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3 things you must know before you buy a condo in Hawaii.
If your realtor hasn’t mentioned these important
issues, you need to dig a little deeper on your own.
- AOAO fees (aka maintenance fees or HOA
fees)
In Hawaii, every condominium
development is required to have an AOAO (Association of Apartment Owners). The association is comprised of the condo
owners who are responsible for running and maintaining the condominium
complex. So, when you become an owner,
you get a vote in how the complex is managed and you have some responsibility
for maintaining the property.
With AOAO fees, you need to know
not just how much you have to pay, but what do you get for your money, i.e., what
is paid for by the AOAO, what are the extra costs that come out of your pocket,
are there any assessments pending (and how do you find out) and how well are
the reserves funded.
At a minimum, all AOAO’s are
responsible maintaining the condominium’s “common element”, i.e., the grounds,
the pools, the exterior of the buildings usually including the roofs and so
forth. That’s the minimum, and that is
all that some AOAO’s maintain. This is
OK, because you know that up front and your fees should be lower than some
other complexs that cover more items with your fees.
And some cover much more.
At some so-called “condo-tels” the
fees will cover items that guests might expect like cable television and basic
telephone. If your condo has
air-conditioning you definitely want to know if electricity is covered or if
you are going to get a separate bill for it every month. So, in some cases, you pay more and you get
more for your money.
How much should your fees be?
The fees should be enough to cover the operating expenses and reserves
for your development. So the next
questions are:
·
how much are the operating expenses,
·
how is the budget determined,
·
how are reserves set and
·
is the complex you are looking at now adequately
reserved?
And just as important is, how do
you get the information?
The first thing to do is to ask
your realtor. S/he probably won’t know
the exact answer but should be able to give or at least get some basic
answers. Even though you get the basic
answers, you still need the details. You
won’t get the details until you’ve made an offer that has been accepted and you
get into escrow.
Once you get into escrow, the condo
owner, the seller, is required by contract to provide you with what ever
condominium documents you request within a reasonable time frame. The time frame is negotiable, however we
usually request that sellers get the docs to you within 5-10 days. We usually ask for another 5-10 days for you to
review the docs.
What to look for…
The first thing I look for is the financials,
the profit and loss statement and the balance sheet. If you are not comfortable reviewing the
financial statements, have your accountant look them over for you. We’ve received P&L’s with sections, such
as the manager’s salary, whited out.
We’ve received statements that were 2 years old. Of course, those are exceptions. Usually, the statement will be in order.
Next you want to see the
budget. Again, if you are not
comfortable with budgets, get your accountant to look it over. You are looking for reasonableness. In order to determine how reasonable these
numbers are, it will be helpful to have the reserve study.
The reserve study tells you the
useful life of capital items such as roofs, pools, parking lots, etc. They also tell you the estimated replacement
cost for those items and tell you how much money should be held in
reserve.
By law, condominium developments in
Hawaii must choose one of two methods for establishing reserves. They are required to hold a either a minimum
of 50% reserves determined by the reserve study or the so called cash method
which means they will have enough cash in the account to cover capital expenses
in the upcoming year.
Many realtors and buyers rely on
the law. However, it is not all that
unusual to find that a development is under reserved.
Being under reserved doesn’t
necessarily mean you should reject the property, but you should proceed with
caution because the lack of adequate reserves can result in an assessment or
cause some needed maintenance to be deferred.
An assessment is levied when the
reserves are not adequate for necessary repairs or replacements or sometimes,
just to get the association back in compliance with the law. The assessment can range from a few hundred
dollars to tens of thousands of dollars per unit.
If you are buying a foreclosure or
in a complex that has had a number of foreclosures, there are other things that
you need to look out for, but we’ll cover that in another article.
- Rental company management agreements
Most people who buy condos want to
make a little, or a lot, of their money back by renting out their unit to
vacationers. There are basically four
ways your rental can be handled:
- Manage
it yourself, (you need to live on island to do that)
- Hire
an off site property manager to handle it for you,
- Use
an onsite company owned by your AOAO,
- Use
an onsite company hired under contract by your AOAO.
There are several competent rental
management companies on Maui, and many condo
developments have onsite companies.
Before you sign with any rental
management company, make sure you know what you get, how much they charge, and
what are potential additional charges that aren’t covered under your contact
that could give you an unwelcome, nasty little surprise.
There are a number of things that
you might rely on your management company to do. The five big things that you must have from a
company so that you can rest easy are:
1. Marketing
2. check
in
3. cleaning
4. minor
maintenance
5. on
island representative to handle major repairs or replacement of items such as
appliances
AOAO Owned Rental Management Companies
Most resort condominium
developments (condo-tels), large and small, have a “front desk” operation and
some other services, such as house keeping, onsite.
In some developments, usually in
smaller complexes, the AOAO forms its own management company, perhaps in the
form of an LLC, to run the front desk, house keeping, maintenance and the
like.
These companies usually hire a
manager to be in charge of day-to-day operations. The manager and company’s performance is
usually reviewed by the board of directors and the other owners at an annual
meeting. At the meeting the owners,
which includes you, will also set an operating budget for the company.
As owners of the rental management
company the condo owners, including you, have a responsibility and liability
for the actions and employees of the company.
If an employee needs to be reprimanded or fired, your company is on the
hook if it isn’t handled properly. And,
if your manager needs to be replaced or leaves, you can count on being in
conference calls or meetings to deal with the situation.
This type of management company
will normally take between 30% and 35% of your rental income with the balance
being distributed to you. In some cases
however, your distribution may be determined based on the profitability of the company,
and your distribution may be paid monthly, quarterly, semi-annually or
annually.
Since most of the smaller
developments tend to be more “homey” and laid back as compared to the luxury
resorts, they get nightly room rates ranging from the low $100’s to the high
$100’s on average. Occupancy rates will
vary based on several factors, but you should expect at least a 50% occupancy
rate on a year around basis. Tourism is
picking up again, so hopefully you will achieve a much greater occupancy rate.
AOAO Outsourced Rental Management Companies
At larger condominium developments
like Kaanapali Shores and aina-nalu, the AOAO tends to
hire a seasoned management company, i.e., Aston, Outrigger, and the like, to
manage the rental operations.
These types of management
companies make your condo ownership and rental completely turnkey. They have marketing power and get favorable
treatment from travel agencies including big vendors like Expedia. They know how to make guests feel well taken
care of and deliver a consistently high level of service.
It is not unusual for condos
managed by these types of companies to average occupancy rates of 75% to over
90% and be completely sold out during high season.
If there are employee issues, they
are handled by management. If there are
management issues, they will be handled by the parent company. You will likely never have to get involved at
all, and, in most cases, won’t even hear about it.
These companies do a lot for you
and make your ownership worry free. They
also take between 45% and 50% of your revenue.
Off-site Rental Management Companies
Just because your AOAO chooses a
management company or decides to run its own program, you are not under any
obligation to participate. The company
you choose to manage your property is entirely your decision.
Some condo owners opt for off-site
management companies instead of going along with the crowd.
Off-site companies tend to charge
less for their services, we’ve heard of rates as low as 25%. Of course, they usually have lower occupancy
rates as well.
If you own a condo managed by an
off-site company, you should be getting an occupancy rate of at least 50%. Our expectation for oceanfront complexes
would be higher.
There is only 1 acceptable reason
for a lower occupancy rate. You. If you hold your unit for personal use during
the high season, when occupancy rates are frequently at 100%, you can’t expect
to achieve big numbers during the off months – spring and fall – when tourism
rates are naturally lower.
Do-it-yourself rental management
We know a handful of brave souls
who are do-it-yourselfers. Of course, in
Hawaii, unless you are a resident, you can’t legally do-it-yourself. You must have a representative, either a licensed
real estate agent or employ a caretaker.
A caretaker is someone who is not licensed, but is hired as an employee
to care for your property. There are
some companies that will agree to act as your management company to cover you
legally and help you out in case of emergencies.
The other thing you have to have
is a reliable housekeeping service.
To get renters, many owners run
ads in the Maui News, some Magazines like Sunset and Hawaii, and set up websites with links to on
line portals like VRBO, Vacation Rental By Owner.
The benefit of managing your
property yourself is that you have control and you get to keep most of the
rental income. Of course, the other side
is that you are now a small business owner.
You are responsible for getting your condo rented, dealing with
customers and complaints, repairs and maintenance and don’t forget to get
liability insurance.
Of course, if you are experienced,
go for it.
A word on taxes… first you have to pay them. “Them” include Hawaii’s general excise tax,
transient tax (TAT) and income tax. Your
accountant needs to file a tax return for you in Hawaii. I can’t tell you home many owners I’ve
counseled who tell me they’ve never filed a return in Hawaii and it has to be dealt
with when you sell.
- Form of land tenure – leasehold vs.
fee simple
You may have heard that in Hawaii
we have 2 types of types of properties: fee simple and leasehold. You need to know which kind you are buying.
Fee simple is easy. It’s probably what you own now. You own your
dwelling and the land under it.
Leasehold is a bit more
complex. In a condominium complex that
is leasehold you own your unit, others in the complex of course own their units
and collectively you own the building.
However, you don’t own the land under the building. Someone else owns it and each month you pay
that owner a lease payment.
Over the term of the lease your
monthly lease payment is usually renegotiated every 5 to 10 years. There will be terms in the lease that
describe how and when the lease payment amount is to be renegotiated.
We’ve seen some leases that based
the new lease amount on the value of the property. When property values were skyrocketing the
lease payment amounts followed suit. Now
that prices have fallen from the sky, are the lease payments coming down? I’m not sure.
Many of the complexes that are now
fee simple, like Kaanapali Shores for the most part, were once leasehold. Over time either individual owners or the
AOAO were able to negotiate with the land owner to buy the “fee”. That means they converted it from leasehold
to fee simple.
In recent years, we’ve seen other
developments negotiate with their land owners to buy the fee with varying
results.
As you can see, there are some
potential risks and problems with leasehold properties. In the past the risk was offset by a much
lower purchase price for leasehold properties vs. fee simple. To a certain extent that is still true today.
The potential problem, in my mind,
comes as you near the end of the lease.
If you don’t or can’t buy the fee and if the lease ends and isn’t
renewed your building is setting on some else’s land. So who owns that building? The land owner does. That doesn’t happen often, but it has
happened. The former owners were evicted
and they don’t have any right to compensation.
Now, if you are adequately
frightened of leasehold properties, let me say there are some good leases and
there are some good values on leasehold properties. Rely on your realtor to help you through the
maze, but you must do your own due diligence, including having the lease
reviewed by your attorney if necessary.
There is a lot more to owning a
condo in Maui or anywhere in Hawaii. In
future articles we’ll cover financing in today’s market, HARPTA and FIRPTA and
the associated capital gains withholding.
We’ll also get into purchasing short sale and foreclosure properties.
If this article was helpful
forward it to a friend. If it just
raised a bunch more questions, call or email.
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