If your realtor hasn't mentioned these important issues, you need to dig a little deeper on your own.
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 elements”, 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 complexes 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, WIFI 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. They 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 whatever 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 tells 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 a unit 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.
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:
There are numerous 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 are getting, 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:
AOAO Contracted Rental Management Companies
Most resort condominium developments (condo-tels), large and small, have a “front desk” operation and some other services, such as housekeeping, onsite.
In some developments, usually in smaller complexes, the AOAO contracts with a management company, to run the front desk, housekeeping, 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.
As owners of the rental management company, the condo owners, including you, may 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 charge between 20% 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 60% occupancy rate on a year around basis. Tourism is high on Maui again, so hopefully you will achieve a much greater occupancy rate.
AOAO Affiliated Rental Management Companies
Here we are using the term “affiliated” to indicate that the onsite rental company is leasing space, usually, but not always, from the association. At larger condominium developments like Kaanapali Shores and aina-nalu, the AOAO tends to have 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 80% 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 charge approximately 40% of your revenue at this time. The percentage may vary over time depending on competition and the budget setting process. In the recent past, fees at these companies were charging approximately 50%.
Off-site Rental Management Companies
Just because your AOAO leases space to a management company onsite 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 20% but we are seeing rates more in the 30% range. Of course, they may 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 60%. 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 unless you have an on island contact who will handle emergencies. You must have a representative, either a licensed real estate agent, an unlicensed contact to handle emergencies and check ins, 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 need 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, Air BNB and HomeAway.
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 and collect and pay your taxes.
Of course, if you are experienced, go for it.
A word on taxes… first, you have to pay them. “Them” includes Hawaii’s general excise tax, transient tax (TAT) and state income tax. Your accountant needs to file a tax return for you in Hawaii. I can’t tell you how many home 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.
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 sitting 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.
If you are thinking of financing a condo purchase in Maui, you will need to use a lender who is licensed in Hawaii. If you plan to purchase a condo-tel, the lender will likely require you to put 30% down. There are only a few direct lenders who will lend on condo-tel properties. There is a slight premium in the interest rate for condo-tel loans, too. Typically the financing period is now 60 days from the acceptance date, and the entire process can be handled by email and electronic signatures until the very end, when escrow may dispatch a courier/notary for “off island” clients to sign documents.
Your agent can provide you with a list of licensed lenders, including mortgage brokers, who we have worked with and who know the Maui market. There are differences between the lending and escrow processes in Maui and the mainland. There are delays built into the process for neighbor islands, since final documents are sent to Oahu for recording, which takes an additional two days. It’s really important to work with a lender who understands the Maui market, since the various properties can be very different, and one may be financeable while another may not, for various reasons.
There are a handful of condos that qualify for FHA financing, which would allow a buyer to purchase with as little as 3% down, and even a few that qualify for USDA financing, which does not require a down payment. These condo developments would not allow short term rentals. Some single family homes would also qualify for these programs.
VA loans are great for qualified buyers, and they may present challenges in this market because the property being purchased must be permitted and conforming in use. Many Maui properties do not qualify for these loans, especially in the more affordable price ranges.
Buyers are constantly astounded at the number of requests and the volume of information required from lenders before a loan is approved. There is a lengthy list of documents that are required by underwriters, starting of course with tax returns. So it’s a good idea to get those taxes done on a timely basis if you are thinking of financing a purchase! For Canadians seeking a loan with a Maui lender, be prepared for a process that will be both new and probably overwhelming to you! But, you can do it.
Recently a new law was passed that “simplifies” the disclosure documents for buyers who are financing; we agree that the documents themselves are more thorough and understandable. The downside of the new law is that it has placed several more days into the escrow period to accommodate required 3 day review periods for closing disclosure documents before escrow can close, and any last minute changes such as seller credits for repairs can trigger a second 3 day review period.
It’s important to get prequalified for a loan with a licensed Hawaii lender before you start looking at properties for purchase. Having a good idea of what price range you are qualified to purchase, which loan program is best for you, and obtaining a prequalification letter not only helps you save time by targeting your search for what you can afford but also makes any offer to a seller much stronger. Most sellers will want to see that lender qualification before taking their property “off the market” by going into escrow.