The recent ups and downs of the housing market, both nationally and locally here in Hawaii, have put both current and would-be homeowners in a pickle. If you’ve been hit by the economic downturn, maybe even put in an underwater mortgage situation, then you’ve either had to seek help, such as a short sale or loan modification, or be forced to ride out the wave until the market picks up.

However, for real estate investors, there’s no denying that the doldrums of the market the past five years have presented unique investment buying opportunities. The old adage of “Buy low, sell high” certainly rings true when a bottom falls out, whether it be in stocks, baseball cards, cars or, yes, real estate.

The drop in prices combined with very low interest rates present unique buying opportunities for savvy real estate investors in Hawaii, especially with inventory starting to shrink to normal levels. Of course, not all investors are the same and the type of investor one is determines what, where and how one views these opportunities and ultimately invests. Let’s look at a few examples:

The House Flipper – Today’s investors who flip houses (such as my company, Big Rock Investments) can find opportunities in Hawaii today in niches such as short sales and preforeclosures. It wasn’t too long ago that Hawaii’s foreclosure rate was in or near the top ten nationwide. While the moratorium on non-judicial foreclosures for most of the past year brought that “deal source” to a crawl, there were still judicial foreclosures being processed. These are homeowners who need options, and the investor who can have a short sale processed can pick up great properties at discount prices. Most of these are centered in the Ewa and Kapolei areas on Oahu, but neighborhoods across Oahu and all Hawaii (ex. Kihei in Maui) have all had distressed properties hit the auction block. Now, with the expiration of the moratorium set for this summer, these homeowners won’t have that protection anymore and will need a helping hand.

The Landlord – For the savvy real estate investors who love the idea of cash flow (who doesn’t?), picking up properties in Hawaii now to buy and hold for the long haul is a great idea. Buying houses and condos now before prices increase allow you to capture rent checks monthly in addition to market appreciation – passive income now with a long-term upside. While Hawaii has, no doubt, been a difficult place to cash flow compared to other states in the country, there are good deals out there. Look to multi-family properties in neighborhoods of Honolulu such as in Kalihi, Kaimuki and Moiliili and out west in Maili and other parts of Waianae. You can also pick up plenty of cheap studios, 1 and 2-bedroom condos in Waikiki and Kihei that you can use as vacation rentals for international visitors. Guess what? They’ll pay well if it looks good!

The Property Buyer – Some people just love to own property because they know that real estate is almost universally a sound investment – if acquired strategically and wisely. Hawaii is at the top of many lists for these types of real estate buyers and with good reason: it offers year-round wonderful climate, it attracts international visitors and is easily rentable if desired. The sand, sun and surf sure help as well! These types of investors usually have a very long timeframe in which they view their investments, and the aforementioned low interest rates with low housing prices make now a good time to pick up a house or two while the opportunity is there. How about a house in Poipu, a multi-family house in Kailua or a couple condos in Lahaina? All good bets right now.

The “Hands Off” Private Lender – If you’re not familiar with private lending, please check out our full-length explanation video at http://bigrockinvestments.com/smart . Basically, private lending allows a wise investor to park their funds in one of our short-term rehabs with a fully collateralized and recorded lien while they earn 10% or more on a fixed rate promissory note. Since the value of the property is always worth significantly more than the loan, the investor is always in an equity position while they passively earn a very high interest rate. No volatility of the stock market, no susceptibility to unforeseen market events and no miniscule returns of savings accounts. If you like the idea of collateral and high fixed interest but don’t want to do the actual ‘heavy lifting’ of a house flip, you can align with a local investor company like us who can put your funds to use, all held by a third-party escrow company. You can even use a Self-Directed IRA to earn the interest tax-free or tax-deferred – ask us how.

As you can see, the Hawaii real estate market offers opportunities to a diverse array of savvy buyers. With the anticipated summer expiration of the non-judicial moratorium, there will be more distressed properties hitting the open market. While this increase in supply may, in the short term, prevent a large uptick in prices it will also present more properties to be had with upfront equity at closing since these types of properties – primarily short sales and REOs – tend to be sold off quickly at discounts to move them through the pipeline.

If you’re a Hawaii real estate investor, no matter the type, who wants to get into the market while the time is right, don’t spend too much time on the sidelines. There are great deals to be had, but it remains to be seen how long they will be available.

Aloha,
Mike

However, watching the big guys take a fall doesn’t really do more for those of us in Hawaii than provide a nice diversion and maybe an “I told you so”. So with that being said, let’s look at the March foreclosure info for Hawaii.

Looking at the data, it’s no surprise that most of the foreclosures were on Oahu. However, the Big Island had the highest foreclosure rate with 1 out of every 460 housing units in foreclosure, mostly in Kona. Maui was right behind with Lahaina and Kihei contributing to the 1 out of 514 foreclosure rate. Statewide, bank repossessions (REO) more than doubled from 102 to 214!

Yet at the same time, inventory is dropping under the 6-month mark and prices have creeped upwards. It remains what will be done when the statewide moratorium on non-judicial foreclosures comes up for renewal in July , but it seems obvious that this will have a tremendous affect on the future of Hawaii housing and real estate.

With Bank of America, a major provider of home loans to Hawaii residents, revamping their short sale process this past week, now might be the best time to get out from an over-leveraged mortgage if it’s crippling your family’s budget, especially with the 2007 debt forgiveness act still in effect through the end of the calendar year.

Join the forum discussion on this post

Learning how to ‘run your numbers’ is a key component of flipping houses. The most important numbers are:

1) Acquisition cost
2) Financing cost
3) Resale Price
4) Rehab Cost

Today we’re going to talk about #4 — estimating your rehab costs. Get this number wrong and not only could you sabotage your expected profit but you could actually end up losing money. Get it right and BAM — you’re in the green!

When you’re visiting a house for the first time, it’s helpful to have a sheet with you that details out the cost for each rehab item. Then you just check each item and tally up your costs. Full kitchen renovation? Check. One full bathroom and one half bath? Check, check. New roof? Check. Tally up — $34,000.

If you really nail this system down, you can be in and out of a typical house in 30 minutes or less with a solid idea of how much your rehab is going to cost. Maybe you won’t get it down to the exact dollar, but you’ll be pretty darn close. Knowing this, you can then figure out your other numbers and come up with your MAO (that’s Maximum Allowable Offer for you folks who like the lingo).

Think about how much time this can save you. Maybe you can visit 1 or 2 more houses each and every day! Think that will increase your efficiency and, therefore, your bottom line? You better believe it.

But we need to backtrack a minute. How do you know that bathroom remodel will cost $5,250? There are a couple ways to really tighten up that number so you’re prepared when you get a call on that Ewa Beach fixer upper and need to go visit the house for the first time.

Have a Handyman or General Contractor Give You an Estimate

“Wait a second, Mike” you say. “I thought the plan is to be able to properly estimate the cost when I first visit the property, not when I have a handyman or GC walk the house during my inspection period.”

You’re correct, but when you’re starting out you might need to get a few estimates to make sure your numbers are right. Do this a few times and you’ll quickly get an idea of what your kitchen tile floor will cost and how much that fourth bedroom extension on your Kaimuki single family house will add to your rehab budget. Eventually you won’t need them with you on the first visit but only when you want to be sure you didn’t miss anything.

Go For a Long Walk

Another way is to spend an afternoon or two at Home Depot or Lowe’s with a tablet of paper and pen in hand. Price out your materials at different grades. Corian vs granite countertops; hardwood vs tile vs carpet floors and different grade appliances. Don’t be afraid to chat up the employees — they should know how much the labor should cost to install the materials you’re scoping out.

Take these material costs and put them in your rehab sheet that you take with you on your site visits. Don’t reinvent the wheel every time — stay efficient.

You Don’t Need to Be Perfect….

Again, the idea is not to get the perfect repair estimate inside of a half hour. The idea is to be able to act on a moment’s notice on that Mililani hot deal and know within a couple thousand dollars and 30 minutes onsite whether that rehab is going to cost you $20,000 or $40,000 to fix up.

Here’s the REAL POWER in this skill. If you can figure out your repair estimate while visiting with the seller for the first time, then you can go to contract right then and there! Don’t give them the opportunity to call up a competitor while you mull it over and reschedule another meeting a few days later in the week. That window of opportunity is GONE, my friend!

Knowing how to estimate rehab costs is a key skill for any real estate investor interested in flipping houses. Practice it until you’ve systemized the process and you’ll save both time and money on your deals.

Magic 8 Ball says....

Well, I wish my crystal ball held the answer to that but alas all I have is an old Magic 8 ball and it’s not very reliable about anything. But it’s certainly a topic that is going to start getting increasing attention in the next few months.

The initial voices for the moratorium were adamant about stopping the illegal foreclosures in light of the robo-signing and other mortgage impropriety scandals. They also wanted to give homeowners with underwater mortgages a greater opportunity to agree to a loan modification with their lender. Understandable.

However, the cons stated a clogged up inventory of overleveraged mortgages and the ill-advised encouragement of homeowners with bad mortgages to try and salvage their sinking ship. “Just because they CAN stay in the house doesn’t mean they SHOULD” was (and still is) a common sentiment.

No matter which side of the coin you’re on, it’s safe to say that the question of policy renewal is an important one. The most important question to ask is:

Has the moratorium been effective?

That itself is a trick question. How do you define “effective“?

Is it the number of homeowners kept in a mortgage who would others have been foreclosed upon? I might buy that, although some of the mortgage terms are still likely exorbitant. Or is it the % of homeowners previously denied a loan modification that now find themselves with modified terms? That might work as well. The problem is that you can’t measure the outcome until you clearly define your criteria for measurement, and that alone can be very contentious. Generally speaking, the objective would be to determine how the situation has changed since the enactment of the policy and to what degree those changes are a result of the policy or would have happened had it not been in effect at all. There’s no right answer. Hey, that’s what we elect politicians for, right? (insert pun below)

If you’re in the industry or following the housing market closely, you’ll notice that there’s no shortage of new REO properties being released out of inventory. Everyday it seems there are a few new foreclosure properties hitting the market as the banks continue to try and unload some of their stockpile. A renewed moratorium would likely make this drag on a bit further (not that it’s going to end anytime soon) keeping prices (and equity) low, however if it’s preventing people from being kicked out on the streets, well then there’s that argument as well. Again, it’s a contentious issue.

And before people think that stopping all foreclosures is good, remember this is only for non-judicial foreclosures. I’m working with some homeowners on the west side of Oahu right now on a short sale who were recently served judicial foreclosure papers — this is not one big parachute for all.

This post is just food for thought. I’d love to hear from others on whether they’re for or against renewal or even modification of the policy enacted last year.

Share your thoughts below!

As a former coastal geography academic, I really find it interesting on a “meta-level” of observation when man tries to control the “permanent impermanence” of coastal systems. There are few things in nature less stable than beaches. They naturally breathe, growing and shrinking in all directions on daily, monthly, yearly and even decadal time cycles. Yet we continue to build jetties, groynes, seawalls and revetments that, at their very best, provide temporary periods of safety and usage, to give the idea of ‘control’. Yet these initiatives are temporary at best, even the ones with longer life spans.

However, that doesn’t mean they don’t serve a purpose. It’s a trade-off between what’s given up (costs, sand in front of a seawall or behind a groyne) and what’s gained (beach width, more permanent shorelines, land and home protection). It comes down to a society’s wants, needs, resources and values.

Back to Waikiki, the cost is expected to be more than negated by the increased aesthetics of a wider beach and greater tourist experience which should bring in greater revenues. Do you agree?

What effects do you think this will have on the vacation rental market in Waikiki? Do you think a landlord will be able to realize increased rents from a wider beach? Will condo owners see any uptick in property value?

On one hand, we have the continued ineffectiveness of governmental housing policies to encourage economic recovery. Hey, the easy judgment of that is that if everything was back on track, why would we keep needing new programs? If HAMP and the like aren’t serving their purpose, that means there’s still a need to solve the same problem, hence: no recovery.

The latest? Word that Hawaii’s own President Obama will be extending the 2007 Mortgage Forgiveness Debt Relief Act (which lets homeowners completing successful short sales write off their taxes from otherwise taxable deficiency waivers). The only reason to extend it beyond the current 2012 expiration date is that we’re not yet where we ought to be. I mean, that’s a quick two-cent judgment, but it kind of makes sense on the surface, right?? (By the way, I’m in favor of extending the policy as it encourages homeowners with over-leveraged mortgages to complete short sales and ideally put them back on a fiscally sound economic path and, therefore, aid overall economic health).

The other view is that we’ve seen 5 straight months of rising median sales prices, according to data by the Hawaii Board of Realtors. The data doesn’t lie, but they’re just numbers. That’s the difference between data and information. Information tells a story.

Courtesy: Hawaii Board of Realtors

So what are the implications of this 5-month run? Does it mean we’re out of the doldrums and can expect a continuation of the current trajectory? Are Hawaii housing prices expected to keep creeping north? Possibly. Then again, January’s median price of $618,900 (single family) isn’t far from September 2010′s price of $620,000. If you’re following along, then you know what that means — prices must have dropped after that month in order for a 5-month run to bring us right back to where we are.

Cycles, my friend. Cycles. It’s all in what you make of the data. We could see another dip similar to before or this might be the last one that sees climb out of the tip into a brighter day.

I will say this — the one thing that sort of crushes the cycle idea is that surrounding factors are always changing. Today’s geopolitical environment is a powder keg. Syria’s on the brink of civil war as Assad refuses to cede power. Iran is threatening everybody with nuclear bravado, especially Israel, which history tells us is a bad idea (see: Baghdad). And Greece is once again with empty pockets asking for a handout.

Does this affect Hawaii housing? It certainly has ripple effects through the American economy, so I’m very inclined to say “yes”.

Your thoughts?

Reinstatement — Reinstating your loan means bringing it current. You’ll do this by paying off the arrearages (how far behind you are) and possibly some accrued attorney fees. Your lender will give you the amount. Your loan should then go back into a ‘good’ standing with your bank. The caveat? If you had the funds to reinstate your loan, you probably wouldn’t be reading this article. But maybe you have a relative or other source of funding you didn’t have beforehand (like a new job) and can now get back on track.

Filing Bankruptcy — Ok, filing for bankruptcy is a bigger deal than just stopping foreclosure, but it does halt the process in its tracks until you get your affairs in order. By all means, consider the consequences, both temporary and long-term of filing “BK” as there are different “chapters” with different schedules and intended outcomes (ex. wiping out debt versus reorganization). Consult a bankruptcy attorney if you have any questions as it can be a tricky legal process.

Deed-in-Lieu — A deed-in-lieu of foreclosure is when you voluntarily deed your property back to your lender. It’s still a form of foreclosure, but you’re potentially saving your bank thousands or more in legal fees by not forcing them to take your foreclosure to the end. In return, they may be willing to offer you incentives for a smoother “exit”. This is something you’ll have to negotiate with them. Again, just be sure you are clear on the legal and/or tax consequences.

Facing foreclosure in Hawaii or any other state sure isn’t fun. The current moratorium in force only affects non-judicials directly, but judicial foreclosures are still proceeding, so there’s no time to lose. Getting educated is the first step in moving forward in the best direction possible. Hopefully you’ve found the information here and in the last post informative and helpful. There are other sites out there as well, so take it all in and proceed in whatever direction you feel suits your situation and objectives the best.

Have you been down the foreclosure road already? Any insight to share as to what’s worked and what hasn’t? Share your experiences here!

Join the forum discussion on this post

Loan Modification — A loan modification is when your lender changes the terms of your mortgage, usually by lowering your interest rate. Homeowners are normally given a trial period to show the ability to make modified monthly payments for 3 to 6 months, after which the new plan stays in effect or they are rejected from the “loan mod”. Unfortunately, banks today have very little incentive to grant a successful loan mod. A colleague of mine and former REO broker recently informed me that banks make only about $500 per successful modification. Think that motivates them at all? Neither do I. This means the homeowners often find themselves back where they began. I’ve talked to people right here in Hawaii who went through THREE loan modification trials only to be rejected.

Short Sale – A short sale occurs when your bank or lender allows you to sell your property for less than the mortgage balance. In this situation, your lender is taking a ‘short’ position on the transaction, even if the sale itself could take 4 to 6 months or longer as your agent or short sale processor negotiates with the bank on your behalf to accept an offer. Short sales are a different breed of real estate transaction and are beyond the skill set (and patience!) of many professionals, whether agents or investors (I don’t mind them, though!). Ask any homeowners who’s attempted a Hawaii short sale, and they’ll likely tell you horror stories of being routed through 10 people at the call center and faxing in the same stack of paperwork, only to see it collapse at the last second because a BPO (broker price opinion) came in too high and the buyer left, or they were working with someone who didn’t understand the intricacies of a short sale. Make sure you work with a pro.

Forbearance — A forbearance occurs when your bank or lender takes your past due amount (arrearages) and rolls it into the current loan. This increases your monthly mortgage payment and/or extends the life of the mortgage. You’re not getting debt forgiveness — you’re essentially getting a form of loan modification or restructuring. A forbearance may reinstate your loan into good standing, although you may be putting lipstick on a big if you’re saving a mortgage you’re better off not keeping around for the next 20 years, like an adjustable rate mortgage (ARM) that was popular not too long ago.

Remember, just because you can save a house and mortgage doesn’t mean it’s best to do so. That’s a personal decision to make with your family (and your attorney and/or CPA) after weighing all your options.

Sell Your House (non-short sale) — This is really only an option if you have equity in your house, which is not the case for most Hawaii homeowners caught in the foreclosure process. However, if you have equity but just haven’t been able to keep up with your mortgage payments, then you may have the option of selling it outright with the help of a realtor or directly to a Hawaii real estate investor. Depending in your debt to equity ratio, you might even profit well from the sale. The primary advantage, however, is that you keep both a foreclosure and a short sale from your credit history.

Click here for “Options for Avoiding Foreclosure in Hawaii — Part 2“…..

Flipping Houses Just Got Easier

If you didn’t notice, the FHA just extended its anti-flipping waiver. That means it doesn’t matter how long the current owner has held the property if a buyer is using FHA financing. Those 90-day seasoning periods are gone for at least another year, so house flipping investors with capital should step up the plate because you just increased your buyers pool and reduced your holding costs. With the economy of the last few years, not everyone is a Cash Buyer (if you are, then get on this list!). Marketing to FHA buyers not only helps people get a new home but should also help the banks plow through their backlog of REO inventory.

The Hawaii Foreclosure Moratorium Backfires

I’m not saying I want this to happen, but I fear the intended objectives may not be attainable. I still get calls from people in foreclosure asking about their options because they’re getting taken through the judicial foreclosure process. Keeping someone in a pay-option ARM mortgage isn’t always the best decision for anyone, especially the homeowner. I know it’s a process that needs to take its course, but I’m skeptical. I’m wary that people in trouble before will be put right back in a situation of not being able to make their monthly payments and need foreclosure help all over again. Another downside to this is that it will clog up the banks’ property pipeline, likely delaying a Hawaii housing market rebound.

Landlords Line Up

There’s been a lot of talk lately about the “Nation of Renters” that’s headed our way and I think there’s a lot of truth to that. Investors are getting creative again in how they purchase and sell properties, and this includes the Lease Option. It’s no secret that Hawaii has some of the highest housing prices in the nation. As such, many people who’d like to buy simply can’t do so the conventional way, but a lease option gives them a way to get their foot in the door. What does that mean? It means landlords and cash flow investors should reach out to this group of buyers who will take better care of their place because they see themselves as the future owner and will pay a rent premium for that right. Until the economy comes around, it’s a specialized yet profitable niche.

Investors Will Step Back From Stocks

Ok, this may not be housing related, per se, but there’s a correlation, of course, between real estate prices and the stock market. The S&P 500 reportedly finished right where it started twelve months ago. Let me repeat that another way — the market gave out DIDDLY SQUAT for the entire year. When you consider that most people are taught that stocks and bonds are the only way to grow your portfolio, it’s outright depressing. A year wasted.

My friends over at New Direction IRA just reported phenomenal growth for another consecutive year in their Self-Directed IRA business (SDIRA). These financial instruments allow people to invest in much, much more than the stock market. You can invest in gold, silver, startups, and, yes, real estate. Flip houses, earn cash flow or grow at 12% or more as a private lender for real estate investors — all inside your IRA. With the growth reported, I predict that more and more people will step out from behind the tightly-controlled veil of commodities brokers and embrace the freedom of a Self-Directed IRA. Education is empowering.

Need another reason to watch out for the market? The next country in Europe to go belly up or Arab country to get overthrown or natural disaster in who-knows-what corner of the globe affects your return on investment. Scary, isn’t it? I agree.

One Giant Leap for Mike…

I also predict that my wonderful girlfriend Nanae will move here in early April from San Diego and start a very successful career as a Honolulu piano teacher (here’s her current site in SD). Know any kids needing lessons? Let me know!

That’s all I have on this Wednesday afternoon before I head over to the FAMES Hawaii monthly event at Dave and Buster’s. Let’s all keep a watch out in this first month for some signs of where the new year is taking us.

What Rebound??

Hopefully 2011 was a great year as you reflect on all that’s transpired the past 12 months. From a Hawaii housing and real estate perspective, two stories come to my mind that pretty much sum up the past year. First, the housing rebound that largely never came. There has been an increase in volume, but sales prices have not risen as expected and we can now expect more of the same in the coming year according to the latest stats and projections. Whereas 2012 was supposed to herald a return to more prosperous times, concerns over European economies, the unanticipated and still fragile Arab Spring and tight lending guidelines have all served to keep the national economy — and housing — flat, even with still low prices and record low mortgage rates.

Grind to a Halt

The other story is the moratorium on non-judical foreclosures signed by Governor Abercrombie in the summer of 2011. That has had a rippling effect throughout the local housing market, even if the signs aren’t yet clearly visible. It has undoubtedly increased the timeline on which the banks and lenders will get through their shadow inventory of already repossessed homes — the faucet has been reduced to a very slow drip. Instead of continuing to process the foreclosures and churning through their pile of properties to speed the arrival of a more normal Hawaii housing market, the public backlash from the robo-signing and other lending practice discrepancies has brought about a policy that will attempt to modify these loans instead and keep owners in their homes. Noble, but it remains to be seen how many successful modifications are made in lieu of foreclosure. The jury’s still out on this one and while opinions are decidedly split down the middle, it remains a significant hallmark of the past year nonetheless no matter it’s result.

We can always hope for a brighter 2012. Who knows what’s in store in the coming year??

So from my family to yours, thank you for your readership and continued interest in this site. Please give me feedback on what you’d like to see here and what you’d find valuable. I’m open to all suggestions!

MELE KALIKIMAKA!

From Michael Borger, Owner