Four Things You MUST Know Before Buying A Condo In Maui

If you've been thinking about buying a condo on Maui, there are four things you really need to understand before investing.

#1 is what people commonly think of as the HOA or homeowner association. On Maui, for condos that is commonly called the AOAO (Association of Apartment Owners) or the AOUO (Association of Unit Owners). Every condo association in Hawaii has one. The AOAO is responsible for maintaining the buildings, the grounds, managing any staff, shoreline issues and so on. And you are going to be paying a monthly maintenance fee, or what some people refer to as "dues." You are going to want to know how much those monthly fees are, what do you get for your money and what is NOT included in your fees. In my experience, if you've seen one association, you've seen one association.

#2 is rental rules and regulations. A lot of people come to Maui planning to buy a vacation property that they can rent when they are not on island. That's what the vast majority of Aloha Group's clients do. So, you are going to want to make sure the condo complexes you're looking at are property zoned for short-term rental and that the complex itself allows short-term rentals.

#3 you will want to know if the property is leasehold or fee simple. That short version is you need to know if you, as a member of the association, own the land that your condo is sitting on or is your condo sitting on someone else's land, and you're just renting the space.

#4 is lending. In some condo complexes, getting a mortgage is just about like getting a mortgage on any house. But on short-term rental condos, the loans are different. They typically require a high down payment and interest rates are going to be slightly higher than a normal conventional loan.

Be sure to tune in for our podcast series, Lahaina Lee, is going to dive into each of these topics. We might get into the weeds a little bit, but rest assured your time will be well spent and you'll get some valuable insights that will make you a more informed investor.

1. AOAO fees (aka maintenance 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.

A good way to think about your owners association is that it is a business, and you are going to be in business with as many partners as there are owners in the business. The monthly fees you pay are the chief source of revenue, sometimes the only source of revenue, for your business.

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, which is money set aside for capital expense, how well are they 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.

Some of those that allow short term rental, so-called “condo-tels” the fees will cover items that guests might expect like cable television, WIFI and basic telephone. Some include electricity. If you own a short term rental and 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 higher fees 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 complex. 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 ahead of time?

The first thing to do is to ask your realtor. Those of us who specialize in in condos know a lot about a lot of the complexes. And for Realtor that certain favorites, well we know a lot about what makes them good, and probably a little of dirt as well.

They probably won’t know the exact numbers answer but should be able to give or at least get some basic answers. Even though you get the basic answers, you should not rely entirely on that information, and you still need to do your due diligence, just as with any investment, get details. You won’t get some of the details until you get into escrow and you’re in your contractual due diligence period.

Once you get into escrow, the condo owner, the seller, is required by contract to provide you with a number of documents including budgets, minutes of directors meetings and much, much more. 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 statements 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 give you a sense of 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 a special 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. In 2024 many condos were hit with special assessments due to huge unexpected increases in property insurance. I understand that some of the insurance premiums increased 200% - as much as 700% in that year.

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.

2. Rental Company Management Agreements

In 2024 there were 851 condo sales on Maui. About 60% of those were purchased on condo complexes that allow, and are currently zoned for, short term rental. The other 40% were sold in complexes that that are primarily built for long term hosing by either an owner occupant, like me, or for a long term rental.

Most people who buy condos in complexes that allow short term rental want to make a little, or a lot, of their investment and their operating expenses back by renting out their unit to vacationers.

Today most everyone is familiar with short-term rental companies like Air BNB and VRBO. But back when many Maui condo complexes were being built, specifically for short-term rentals, some starting as far back as the 1960’s, there was no such thing as VRBO. And since the intended buyers were mostly on the US mainland, most of the complexes had an onsite management company with a “front desk” for check ins and other guest services.

Owners generally hired the onsite company to manage their condos. Some of those management companies charged 50% of the revenue or even higher. In those days owners didn’t have much choice.

Back in the ‘70’s I would have happily paid a management company to make my ski cabin a little easier to manage. Of course that wouldn’t work for everyone, and today, it doesn’t have to because there are options.

Today there are basically four ways your vacation rental property, short term rental, can be handled:

• Manage it yourself (you need to live on island or have an "on island" contact designated to handle emergencies)
• Hire an offsite property manager to handle it for you
• Use an onsite company that leases and manages the "front desk"
• Use an onsite company hired under contract by the owner members of the association.

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 unwelcome, nasty little surprises.

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:

• marketing
• check in
• cleaning
• minor maintenance
• on island representative to handle major repairs or replacement of items such as appliances, and
• emergencies including everything from an overflowing toilet, to how to turn on the AC and TV.

Association Member 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. The services they provide and the quality thereof vary widely.

In some developments, usually in smaller complexes, the AOAO contracts with a management company, that will run the front desk, housekeeping, maintenance and the like. The AOAO doesn’t necessarily supervise the rental company. Instead some of the owners will form what’s called a rental advisory committee, RAC, that interacts with the company.

These management company will usually hire a manager to be in charge of day-to-day operations. The manager and company’s performance is usually reviewed by the rental advisory committee. and the other owners at an semi-regular meetings.

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 this type of management system seems to be in place at the more boutique, developments tend to be more “homey” and laid back as compared to the luxury resorts, and tend to have fewer amenities and provide fewer services, they charge lower nightly room rates than some of the full on resort properties.

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. That’s the case at some larger condominium complexes, but we are seeing fewer of them today

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 and Costco. They know how to make guests feel well taken care of and deliver a consistently high level of service. During normal years (pre COVID), it was 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 30% - 40% of your revenue at this time. The percentage may vary over time depending on competition and the budget setting process

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% or higher in normal years. 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 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.

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 Maui transient accommodation tax (MCTAT), 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.

3. Form of Land Tenure – Leasehold vs. Fee Simple

I’ve heard potential buyers say, “I hear all the land on Maui is on a 99-year lease.” That is absolutely not true. The vast majority of condos on Maui, and in Hawaii, are fee simple. However, there are still some condos on leased land. When you start shopping for your condo on Maui, you need to know which type you’re looking at.

So, what’s the difference?

Fee simple is easy. It’s what most of us are familiar with. If you own a home or a condo, you likely own the building—known as the improvement—and the land for your house, or an undivided interest in the land if it’s a condo. In short, you own your building and the land it sits on.

Leasehold is a bit more complex. In a condominium development that is leasehold, you own your unit, others in the complex own their units, and collectively, you in the association own the building or buildings.

However, you don’t own the land under the building. Someone else owns it, and each month you pay that owner a lease payment. Now, you might be thinking logically that if you buy leasehold and don’t own the land, at least your property tax will be lower because the landowner has to pay that tax, right? Not so fast. The condo owner still gets the pleasure of paying the portion of the tax allocated to the land, as if the condo owner owned the land as well. Good deal for the landowner.

Over the term of the lease—a 50-year lease is not uncommon—your monthly lease payment may change. It usually goes up, not down. The lease amount is typically renegotiated every 5 to 10 years. When you buy the property, you will receive a lease agreement to review before your purchase, and the terms of the lease will be described, along with how and when the lease payment amount is to be renegotiated and, of course, what happens if you don’t pay.

When it’s time to renegotiate your lease, typically, but not always, your condo association board will engage a company that specializes in lease negotiations. Your association may hire an appraiser to determine the value of the land. Sometimes, both the landowner and the association will hire their own appraisers, and those two appraisers may hire a third “neutral” appraiser in an attempt to get an unbiased value on the land.

You can expect the lease amount—and any increase in your lease payment—to be based on the updated property value. When property values were skyrocketing, lease payment amounts followed suit. Now that prices are declining a bit, will the land value and lease payment come down? Call me skeptical, but I wouldn’t count on it.

Many of the complexes that are now fee simple, like most of Kaanapali Shores and Papakea, were once leasehold. Over time, either individual owners or the AOAO were able to negotiate with the landowner to buy the “fee.” That means they converted the property from leasehold to fee simple.

At both Kaanapali Shores and Papakea, the fee—land rights—was offered to the individual owners. Some of those owners chose not to buy the fee. So today, at those properties and a handful of others, we see the odd situation of a mix of fee simple and leasehold ownership in the same condo development.

As you can see, there are some potential risks and challenges with leasehold properties. In the past, the risk was offset by much lower purchase prices for leasehold properties vs. fee simple. To a certain extent, that is still true today.

The larger potential problem comes as you near the end of the lease period. For one thing, the value of your condo declines as you get closer to the end of the lease due to the risk of the lease ending. When the lease ends, one of three things will usually happen:

• You may be offered the opportunity to buy out the lease and convert your property to fee simple. In today’s market, that buyout might cost several hundred thousand dollars.
• The landowner might renegotiate the lease, allowing you to continue with your lease agreement for a new term.
• The landowner can order you to leave and require you to leave the condo in good condition. In short, you no longer own that condo. The landowner does.

That doesn’t happen often, but it has happened. In one case, the former “owners” were evicted, and if they had a right to any amount of compensation, it was nominal at best.

4. Financing Condo Purchases on Maui

If you are thinking of financing your condo purchase in Maui, there are a few things you need to know.

If you are buying a condo in a complex that does not allow short-term rentals, almost any lender licensed in Hawaii can provide you with a mortgage. In most cases, you will make a down payment of 20%, but there are special programs available for lower down payments in many situations.

If you are buying a condo in a complex that allows short-term rentals, your regular bank back home and the big national banks will NOT make the loan. I have dealt with many situations over the years in which the buyer insisted that his or her local mainland bank could handle the loan. Even their loan officers swore up and down that they could handle the loan. Every single time, that loan fell through about 30 days into the escrow process, and buyers were sent scrambling for a local lender.

Even then, there are only a few local lenders who will make those loans on properties that we typically refer to as condo-tels. Your Realtor can provide you with a list of licensed lenders, including mortgage brokers, whom we have worked with and who know the Maui market.

For condo-tels, your lender will likely require you to put 30% down. There is also a small premium in the interest rate for condo-tel loans. To be safe, we typically like to allow 60 days from the acceptance date to fund the purchase. However, in slower times, most lenders can get it done in 45 days. 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.

There are differences between the lending and escrow processes in Maui and on the mainland. There are delays built into the process for neighboring 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 and escrow process. 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 could require no money down. These condo developments do not allow short-term rentals. Some single-family homes would also qualify for these programs.

VA loans are great for qualified buyers, but 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.

A Word About the Loan Application Process

Buyers are constantly astounded at the number of requests and the volume of information required by their lenders before a loan is approved. There is a lengthy list of documents 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!

It may—no, it will—seem like you are being asked for the exact same information over and over again. So, just grab the beverage of your choice and settle in for the ride.

For Canadians seeking a loan with a Maui lender and who are in no way familiar with the U.S. process – you may need two beverages. Be prepared for a process that will be both new and feel overwhelming to you! But many a brave soul has accomplished this feat, and you can do it as well.

A while back, a law was passed to “simplify” the loan 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 three-day review periods for closing disclosure documents before you can close. Any last-minute changes, such as seller credits for repairs, can trigger a second three-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.

Thinking about a Maui condo investment and questions? Get in touch with our team today. The more questions you ask the better we can assist you. Contact us at www.AlohaGroupMaui.com to speak with a specialist from our top-performing real estate team on Maui.