, the buyer must elect in writing to terminate the contract within the specified time period, otherwise the buyer will have waived this contingency.
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Cash offers do not involve any financing and therefore eliminate the lengthy loan application process and diminish the uncertainty of closing associated with trying to obtain loan approval. For those reasons sellers often prefer a cash offer over a financed offer. While most financed transaction take at a bare minimum 30-days and often 45 to 60-days to close, a cash transaction could theoretically close as fast as within one week, as long as escrow can prepare the recording documents to be recorded at the Bureau of Conveyances.
Cash is King, especially in a hot market where multiple buyers compete for the same property. However it is important to know that there are strategies to present a financed offer in a way that could increase the chances of the seller’s acceptance over a cash offer. A pre-approval letter, proof of funds and a well written cover letter presented along with the offer can help in the process. Often equally important is the quality of direct communication of the buyer’s agent with the listing agent that could make the difference and give one offer an edge over another.
The Acceptance Date is the date when the Purchase Contract becomes binding on both the buyer and seller. This is the date when the contract has been signed by both parties, either the buyer’s offer has been signed by the seller or the seller’s counter offer has been signed by the buyer. It is important that the signatures need to be delivered to the other party as evidence that the contract has been accepted. Most contingency time periods and often even the closing date in the Purchase Contract are tagged to the Acceptance Date. Once the contract is accepted, the clock starts ticking for a number of important contractual time periods.
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When the Hawaii real estate market is hot properties often receive multiple offers from competing buyers. Seller’s will review the offers received and decide how and who to respond based on price, terms and other factors.
Pre-Approval:
One option to add credibility to your offer is to attach a Pre-Approval letter from a reputable qualified lending institution when submitting your offer. A Pre-Approval letter shows the seller, that: a.) a financial institution has reviewed your finances (income and employment history, liabilities and assets), and b.) determined that you are qualified to obtain a mortgage loan up to a certain amount. Furthermore a Pre-Approval shows the seller, that c.) your credit score has been verified and is sufficient to obtain the type of loan you are applying for.
These are three important factors that could possibly give your offer an edge over other offers received and give the seller a degree of assurance that your loan should get funded.
Pre-Qualification:
While a Pre-Approval letter includes the important credit check, a Pre-Qualification letter lacks the verification of credit history. For added credibility we strongly recommend to obtain a Pre-Approval letter over a Pre-Qualification letter when submitting an offer.
It is a good idea to have the Pre-Approval dollar amount on the attached letter match the offered price. If the seller counters a higher price we could submit an updated Pre-Approval letter once buyer and seller agree on the new price.
What if the Pre-Approval letter shows a higher price than the offer price and we are unable to obtain in time a Pre-Approval that matches the offer price? On one hand it could show the seller you can afford more and therefore the seller might counter higher. On the other hand a higher Pre-Approval amount shows your financial strength but it should not be interpreted as your willingness to pay any more than the offered price.
When possible, matching the Pre-Approval amount with the offer price is the better option.
By the way, getting a Pre-Approval letter from one lender does not obligate you to get the loan from this lender. You might still discover a better funding source.
Proof of Funds:
With any cash transaction, we recommend to attach a Proof Of Funds with your offer. This could be a copy of a bank statement showing a.) buyer’s name, b.) name of the financial institution, and c.) account balance (make sure to black out the account number!). Or, if you prefer, it could be a bank letter on the bank’s letterhead indicating the buyer is in good standing and has sufficient funds to make a cash purchase up to a certain dollar amount. Be prepared, if you don’t provide proof of funds with your cash offer, the seller will often counter and require the proof of funds. It might be to your benefit to be proactive and add an edge to your original offer, especially in a market where multiple buyers are competing for few available properties.
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There are many different type of mortgage loans available. Depending on market conditions and law updates, loan products and loan requirements change often.
Let’s take a look at some of the common programs available:
Conventional Loans: The most common loan program in Hawaii. Must comply with strict Fannie Mae or Freddie Mac approval guidelines. Minimum cash down payment requirement could be 10% or sometimes as little as 5%, but the best rates are available if the buyer has 20% cash down payment, a minimum of 700 FICO credit score and a stable income history.
Portfolio Loans: Some properties (or the buyer) may not meet the strict Fannie Mae or Freddie Mac approval guidelines, such as condotels, or condo buildings with litigation, or non conforming properties, or the buyer has to many mortgage loans, etc. A buyer might have to opt instead for a portfolio mortgage loan with less strict requirements than a conventional loan. However the interest rate might be about a ¼% higher than a comparable conventional loan. Only a few lenders offer portfolio loans.
Government Loans:
VA Loans: Great loan program with 100% LTV (Loan To Value) ratio, means $0 cash (!) down payment, available for military personnel only, including veterans, reservists, active-duty personnel and surviving spouses. VA loans are guaranteed by the US Dept of Veterans Affairs.
FHA Loans: Great loan program with 96.5 LTV (Loan To Value) ratio, means as little as 3.5% cash down payment required, available to anybody in the United States. FHA Loans are loans insured by HUD, the US Dept of Housing and Urban Development.
USDA (Rural Housing): Great government backed loan program available with 100% LTV (Loan To Value) ratio, means $0 cash (!) down payment, available to any owner occupant in the United States. However, income restrictions apply, and the loans are only available for properties located in designated rural areas.
Land Loans: A land loan is for vacant land where you would not be able to get any other mortgage loan. A land loan usually requires a larger amount of cash, sometimes as much as 50%. Land loans often have only a 3-year maximum term. At the end of the term the loan will need to be paid off or rolled into a construction loan.
Besides these categories, a mortgage loan could be a fixed rate mortgage, or an adjustable rate mortgage, or an interest only mortgage.
Fixed rate mortgage: A mortgage loan where the interest rate stays fixed for the term length of the loan.
Very conservative loan as the monthly principal and interest payment does not change.
Adjustable rate mortgage: A mortgage loan where the interest rate can fluctuate over the term length of the loan. There are 1-year, 3-year, 5-year, and 7-year adjustable rate mortgages available. The rate stays fixed and low for the first few years (1, 3, 5, or 7 respectively). After that the rate will adjust and is tied to a predetermined index. Great loan program with a low initial rate if you know you won’t keep the loan for an extended period of time. The risk is an increased monthly payment once the rate adjusts.
Interest only mortgage: A mortgage loan where the monthly mortgage payment only includes the interest and not any principal paydown. This type of loan does not amortize, means the loan balance does not diminish over time. At the end of the term length, the loan will have a balloon payment, means the loan needs to be paid off in full. The monthly loan payments are lower because there is no principal included compared to an amortized loan. The drawback is, there is no equity buildup.
Mortgage loans (except the interest only loan) can be amortized over different term periods such as 30-years (most common), 20-years or 15-years. This is the time period that it will take to pay off the loan if you make all required monthly mortgage payments without any additional principal payments. Some mortgage loans require a balloon payment (such as the interest only loan), that is a payment in full at a predetermined time. Some mortgage loans require a prepayment penalty. If you sell the house or pay off the loan before the predetermined date, the lender will charge you a penalty.
These are only the basics. Loan programs and requirements change often and can be complicated. We recommend working with a local mortgage broker for the finance aspect of the purchase, rather than a specific bank. A mortgage broker has access to a large number of loan programs from different lending institutions and can advise on which lending source might offer the most suitable loan program at that particular time. It comes down to what is best for you, the buyer. This is added value at no additional cost. We are happy to assist in guiding you in the right direction.
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Hawaii's Real Estate Purchase Contract provides that the buyer's initial deposit is fully refundable as long as the buyer cancels the Purchase Contract during the inspection contingency (J-1) time period, usually between 10 to 15-days as of the acceptance date. This is the obvious and most often used contingency to cancel where the buyer can expect a full refund. There are other contingencies that the buyer may use to terminate the Purchase Contract, such as the buyer's review and approval of the seller's disclosure, the buyer's review and approval of subdivision and association documents, etc.
With brand new development projects the buyer's initial deposit is fully refundable as long as the buyer cancels the Purchase Contract within 30 days of the receipt of the Final Public Report. Be prepared that it might take a few days for the escrow company to process your refund.
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In the State of Hawaii an initial Earnest Money Deposit is customary when submitting a Purchase Contract. Often an additional deposit becomes due once the inspection contingency (paragraph J-1 of the Purchase Contract) has been removed. In case of a brand new development project, an additional deposit often becomes due once the Buyer’s 30-day review and approval time period of the ‘Final Public Report’ has expired. Both, the initial and the additional deposits will be deposited with the ‘escrow company’, an independent third party which acts as the safe keeper of funds until closing. The initial as well as any additional deposits will be applied towards the purchase price and are for the most part fully refundable as long as the Purchase Contract gets terminated within certain contingency timeframes as per the Purchase Contract.
A typical deposit schedule for a regular residential resale transaction may look something like this: Initial Earnest Money Deposit anywhere between $1,000 minimum and up to 5% or more of the purchase price at time of submitting the Purchase Contract. Additional deposit between $2,000 minimum and up to 15% or more of the purchase price within 2-business days of the removal of the J-1 inspection contingency. The J-1 inspection contingency time period is often in the range between 10 to 15-days from the acceptance date. Final remaining balance could be cash and or loan no later than 2-business days before recordation.
The exact deposit amount depends on a.) the buyer’s available cash to be used for the purchase, and b.) the buyer’s willingness to show financial strength when submitting the offer. For example, a buyer with limited cash funds trying to obtain a 97% LTV (Loan To Value) mortgage may only deposit minimal cash. An all cash buyer that wants to show sincerity and financial strength to the seller may deposit a much larger initial deposit sometimes 5% or more. The same buyer may make the additional deposit even larger sometimes 15% or more.
These are guidelines only. Every buyer has different circumstances that need to be considered when structuring an offer.
A typical deposit schedule for a brand new development project (before or during construction) may look something like this: 5% at signing, 5% within 30-days of receipt of the Final Public Report, 5% when the project is 50% completed, remaining balance (could be a loan) no later than a few business days before recordation. These numbers and due dates vary depending on the developer and or the strength of the market. When the market is hot developers may require a more aggressive deposit schedule (more money or at an accelerated pace), and bulk-closings (multiple closings on the same day) with the remaining balance due sometimes weeks before recordation.
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Our website displays the following Oahu residential real estate MLS (Multiple Listing Service) data: ‘Active’ and 'In Escrow' listings. In escrow means a property is under contract, but the sale is still subject to one or more contingencies.
This is a powerful tool for real estate investors to re-balance their real estate portfolios (improve cash flow, increase leverage, upgrade property quality, reduce maintenance or management costs, improve appreciation potential, etc…) while minimizing capital gains taxes.
A 1031 Exchange allows a real estate investor to defer capital gains taxes by selling one or more investment properties and purchase one or more ‘like kind’ investment properties. ‘Like kind’ means, both the relinquished (sold) and replacement (bought) properties need to be investment properties (show on tax return schedule E) and need to be located within the United States. These could not be your principal residence or your 2nd home or vacation home. After the sale and recordation of the relinquished property you have a maximum of 45-days to identify one or several replacement properties and a maximum of 180-days to close on the replacement properties. A third party qualified intermediary will prepare all required documents and hold the sales proceeds in the interim. Additional rules apply and need to be considered to qualify for the successful tax deferral.
Properly structured 1031 Exchanges can help real estate investors build substantial portfolios over time while deferring otherwise debilitating capital gains taxes. Always check first with your favorite qualified CPA and attorney if a 1031 Exchange is suitable for your individual situation. Call us to discuss your buy / sell options to maximize your real estate investment goals.
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Our website displays all available Oahu properties that sellers like to advertise with the MLS (Multiple Listing Service). You may find your dream property right here on our website without ever talking to a Realtor. But sometimes the perfect property is not actively advertised. An experienced Realtor can research and explore other possible opportunities.
An experienced Realtor can also share quickly changing market insights that are otherwise not readily available.
An experienced Realtor can assist with identifying your purchasing power, suggest appropriate financing options and provide you with a list of qualified lending institutions.
An experienced Realtor can also assist with analyzing and evaluating the property in regard to a multitude of issues. This includes referring additional qualified professionals to further investigate title issues, survey issues, zoning issues, tax issues, structural concerns, foundation, roofing, plumbing, electrical, lead-paint, asbestos, cesspools, septic tanks, building restrictions, setbacks, encroachments, easements, flood zones, utilities, appliance & pool inspections, termite issues, mold, dry rot, building permits, HARPTA & FIRPTA, 1031 exchange strategies, schools, hurricane and flood insurance, tenancy & vesting, association issues including pending lawsuits and reserve studies / budgets, road widening, future developments, resale value, etc.
An experienced Realtor can help negotiate price, terms, financing, closing date, occupancy date, rent back, inspections, other contingencies and timeframes, repairs, credits, inclusions, etc.
Today’s Hawaii Real Estate Purchase Contract includes 14-pages plus often several addenda. Sometimes there are revisions to the Hawaii Purchase Contract, which sometimes is due to legislative changes. An experienced Realtor can advise on recent changes and how it might affect the buyer's and seller's rights and obligations.
An experienced Realtor, as the listing agent, can help evaluate, analyze and compare every buyer’s offer received and advise on how to best navigate through the escrow process, foresee and reduce the risk of possible pitfalls and improve certainty of closing.
An experienced Realtor, as the listing agent, can advise on how to prepare your home for the most effective sales results (repairs, re-purpose, cleaning, staging, etc) and how to best position your property in today’s market to obtain your desired goals regarding price, terms, closing time frame, etc.
An experienced Realtor is required to take Continuing Education (CE) courses to keep up with law updates regarding real estate in order to give you current and valuable advice.
All Hawaii Living, LLC agents are full time licensed Realtors in the State of Hawaii and members of the National Association of Realtors that subscribe to a strict Code Of Ethics.
