The Hawaii Real Estate Market

Matt Beall
Principal Broker, Owner
Hawaii Life Real Estate Brokers
P.O. Box 356, Hanalei, HI 96714
Phone: 800.667.5028
Email: [email protected]
Website: HawaiiLife.com

Tweet

 

Geography and Culture

Hawaii is home to variety of climates (perhaps surprisingly) and a variety of real estate markets. The Big Island of Hawaii, which is larger than the rest of the State combined, boasts the most affordable real estate in Hawaii as well as the highest concentration of luxury homes in all of Hawaii. In the Puna District on the east side of Hawaii Island, for example, it’s still possible to purchase an acre of land for under $10,000 (granted, the entire acre may be the result of a recent lava flow) whereas in the resort areas of Hualalai and Kukio on the west side of the Big Island feature homes into the $20 million range.

On most Hawaiian islands, the climate, rainfall, and market conditions can change dramatically in the stretch of just a few short miles. The visitor industry’s influence on the real estate market is particularly significant, but doesn’t necessarily apply to every neighborhood and/or location.

In addition, differences in cultural value systems influence the market place. Buyers from the U.S. mainland may place a premium on ocean views and proximity to the beach, whereas local residents may relate to the ocean as such an essential and consistent part of life that looking at it every day might not be of enough interest to dramatically impact property values.

 

Hawaii-specific considerations

Flood & Tsunami Zones & Shoreline Hazards

Depending on which Flood Zone a specific property is located in, an additional annual insurance premium may be required. If the property is in an area deemed high risk, a lender may be require flood hazard insurance through the National Flood Insurance Program. The Federal Emergency Management Association’s (FEMA) Flood Map Service Center can be of additional help: http://www.fema.gov/hazard/map/flood.shtm.

Coastal property in Hawaii is extremely vulnerable to tsunamis (tidal waves), storm surges, floods, high wave impacts, and hurricanes. In addition, owners along the shoreline bear the risk that their property may erode.

For information about tsunamis, check www.fema.gov/hazard/tsunami/index.shtm

For hurricane information: http://www.fema.gov/hazard/hurricane/index.shtm.

Hawaii State Department of Health, Office of Environmental Quality Control at: www.hawaii.gov/health/environmental/ or the Hawaii Coastal Zone Management Program at: http://www.hawaii.gov/dbedt/czm/

Volcanoes

The “Big Island” of Hawaii has several active and inactive volcanoes. The most popular is Kilauea, which is the most active volcano in the world. Kilauea is adjacent to Mauna Loa, another active volcano and actually the largest volcano in the world.

Air quality on the Big Island can be affected by volcanic emissions known as “Vog.” Vog may affect people with respiratory problems and may also affect water catchment systems if precautions are not taken. The buyer should contact the State of Hawaii, Department of Health http://www.state.hi.us/doh/index.html for information about recommended precautions as well as other professionals. While Vog is more common and persistent on the Big Island of Hawaii, it can also impact the rest of Hawaii in certain wind conditions and depending on the activity of the volcano.

Also on the Big Island, there are “Lava Zones” or “Hazard Zones” as characterized and classified by the U.S. Department of the Interior, Geological Survey. For more information go to: http://volcanoes.usgs.gov/Hazards/ or www.fema.gov/areyouready/volcanoes.shtm. Different Lava Zones may affect the availability, limits and costs of property and/or liability insurance. Other affects of volcanic activity that may occur include lava tubes and periodic earthquakes.

Visitor Destination Areas

Some counties in Hawaii have very specific zoning ordinances related to Transient Vacation Rentals, often defined as any rental of less than 30-days. In some cases, Transient Vacation Rentals may be strictly prohibited, despite some irregularities in enforcement.

 

Uncommon Deals, Seasons, and Opportunity

The great majority of the residential real estate on the “neighbor” islands of Maui, Kauai, and the Big Island of Hawaii is traded by people who reside outside of Hawaii.  Hawaii’s robust visitor industry brings millions of visitors into these markets every year from the U.S. Mainland, Canada and other countries.

As a result, the market for second homes, vacation rental properties and investment properties is regularly exposed to buyers who are more affluent than the average full-time resident in Hawaii. Hawaii’s economy is largely driven by tourism, agriculture and the military. With such little diversity in industry, the average full-time resident in Hawaii isn’t financially capable of competing in a market driven by a wealthy cross-section of visitors from the U.S. mainland (particularly the West Coast). This phenomenon drives the real estate values higher, since the demand stems from such a broad base and high number of visitors.

Since most of the buyers for vacation properties, second-homes, and other investment properties reside “off-island”, the “Days on Market” (the amount of time it may take for a property to sell) is radically different on the neighbor islands than in more conventional real estate markets (Honolulu, for example). Most buyers aren’t willing to purchase property “sight-unseen”, they’d prefer to inspect the property in person.  The only chance they’d have to shop for real estate and personally inspect the property is either when they’re on vacation or in Hawaii specifically to look at property.

So, at any given time, the number of prospective buyers who are currently “on-island” is far lower than the total prospective buyer pool. This leaves the door wide open for foreclosure sales, trustee sales, and anything that generally requires a buyer to be present, in person in order to complete (or, at the very least, initiate) a transaction at the time of a foreclosure auction or trustee sale. Of course, Realtors or attorneys could bid at a foreclosure auction or trustee’s sale on behalf of a buyer, but even that is relatively uncommon, since the buyers would most likely still want to inspect the property in person.

In addition, and perhaps similar to other second home markets, buyers from out of State are often more willing and available to wait out the extended period of time it might take to complete a short sale. This ability to wait creates an advantage overs buyers who are the in the market for more conventional reasons and therefore have more of a deadline to complete a purchase (growing families, job commutes, school years, etc.).

In a more conventional real estate market, most of the buyer pool is located in the same geographic area as the properties for sale. People buy and sell property because of job commutes, school districts, growing or shrinking families, etc. If a property is listed for sale, most of the prospective buyers have access to the listing and can readily discern if the property is right for their needs, if it’s priced right, etc. If a property stays on the market for 60, 90, or even 120 days, buyers may start to draw the conclusion that the property is over-priced. And, over time, if the price isn’t lowered, the property may get “stale” (as Realtors often say). In Hawaii, and especially on the neighbor islands, most of these rules are off. Every week, a new group of prospective buyers gets off the plane to start their Hawaii vacation. Hundreds of thousands of people will visit an island in a matter of months, so getting “fair market value” may require a much longer period of time for the average seller.

This extended marketing period also creates opportunities for buyers. Hawaii’s visitor industry isn’t quite as hot and cold as a market like Florida, for example, which largely relies on “snowbirds” in the winter months, which Floridians might refer to as “the season”. In Hawaii, there is a relatively consistent flow of visitor traffic throughout the year, but there are clearly slower months. The month of September, for example, is particularly quiet. Families have their children back in school, the summer months have passed, and the visitor industry is generally slower, resulting to anywhere from a 25% to 40% drop in arrivals, depending on the location.

Different islands also have different “seasons”. Maui and the Big Island, for example, generally get a lot more ‘snowbird’ traffic than the island of Kauai, for a variety of reasons.  The average rainfall on Kauai is far higher than the resort areas of the Big Island and Maui, so a vacationer visiting for a two-week period, for example, is less assured of a sunny vacation. Kauai experiences a significant uptick in occupancy during the holidays (usually visitors who are familiar with the island and seem to prefer it to the rest of Hawaii), but after mid-January or so, the visitor occupancy drops off until a brief uptick during spring break and then the busy summer season.  Maui and the Big Island, however, see a steady stream of occupancy from January thru April. In general, all of Hawaii is busier in the summer months, when traffic from the U.S. mainland is the highest.

Taking advantage of the slower months can often be a key strategy for buyers, whether just by submitting offers to sellers on the open market, or by attending foreclosure and/or trustee sales during times that other buyers are less likely to attend.

In any case, do the variety of property types, climates, and micro-markets, working with a professional Realtor is extremely recommended. Be sure to choose a Realtor with years of experience not only in the industry but also on the particular island you’re considering.

 

Judicial and Non-Judicial Foreclosures

Hawaii is one of the few States that features both Judicial and Non-Judicial Foreclosure Sales. Judicial foreclosures are more conventional, and provide the backing of the court system to insure that the foreclosure process has been handled according to the laws of the State of Hawaii, and that the title is clear to the purchaser (via a Court Commissioner’s Deed).

Judicial Foreclosures

In the Judicial foreclosure process, there are generally two foreclosure auctions. The first auction is publicized in a local paper and is usually held at the Courthouse or some other advertised location. At that auction, bidders are usually required to present a cash deposit (often 10% of their bid amount), and Commissioner appointed by the Court conducts the auction.

Once the winning bid is reached at the initial auction of a Judicial foreclosure, the Court Commissioner then files for a Confirmation Hearing. The purpose of the confirmation hearing is to confirm the winning bid, but Hawaii law provides for the bidding to be reopened at the Confirmation Hearing, provided that any subsequent bidders bid at least 5% more than the previous winning bid. So, often the Confirmation Hearing can lead to a second auction. As opposed to the initial foreclosure auction, there is no requirement for the Court Commissioner to advertise the time and date of the Confirmation Hearing. So, a degree of diligence is required to keep up with the Court Commissioner (often a local attorney appointed by the Court to conduct the process) to track the results of the initial auction as well as the scheduled date and time of the Confirmation Hearing.

The fact that there are two essentially two separate auctions, and the additional bidding requirement at the Confirmation Hearing, requires some specific bidding strategies for success. For example, the period of time between the initial foreclosure auction and the Confirmation Hearing may be anywhere from a few weeks to several months, depending on the Court’s schedule, the competency of the Court Commissioner, and other factors. As a result, it may be wise to consider that the bidders at the initial auction may not be available to attend the Confirmation Hearing. Knowing this information, it’s often a good idea to avoid a bidding war at the initial auction, since you may well be able to attend to the Court Confirmation and be on the only bidder, despite having to pay 5% over the winning bid at the initial auction.

Non-Judicial Foreclosures

In short, Non-Judicial Foreclosures are among the riskiest purchases, because there is no (court) guarantee that the foreclosure process has been handled properly, and therefore there may be lingering title claims that may adversely impact the purchase and/or the property’s value.

Foreclosure sales in Hawaii are AS-IS, meaning that the Court and/or lien holders offer no warranty of any kind. Do your due diligence in advance, before even considering bidding on a foreclosure property. Hire a Realtor and an attorney. Have the property inspected as much as possible prior to the auction. In the case of a Judicial foreclosure, you should be able to arrange for access to the property with the Court Commissioner prior to the foreclosure auction. Hire professional home inspectors. Have your Realtor and/or attorney research the building permit history, the waste water system, and any previous insurance claims. Order a current title report to discover any liens, deficiencies, and the current balance of the loan (having this information in advance may provide an advantage if a representative of the lien holder attends the auction to make a credit bid).

I very strongly recommend seeking legal counsel before pursuing a foreclosure sale in Hawaii, and specifically, I recommend obtaining title insurance before participating in an auction for a property that’s being sold via a non-judicial foreclosure.