Yvonne Jaramillo Ahearn (REALTOR-Broker) Oahu Luxury Homes -Beachfront Homes

Wish I had ten dollars for each time I've been asked by my buyer clients and friends to explain options they might have in purchasing short sales or foreclosures, and to explain the notations they see on the MLS regarding various property types. Listing clients, as well, are starting to come to me with similar questions regarding various options to sell their home in the current market.

Hawaii has one of the lowest foreclosure rates in the nation, but recently, one of the highest rates of increase in foreclosures. As usual, we in Hawaii are behind the curve, and Buyers and Sellers in many places on the mainland have been going through what we in Hawaii are just now starting to go through. And our property values, while not having suffered like those on the mainland, are down, as well to about 2005 levels. So I will clarify here, for the Hawaiian readers who may not have seen as many of these, four different property types that are starting to come up more frequently, amidst the regular Hawaii homes for sale:

(1) short sales (2) distressed properties (3) foreclosures and (4) REO homes.

First, Short Sales. A short sale is the sale of a home where the sale price agreed upon between the Buyer and Seller (and any involved lenders) of a home is less than the total costs of the sale. For example, where a home is sold for $750K and $780K is owed between a first and second mortgage, plus other costs of sale like closing costs, other liens, realtor comissions, etc, AND the seller does not come up with the extra cash toward the price and costs, you have a short sale. A home subject to short sale may or may not be distressed or in foreclosure at the time of the sale. The owners of a short sale property may, in many cases, be current on all the payments. The only issue is price, because either the market price has decreased since they bought the home, or the owenr has taken out one or more mortgages or lines of credit on the property and the market value has decreased since that time. All short sales must be approved by the mortgage holders because typically they will be getting paid less than they are owed.

Buyers making offers on short sales should beware that it may take several weeks to months to get an answer from the bank as to whether their offer is acceptable. And the banks may not be very flexible as to terms. Many banks also will not negotiate back and forth, so if the bank rejects an offer, the buyers have to either try again or move on. Not all banks have similar procedures or requirements for short sales. In fact, they are all over the board on these. Short sales are becoming increasingly common in Hawaii and tend to affect those that bought or refinanced in 2005, 2006 or early 2007, when prices were higher, especially if they used a VA or other low downpayment loan.

Sellers of Short Sale properties will generally take a hit on their credit scores, as a result of the short sale, particularly when they have payments in arrears (I have read, approximately 80-100 pts or so). However, the effect is less extreme than a foreclosure, which apparently costs the homeowner 200-300 pts on his or her credit score. Short sales will remain on a seller's credit report for approximately 3 years and may hurt their ability to purchase another home for 18 months or more.

To help preserve a seller's credit, it is important to try to negotiate with the bank that any shortfall between the amount owed by the seller and the purchase price be forgiven (if the seller is unable to pay), and that the notation on the seller's credit as to the loan balance indicate "paid as agreed upon." It used to be that any shortfall forgiven to the seller of property by the lender would be considered taxable income to the seller (via 1099). The Mortgage Debt Relief Act of 2007 changed this and now many homewoners with debt forgiven through a short sale or a loan modification will not be taxed on these amounts. Certain conditions, such as having the property as your principal residence, do apply. If the MDRA does not apply to you, there may be other provisions under which your forgiven debt may not be considered taxable income - for example, if you are deemed "insolvent." Please check with your tax experts to see how this may affect you. Not all shortfalls will be forgiven by the bank, however, particulalry when the seller has considerable other assets or earning potential enabling them to repay the bank using a payment plan.

In their efforts to stimulate the economy, the Feds are offering up to an $8,000 tax credit to first-time homebuyers who purchase a home in the 2009 calendar year, and closing ON OR BEFORE NOVEMBER 30, 2009. Here are some of the details:

• To qualify as a first-time homebuyer, neither the buyer or the buyer's spouse may have owned a home that was used as a primary residence in the past 3 years. It does not need to be your truly first home, however. And you may have owned rental properties in the past three years, so long as none were used as you or your spouse's primary residence. The IRS provides an explanation and various scenarios that help provide guidance on whether one qualifies as a first-time homebuyer.
• The credit may be used for any type of residential property in the U.S. -- single-family homes, condos, co-ops, etc, but the property must be owner-occupied and used as the primary residence, usually for at least 51% of the year. So, the credit may not be claimed for the purchase of unimproved land. Certain houseboats and manufactured homes may qualify, but duplexes, unless wholly owner-occupied probably would not qualify.
• There is an income limitation of $75,000 a single person (and $150,000 for married) for use of the full credit amount. Above this income, the credit is smaller or phased-out entirely (at $95K/$170K).
• If the home is sold within three years after purchase, the entire amount of the tax credit will be recaptured upon the sale.
• There is also a cap on the amount of the credit of 10% of the value of the home purchased or $8,000, whichever is lower. So if the house is purchased for $70,000, the maximum tax credit claimed would be $7,000. (This would not be an issue in Hawaii!)

The terms of this tax benefit are similar to the up to $7,500 tax credit that was offered to purchasers of homes from April 2008 to the end of 2008. However, unlike the 2008 credit, it does not have to be repaid.

Also, it is a "refundable" credit. What this means is that if a purchaser's total tax liability is only $5000, the purchaser can still use the full credit and will received a refund of the difference between the credit and libaility. So, if entitled to an $8,000 credit, the purchaser in this scenario would get a $3,000 refund check in the mail.

AND, in certain circumstances, the tax credit may be applied immediately as a credit against closing costs.

Check with your tax accountant or other financial advisor, for further details and on how this tax credit specifically affects you and your situation. Happy Homebuying!

Many Hawaii homeowners and realtors were dismayed last year when we heard about the new requirement for remodeling or tearing down properties 50 or more years old. Under this law, Act 228 of the 2008 Legislative Session, owners wishing to tear down or remodel such a structure, had to provide photographs of their property to the State Historic Preservation Division prior to being issued a building permit. There was no distinction made as to the condition or stuctural integrity of the building, or any other factor, other than age. On the East side of Oahu, this affected many, many people, as most homes here are at or rapidly approaching the age that would be covered under the law.

As you can imagine, many problems and criticisms arose from the law, including imposing an unfair burden on homeowners in getting and paying for these pictures and, of course, further delays in getting permits. This law was not meant to create a bottleneck, or even prevent destruction of historical properties, but rather just a way to preserve history through pictures. However, it made an already cumbersome permit process a bit more cumbersome.

Governor Lingle, has apparently agreed with the critics of Act 228, and effective April 14, 2009, repealed this law. She stated," Act 228 further impeded the issuance of building permits at a time when we should be doing all we can to facilitate construction activity in order to stimulate the economy and create jobs." Thank you, Governor Lingle, but I have to wonder -- why do some of these laws get passed in the first place?

UPDATE: The Governor Did Sign This Into Law.
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Yesterday, the Hawaii Legislature passed House Bill 1741 which (among many other things) aims to increase the conveyance taxes on the seller for the sale of properties priced at $2 Million and more. If Governor Lingle signs this bill, conveyance taxes will go from the current tiered structure, for owner-occupied homes, ranging from 10 cents to 30 cents per 100 dollars in purchase price:

OLD
10 cents per $100 - Property Price $0-$599,999 (15 cents for non-owner occupied)
20 cents per $100 - Property Price $600,000 - $999,999 (25 cents for non-owner occupied)
30 cents per $100 - Property Price $1M and up (35 cents for non-owner occupied)

to a new structure, that raises taxes to 50 cents to a dollar per $100, for owner-occupied purchases fo homes priced at $2M or more, and 60 cents to $1.25 for purchasers of these homes living elsewhere.

NEW
10 cents per $100 - Property Price $0-$599,999 (15 cents for non-owner occupied)
20 cents per $100 - Property Price $600,000 - $999,999 (25 cents for non-owner occupied)
30 cents per $100 - Property Price $1M - $1,999,999 (40 cents for non-owner occupied)
50 cents per $100 - Property Price $2 M - $3,999,999(60 cents for non-owner occupied)
70 cents per $100 - Property Price $4 M - $5,999,999(85 cents for non-owner occupied)
90 cents per $100 - Property Price $6 M - $9,999,999($1.10 for non-owner occupied)
$1 per $100 - Property Price $10 M and up ($1.25 cents for non-owner occupied)

So, for a $2 Million owner-occupied home the conveyance tax would increase $6,000 to $10,000, or 67%. For a non-ower occupied home of $2M the tax would increase from $7,000 to $12,000, or 71%.

For a $10 Million owner-occupied home the tax would increase from $30,000 to $100,000, or 233%. For a non-ower occupied home of $10M the tax would increase from $35,000 to $125,000, or 257%.

http://www.capitol.hawaii.gov/session2009/Bills/HB1741_sd1_.pdf

You may ask, why is the SELLER responsible for more taxes when the BUYER is an investor? Good question - that is a factor that Sellers may wish to consider and possibly, negotiate with an investor/buyer in a transaction.

Stay tuned to hear what happens.

One of the things I look forward to the most with my annual subscription to Honolulu Magazine is the Kailua edition that comes out every April.

Last year, I was fortunate enough to be interviewed for the magazine's article, "Wanted: Kailua" by Catherine Toth, on Kailua real estate. They even featured a home that I sold and my clients in the article.

This year, the Kailua section featured the history of three very different Kailua families and 13 fun new things to do in Kailua. In the article "Kailua Generations," by Jenny Quill told stories of the Kanentake, Rodrigues-Pope and Peters families of Kailua. I found intriguing the historic photos, including a 1952 picture of Mount Olomana, and wonder what it must have been like here, in the "old days."

In the article on new things to do in Kailua, the writer, Ashley Hamershock, featured several new restaurants, merchants and activity providers, under the headings drink, eat, move and shop. I have tried several of the new places first-hand and found them to be quite good. In particular, Bob's Pizzeria, Crepes No Ka Oi, and Kailua Town Pub and Grill, all casual eateries, with pretty good prices. Of the merchants, I'd recommend Little Sprouts, the new Eco-boutique for kids, featuring green clothing and products, and the Sweet Paradise Chocolatier, with delicious and beautiful chocolate treats, even some handpainted tropical delights.

The last Kailua article in the magazine was my favorite, however, because it so distinctly depicts much of my experience living in Kailua. Entitled "New Year's Day," the writer, Rachel Ross, describes what makes Kailua so special. Stranded o New Year's Day with a flat tire, she hangs out for a while at the historical Kalapawai Market, just Mauka of the kitesurfing part of Kailua Beach, while the owner rides his bike home to get a pump to help fix her tire. She people watches (looking for Obama), interacts, and lives, even if for a brief moment in a "small town meets cosmopolitan" experience, which I completely understood. This is this specific location where I have my coffee almost every morning, so perhaps gives part an explanation of why I am so in love with Kailua.