Get Your Financing Figured Out

Before you know what homes to consider, you need to know how much you can afford, and that comes down to the monthly payment amount. Between loan products and new lending rules, variable interest rates and credit score surprises, most buyers are looking in the wrong price range (too high or too low). Ask your realtor for a referral to a (Local) mortgage lending specialist with at least five years’ experience. Based on your preferred monthly payment, income, and credit scores, he will review all your loan and down-payment options and write you a “pre-qualification letter” stating what purchase price you can afford. The seller’s realtor will need this letter in order to consider your offer. A “pre-approval letter” (as opposed to a pre-qualification letter) requires more labor on your part to provide additional paperwork and verification, but it is important to obtain one. Particularly in an economic slump, it will show the seller that you are a serious buyer who is financially prepared to make a purchase.

You will get the best advice and rates from a mortgage broker who specializes in residential loans, and has access to a large variety of loan products. Loan officers who work for one of the big lenders tend to focus exclusively on their own products. Retail banks are busy with a wide variety of services such as checking, savings, business and auto loans, and normally offer limited lending options, so they are rarely competitive. One exception is a credit union. If you are a member of one, or are eligible to be through your employer or other group such as USAA, (I do not endorse USAA please remove this line)you should talk to them about your purchase.

Shop for the best rate for your family, but think twice about switching away from a lender who invested his time to give you advice and help, just to save an eighth of a point. Anyone can quote you a lower rate, but that lender may drop the ball later and cost you money or delay your closing. Do not use Internet lenders, out-of-state lenders, or any lender who was not referred to you, unless you like surprise rate hikes the day before your closing, when it is too late to react.

A great mortgage broker can sometimes even lower your rate after you lock it in, by moving you to a different lender if the rates go down before closing. The best brokers will call and offer it without you having to ask. Find that broker.

Finally, when your mortgage broker asks for additional paperwork, get it to him immediately. He cannot control what the underwriter will ask for or when, and if you are late, your closing might be also. (Local Hawaii lender is important here no out of state lenders)

Use a Real Estate Agent

All commissions are paid by the seller in the Hawaii, so for a buyer, the help of a real estate realtor is free. A good realtor will help you find the right home in the right area, guide you away from big mistakes, and negotiate a better deal for you. Some buyers think they will save money by not having an agent. Think again. The seller has agreed to pay a certain commission rate to the listing agent, regardless of whether the buyer is represented or not. If you don’t have a realtor, the listing agent will keep the entire amount, and you will miss out on the benefit of professional advice.

Beware of realtors who offer you part of their commission as a “buyer rebate.” This may be a sign they are struggling to survive as a realtor, and as a result may not be competent to represent you.

Start Early

Most buyers purchase a home that does not match their original criteria 100 percent. If you start looking too late, you might buy the wrong home. It makes sense to start looking and exploring long before you are ready to buy to give yourself time to learn and think about what you see. Your criteria for your next home will evolve and change as you look at homes. Meet with a good real estate agent and tell him your criteria. Then spread out a map and ask him what areas are appreciating, and what areas to avoid.

Your realtor will start sending you properties by email. Sort through them and pick the ones you like the most. When you have time, drive by these homes and see what you think about the neighborhood, the shopping, and the commute to work. You will find neighborhoods you never knew existed. At this stage you are trying to figure out in which geographic area you want to live. If, while driving around, you see a “for sale” sign in front of a property you like, ask your realtor for more information.

Continue to look for homes on Realtor.com, Remax.com(KW.com please remove remax) BestHawaiiRealEstateSearch.com, and the search page on your realtor’s Web site. You will find homes you like that do not meet your original criteria. No problem. Tell your realtor about these, change your criteria if you want to, and he will send you more homes to consider.

If you see a home you absolutely love, call your realtor and tell him you want to see it ASAP. No harm in looking, and if it is the perfect home, maybe it makes sense to move a little earlier than you planned.

Move Up in the Down Market

This is the most profitable time in the history of Honolulu to sell your current home and purchase a more expensive home. Here is a simplified example: Let’s assume the average price of a home in Honolulu has dropped 10 percent over the past 18 months. So if you own a home that would have been worth $200,000 in a normal market, you may only get $180,000 for it now, or $20,000 less than you hoped. However, you should be able to purchase your next home at a 10 percent discount also, so you get a $400,000 home for $360,000, which is a $40,000 savings. In total, you took a $20,000 loss and earned a $40,000 gain, and ended up with a $20,000 profit. It gets better, though. In reality, the lower-priced homes depreciated less than the higher-priced homes. So if your $200,000 home only depreciated 5 percent, but the $400,000 home depreciated 15 percent, then you would lose $10,000 on your current home and gain $60,000 on your next home, for a $50,000 profit! Compare this to moving up in a strong market, when any appreciation on your lower-priced home is wiped out by the price increase of your next home. You are actually taking a loss on the transaction. Keep in mind that getting a bargain on the higher-priced home does not necessarily mean negotiating a big reduction off the list (or “asking”) price, because the list price may have already been adjusted downward to the right price.

Know Your Criteria

Here is a list of criteria for you to think about:

Tell your real estate agent everything you want in your next home. If your search results in too many homes to choose from, you can add to your criteria. If not enough homes match your criteria, you can make your criteria less specific.

Understand DOM and Fee Simple vs. Leasehold

DOM is “Days On Market.” This number is important because the longer the home has been on the market, the more likely the seller is to accept a lower offer. Reports printed by your realtor from the Honolulu Multiple Listing Service (MLS) will show each property’s complete MLS history, including price reductions. This report is only available to realtors, not the public, so be sure to ask for this report on any property in which you have a serious interest.

When you find a home you like, how do you know it is priced correctly? Look up the homes that have sold recently in the same subdivision and find those that are of comparable quality to the home you like, considering overall condition, upgrades, lot size, and other factors.

Another number to consider is $/SF, or “Sales Price per Square Foot” for each of these. Usually, the home you like should sell for a similar $/SF to others nearby. However, you should also keep in mind that in Hawaii, home prices are tied much more closely to the amount of land and the location and size of a home than to the features of a house. For example, a modest home on a larger, useable lot may go for a higher price than a larger house with high-end features that sits on a small lot. Therefore, $/SF is less useful to buyers in Honolulu than it would be in most mainland markets. (See more on Honolulu home values below.)

Ask your realtor to print out and help you analyze a “Quick CMA” report for the properties in which you are interested. This report will automatically calculate DOM and $/SF for you.

Another area in which Hawaii real estate transactions differ from those on the mainland is the prevalence of leasehold, in which buyers agree to ownership of a property for a specified period of time, after which it reverts back to a previous owner. The type of real estate transaction most people are familiar with is considered “fee simple.” In these transactions, the person who buys the property becomes its owner forever, or at least until he sells it to another person. In a “leasehold” sale, the owner agrees to transfer ownership rights of the home to the buyer for a set period of time, usually between 50 and 100 years, with a set renegotiation time before then. During that time, the buyer owns the house, but not the land underneath it. At the renegotiation date, the terms of the agreement can be changed. If the full time period expires, the buyer may be allowed to renew or buy the property outright.

While it may sound less than ideal, the leasehold system has helped make property more affordable for many Honolulu buyers. Leasehold purchases can also have tax benefits, so you should check with a tax expert to see if that would be the case for you. Your realtor will also guide you through the differences between fee simple and leasehold properties so that you can decide which is best for you.

Understand How to Determine
the True Value of a Property

A home is worth whatever a buyer is willing to pay and a seller is willing to accept. The best source to estimate the true market value of a property is an experienced, busy real estate agent, because they are working with buyers and sellers in the current real estate market, and they have access to the best data (from the MLS). They will also correctly adjust for quality and feature differences in homes, as well as the size and location of the property.

The second best valuation source is an experienced, busy appraiser. They have access to the same data, but they work for banks, not buyers and sellers. In addition, they are constrained by inflexible appraisal rules which do not allow them to consider some relevant information and comparable properties.

Inexperienced realtors and appraisers can be wildly inaccurate. Web sites like Zillow.com calculate market values without the input from human experience or judgment and they use incomplete data from county tax records. The “value” found in the county tax records is not useful, because it is calculated for the purposes of property tax assessment. Further, in Honolulu, this number is updated only once every year, while the market value of a property may change more quickly.

An experienced local realtor will understand the Honolulu real estate market better than any of these measures. This is particularly important in Honolulu, where home values differ significantly from in other areas on the mainland. One major difference is that the value of a Honolulu home relies more heavily on its size and location than price per square foot. It’s not unusual, for instance, for the land a house sits on to be appraised at a higher value than the house itself. The emphasis on land is due to its scarcity on the island of Oahu. In addition, building permits for new homes can be difficult to obtain, so some buyers are looking for a house that they can rebuild or improve using existing permits. In general, properties closer to town will fetch a higher price. Some beachside areas, such as Kailua, will be quite pricey, with others, such as the Leeward Coast, including Ewa Beach and Waianae, can be quite reasonable.

Know Where to Find the Best Deals in Honolulu

The highest inventory of homes in Honolulu is at the $400,000 to $500,000 price point in the leeward part of Oahu. These are the areas where builders added to the supply of housing in our market, which decreased prices for both resale and finished new construction homes. The higher price ranges have decreased by larger percentages, so while a home that was $500,000 might now sell for $425,000, a home that was at $1,500,000 may now sell for $900,000.

If you like appreciation (and projects), the best deal is to find a home that has all the “right things” wrong with it (out-of-date or worn out carpet, countertops, wallpaper, fixtures, and so on) and fix them yourself. You will want to look for properties listed at a lower price than other properties in the same area, which theoretically means the property in question could sell for that higher price if you bring it up to snuff. Most of these are “as-is” properties, which means you still get a chance to inspect it thoroughly after putting it under contract, and can terminate if you do not like what you see. Enlist your realtor (and his inspector and contractor friends) to help make sure you do not get stuck with a lemon.

For all the properties mentioned in this section, be prepared to stay in the home for several years until the market turns around. It always does.

Ask Two Key Questions in a Competitive Situation

Even in a challenging market, you could find yourself competing against another buyer for a low-priced property. The listing agent is prohibited from disclosing details of any offers received, so she will ask both buyers to return with their “best and highest offer.” She will then choose one buyer with whom to negotiate a final agreement acceptable to the seller. When considering your offer price, ask yourself, “If WE lose this property at this price, will I regret not offering more?” If so, you might want to increase your offer. Conversely, ask yourself “If WE get this property at this price, will WE regret paying that much?” If so, consider decreasing your offer. Rarely will the other buyer offer more than list price, so if you feel the property is a bargain, consider offering just a little over list price. Even $100 over can create goodwill with the seller and get the property for you. Finally, offering to close in less than 30 days may be very attractive to some sellers, especially if it is a bank-owned property.

Walk the Neighborhood before Making an Offer

Before committing to purchase a home, take a few slow walks through the neighborhood at different times of day. Listen for barking dogs. Look for children playing if that is important to you (the law prohibits your realtor from discussing “familial status”). Introduce yourself to a few neighbors, tell them which home you are thinking about, and ask them what they know. Neighbors love to talk and you might be glad you listened.