When it comes to real estate, watch out for the illusion of added value. Realtors and sellers have a way of marketing there is more value added since the last purchase of the home than reality.
This post highlights the illusion of value of a great property I've been tracking in Honolulu, Hawaii since 2014.
During this time, I've seen prices for dozens of properties decline between 10% – 25%. The properties that are only down about 5% still haven't sold years later. The luxury market there isn't strong, especially post the pandemic. Mortgage rates are up and these luxury home prices are not supported by the local economy.
The domestic economy is not strong enough to support high-end prices. They never have and probably never will given wages in Hawaii are 20% – 60% lower than wages on the mainland for similar jobs.
It's really the lack of international buyers that have softened the high-end property market. Buyers from China have disappeared while Japanese buyers have been steady, but uninspiring for years. China is going through a huge bear market at the moment.
I see an opportunity for my family to geoarbitrage to Honolulu given the real estate market softness, especially considering the San Francisco real estate market has been so strong during the same period.
My only fear is that if I get into the Honolulu property market, I won't ever be able to get out if I change my mind.
The Tricky Real Estate Industry
I always believe that in real estate, money is made on the purchase, not on the sale. You can always refinance your mortgage but you can never change your purchase price.
Every buyer needs to be a master negotiator when it comes to buying such an expensive asset. The person who is willing to walk away usually has the upper hand.
Given we're so deep into this real estate bull cycle in many parts of the country, caution is more important than ever before. Many of the most expensive real estate markets in the country have already rolled over.
On the flip side, selling a property is much more stressful and requires some guile. The real estate agent's goal is to convince buyers to pay top dollar, even if they feel another Lehman Brothers collapse is just around the corner.
I've written two must-read posts for property buyers:
1) 10 Warning Signs To Look Out For Before Buying Property
2) How To Convince Someone To Buy Your Property When They Really Shouldn't.
I'd like to focus on the second post and the efforts of some real estate agents to create the illusion of added value.
The Illusion Of Added Value In Real Estate
Creating real value in real estate is easy. You can either remodel or expand the home. Expanding a home is the best bang for your buck given you can usually build for less than the selling price per square foot.
If you haven't created any real value since purchase, then you can attempt to hoodwink prospective buyers by making your real estate agent create the illusion of value.
Here's a great example.
On 12/27/2016, 4534 Aukai Street was sold for $4,850,000 after being on the market since 10/23/2014 for the delusional asking price of $5,495,000. Check out the price history below.
Can you imagine taking two years to sell a property? That's par for the course in high-end Honolulu real estate world.
I toured the house in 2016 just before the sale and found it to be a wonderful house. I thought somewhere in the mid-$4 million range was reasonable and imagined what life would be like living there.
But given we didn't have any children back then, living in a 6,066 square foot house with just the two of us seemed stupid. Further, there was the little problem of not having $4-5 million bucks!
House Back For Sale With A Bigger Price
So it was a pleasant surprise when I saw the house listed for sale on 12/11/2018. It's rarely ever profitable to sell a house within five years of its purchase, let alone two years after purchase. As a result, I sensed an opportunity to buy the home for less than the previous sold price of $4.85 million!
But the agent decided to list the house for $5,900,000, or 21.6% higher than what it sold for in 2016! Absurd! This is despite the high-end real estate market seeing at least a 5% price decline since 2016.
So I asked my real estate agent to have the listing agent explain the reasoning for the high price. Surely, there must have been an incredible amount of work done since 2016 to warrant such a huge increase.
Here was the listing agent's verbatim written feedback:
The reasons for the great price:
1) 4534 Aukai is a brand new looking designer home built in 2015.
2) Estimated land value $1.82mil
3) Developer Tom does NOT build a house for less than $650/SqFt currently. 650/SqFt x 6,066(Living SqFt)=$3.94mil
Point 4) Upgrades/Inclusion: Island Shutters, UV films, Tastefully furnished with designer furniture.
Point 5) Pool, Spa, Landscape estimated cost based on the developer’s agent at 4628 Kahala Ave: $300,000 Landscape architect designed this master landscape with mature trees and specifically selected plants survives in Kahala.
Point 6) Estimated cost for the hardscape, wall, gas line for tiki torch at 4628 Kahala Ave: $100,000. (In comparison, 4534 Aukai only has a coral wall.)
Point 7) Estimated cost for two auto sliding door/screen: $60,000 x2 = $120,000
8) All-in total is $6.28 million, and no one develops for free.
9) Developer took eight years to build this masterpiece.
10) Barclay Butera is the interior designer and his name brand furniture is inclusion.
Point 11) The property tax assessed value of 4534 Aukai is higher than the recently sold 4528 Kahala at $6,900,000.
12) Aukai avenue is a first-class desired street by families, corporations, CEOs, and government dignitaries.
13) Comparable analysis: 4510 Aukai was sold to New Zealand government dignitary at $5.5mil in 2014. The average price for a 5 bedroom single family home in Kahala area in 2018, $6,006,100, is 1.65 times higher than one in 2014, $3,641,667. This home’s $/SqFt, $972 is least amount among 3 homes built (4411 Aukai Ave $1,049.58/SqFt, 4534 Aukai Ave $972.63/SqFt, 4620 Kahala Ave $1,154.07/SqFt) after 2015.
14) Well desired property in well-desired neighborhood by Hawaii Five-O.
15) Strong interests from buyers who missed the opportunity to buy in 2016.
Point 16) Hollywood celebrity couple stayed booked for $6400/night x6nights=$38,400 and spent new year eve and new year day at this home.
Illusion Of Value In Real Estate
If you read carefully, except for the comparables analysis, most of the points are just FLUFF! There is no point that highlights an expansion, which is the only reason to justify the 21.6% price hike.
Further, most of the points the listing agent highlighted were the same points the listing agent highlighted to me back in 2016. After she listed all these points, I then told her that I had already seen the property during the last sale.
If the real estate agent is trying to pull a fast one on me, then surely she's trying to create the same illusion of value to every other prospective buyer out there as well.
How To See Through The Illusion When Buying Real Estate
It's up to your real estate agent to read between the lines and protect you from overpaying. A good real estate agent would look into the history of the property and give you an analysis of what went on in the property since the last sale and what has happened to the real estate market as well.
Any buyer-represented real estate agent who is showing this property and highlighting it as good value is doing a great disservice to their clients.
I'm lucky that I was able to see the property before it last sold. Many real estate agents and most buyers will not have the same luxury. Selling agents know this, which is why they do their best to create the illusion of increased value since purchase.
I get that it's the selling agent's responsibility to get top dollar for his or her client. But not admitting zero work has been done since the last sale and then highlighting all this fluff is borderline dishonest.
We are talking huge money here. Such borderline dishonesty is ultimately going to hurt the real estate agent's reputation and affect negatively the seller's final selling price. There's no doubt in my mind this house will not sell for near its $5,900,000 asking price.
Instead, it will languish for years until the seller wises up and lowers the asking price. Once a property is stalefish, nobody cares anymore. Fair market value for the house is somewhere closer to $4,500,000 or $1.4 million less than asking. Anybody who is paying more is really over paying in my opinion.
To Summarize, Do The Following Before Buying
1) Analyze the historical selling price. Properties that exchanged hands within short periods of time are red flags. It's the same thing with a resume that shows a new job every 1-2 years. You must compare the historical selling price to your neighborhood's price trend to see if the asking price is reasonable.
2) Ask for a list of remodeling and expansion work done. If you don't get an itemized list with estimated costs, you know the property's price performance should be in-line with the neighborhood or city's price performance since is last sale.
3) Smile, nod, ignore. Marketing is a very powerful tool. Read the beautiful brochure, listen to the selling points of the agent, then immediately throw them out the window. You must remove emotion from the buying process as best as you can. The selling agent and the seller don't care if you over pay. Their goal is to get as much money as possible.
4) Run the numbers. You must eliminate the illusion and run the numbers. Ask yourself the following questions: Will the property cash flow after putting 20% down? What is the opportunity cost of buying the property? Which direction is the economy heading? What has been the inventory trend, and what might it be going forward? How will the latest tax laws affect my carrying cost?
The illusion of value is everywhere among us: social media, commercials, branding, and more. It's up to you as a Financial Samurai to see reality instead.
If you are thinking of retiring in Hawaii, I honestly can't think of a better state. Once you're OK with no longer chasing the money, the Hawaiian culture will welcome you with open arms.
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Update 2024: Hawaii real estate got hot in the pandemic and now has cooled due to higher mortgage rates. Living anywhere in the world has made Hawaii more expensive. The nationwide housing market is very strong too.
hi Sam,
Thanks for getting back to me on Honolulu real estate. I just wanted to forward this to you with real estate analyst Keith Jurow interview (https://www.youtube.com/watch?v=GFkkN2M3Y3c) It’s definitely worth watching. Most important part of it is 10:33 minutes into the interview where you can see Hawaii has the highest RMBS delinquencies of all 50 states!!! Also, we have to wonder how many homes have not been foreclosed yet in Honolulu that the banks are sitting on. I think you are right that high-end homes in general will keep falling in Hawaii. I hope this sheds more light on this subject.
I have to disagree with this. You have not talked about the inflation of real estate in Hawaii over the last 4 years in the article. I have two properties in Hawaii, and they have both appreciated well over 25% in that time frame. I have done nothing to them whatsoever to fix them up. They are both single walled construction in good areas. It also sounds like they did do a lot of work on this property, and it is not dated as to when the work was done. Kahala does not follow any rule of thumbs when it comes to pricing. These are luxury properties that are hard to compare. This one looks like it is at its highest and best value. It is also a Hawaii style, indoor outdoor property. The landscaping is superior for Hawaii. There is also the Hawaii method of pricing…price it high in case some mainlander comes in and buys it. That is why many properties in Hawaii are sold for less than they ask for. Most mainlanders will pay more than a local. In other areas they are more competitive and sell in a certain range, but that is simply not the fact here in Kahala. Also, it is common for properties in this price range to take 2 years to sell. it happens all the time, because so few buyers can afford them. Most of them in this price range are also all-cash sales, or with very large down payments.. I have been an active investor in real estate for over 40 years, in several different cities including Hawaii.
Excellent points here. The same tactics of knowing the historical sales prices holds at any level of real estate. I scoured the history and taxes on our rentals. If the price suddenly went north, it often meant a FLIP had occurred.
Now to get that real estate agent’s license…
Your articles are always very timely. Thank you for this. I have been reading a lot about turnkey properties, and read an article today trying to convince me that the bump in price after they renovate it is worth the purchase price. For instance, they purchase it for $90k, put in $20-30k in renovations-HVAC, plumbing, electrical, but then charge you $150k-$170k for the property (some have crap school districts or are right near freeways). There is no additions to the property. For a Cali buyer, $150k looks great without due dilligence. But, when the comps in the area are 90k, I’m not sure how to justify purchasing at that price point. YOU ARE SOOO CORRECT, once you buy it for that price that’s it and thinking about exit strategy is very important too.
When life is so hectic, passive investing seems worth it. Fundrise seems like something promising, but might be worth waiting it out for another year before investing in something different from current portfolio.
“Smile, nod, ignore.”
“Run the numbers.”
Looks like someone’s been reading WSP ;)
Or maybe the other way around! Or maybe I am WSP.
Check our the OG post: https://www.financialsamurai.com/are-you-smart-enough-to-act-dumb-enough-to-get-ahead/
I would say that there aren’t many ways to meaningfully add to a property value since most renovations cost more than the increase in sales price.
Money spent increasing curb appeal is the only thing that is nets you back more than you spent (landscaping and nice front doors).
Even replacing old worn out roofs and bathrooms I think clocks in at about 80% of the renovation costs.
Maybe super hot markets like the bay area break those rules but its true in most places.
That’s a nice looking house. I hope I can afford something like that one day when I retire to Hawaii.
My guess, given they haven’t price adjust downward, and it is currently pending sale, the sale price is around $5.6 million (5% discount).
How did you come up with a fair value price of $4.5 million?
Sam, did not see any comments regarding the Zillow, Redfin and Realtor estimates of $5.6M-$5.7M. Do you think they’re purposely skewed to the upside?
House is in escrow. No idea what the selling price will be but my guess is $5.4M. 11% increase over the last sale, and 91% of current asking. Both seem reasonable. It’s a nice house with extremely high end finishes, and a very trendy design that differs from the typical Kahala single-level resort style aesthetic. There are alternatives in the neighborhood, but most of those are designed for buyers in their 70s+. This one is clearly not. I’ve seen you say the Oahu high end market is soft a few times, but I think you’re overstating that. HNL is not, and never has been SF.
Having said that, I understand why it’s annoying when you ask an agent what was done to warrant the price increase, and they spout off things that were already done as of the previous sale. It’s very easy to look at previous listings and see that the house is unchanged. But I guess he/she is just trying to get as much for their client as they can, so I respect the hustle.
Looked at the Google map street view first. Ha. It still shows the previous house that was there. Fixer upper would have been an understatement. Still it looks like a nice neighborhood . . . if someone would go through and tear down every other house to give them all a little bit of breathing room in between. Saddens me to see all those lots where more than half is covered with house.
All my early memories go back to living on Oahu, but danged if I don’t think my chosen spot on the mainland is looking better and better and yes, I know what the weather is like in both places. We might rent a place in Hawaii for a month or two every year, but that will have to do.
Having a bit of inside insight into how realtors think, unless they are confident of a very quick sale, they generally want the property listed as low as possible, as they would much rather see, say, a 120k commission today, rather than a 150k commission six months or a year from now (and after a lot of work and expense) and that’s IF they still have the listing.
Sam, you’re right that almost all of the listing agent’s “points” are complete fluff, especially point #8 “All-in total [cost] is $6.28 million, and no one develops for free”. The fact that the seller and broker think they’re simply entitled to a premium to cost of improvements isn’t just absurd, it’s irrational. Price is never determined by cost. It’s determined by supply & demand.
The only valid point he makes is #13 (comps). But he actually uses a very old comp in 2014, which should be thrown out and some properties with smaller square footage.
I took a quick peek at recent, nearby sales and there are a few nearby properties with similar finishes (recently remodeled), sq footage, and br/ba count: 4528 kahala, 4628 kahala, and 4411 Aukai. Sq footage varied from 5800 to 6760 and $/sq ft averaged $1050.
What’s noticeable is that all of these properties were on the market for an obscenely long time: 6 mos, 1 year, and 9 mos on the market. It wasn’t until the sellers lowered prices by 5-10% that they were able to close.
You know the Honolulu market better than I do, and it seems that there’s been a recent slowdown.
4534 Aukai has already been on the market for 173 days, so my guess is that the seller eventually wisened up and took an offer at 2%-7% below asking. My best guess for the final s/p is $5.5M to $5.9M.
$5.5 M would still be a huge win.
The thing with the luxury market in Honolulu, Amber hops in many other areas is that once you get in, it really can be excruciating to get out if you need to get out.
If and when this property sells, I bet it’s going to sell to a foreign buyer who has no idea. And if it sells for over $5 million, I would really question the integrity of the agent representing the buyer.
I have seen people get really railroaded in real estate, and I hope my readers here really develop a critical eye when spending big bucks on anything.
I agree that RE prices in Honolulu are bubbly and that you’re right to hold off until prices deteriorate even further. Either in HI or in SF.
And it’s entirely possible the buyer is a foreigner who may be buying it w/o much diligence or even site unseen. That’s still the market we’re in.
But I don’t agree that the agent is pushing the “illusion” of value. He may not be super sharp, his points are mostly babble/bs, but the numbers from the comps clearly show that a value of $900 to $1000 per sq ft isn’t crazy for the lux mkt in this part of diamondhead. The improvements the seller has made justify the higher price. Would be a different story if the listing price was higher than the average.
Beware of the buyer’s agent, too. If s/he can convince you to pay $1,000,000 more than the property is worth, that’s an extra $30,000 in the agent’s/agency’s pocket at the standard 6% commission rate (3% to the buyer’s agent, 3% to the seller’s agent).
So the buyer’s agent also has incentive for you, the buyer, to pay more, fiduciary duties notwithstanding. I may be cynical but I trust most real estate agents about as far as I can throw them (with my bad shoulder!).
Ha!
Yes, I hope the buying agent really doesn’t screw the buyer hereby paying over $5 million.
The other question though is this: if we’re talking about funny money from foreigners who might have extracted the money below board, maybe that’s the key?
The key is to take it vantage of Rich international buyers who have more money than they can spend and who are pushing prices up for the rest of us.
Aukai will record today at 5.3 million. Family from the mainland. The buyer used a very good agent that negotiated a fair market price that was best for the buyer and seller. They were both well represented and satisfied with the results. Using Zillow and Redfin are perhaps good general sources but not with the effort if anyone wants accurate up to date information. The fact that weeks after this property went into escrow it still apparently shows up as active should be a concern for anyone looking for up to date information. Timing is everything. Most of these generic search sites use zip codes for the basis of their analysis. The Kahala zip code has home prices from 30 million to less than a million in value. That makes research very difficult. The agent who listed Aukai works at a company that breaks down that zip code into micro neighborhoods. Their information is updated on average every 15 minutes versus weeks. That is the difference in a smart investor versus and a passive investor. Look and see how long Zillow and Redfin reflect the change.
Good to know. Hope for the seller’s sake, the buyer does not read this article.
And congrats to the seller and the selling agent! I am very impressed they got $5.3M. I was wrong then.
That is a huge win since the last sale since inventory continues to climb in luxury and Kahala luxury.
And I should say congrats to YOU since I’m assuming you are part of the selling team or are related in some way.
No financial benefit to me at all. I am not part of their sales team. I am a manager at the real estate firm and do not sell real estate anymore. I just work at the company that has a clear understanding of the market in Hawaii. We strongly encourage everyone to read what they want. Being well informed is a smart investor. Go back and take a look at this in home in 5 years. They will most likely make money. But that is not their motive. Living in a beautiful home with their family is more important than a financial incentive. Some people actually still believe in that. I have never met the buyers and do not know them at all except they are apparently very happy people now.
1031 exchanges a totally different story. No argument with you there.
Thanks for the debate.
Sounds good. Your comments have given me an idea for a new post, so thank you. BTW I’ve spoken to several local realtors, and they are all very surprised it went over $5M.
Only takes one buyer! And that’s the beauty of things.
The Honolulu property market sure is an interesting one to watch. I’ve been to open houses there at some mega mansions before for fun and was amazed at how long they’ve been sitting. I’m no longer shocked at how long they sit though. It’s just not a great place to buy luxury properties as an investment because you never know if you can get out. It’s a beautiful place to own though. The islands are truly paradise!
I understand you wanting to be back in Hawaii for sure. I’ve spent the last few years traveling the world figuring out where the forever home would be (including Honolulu and all the other islands). I am sort of cursed like you to scour the real estate listings of the places that are on the short list, but I think you are spot on to consider the likelihood of being locked in once you purchase. I’ve seen places for sale that I’ve walked through for years as well and totally confused how that the price is still the same. I couldn’t fathom buying a $5M house without a view though, my $0.02 is at least if you have something right on the beach albeit smaller for $5M it has a chance to appreciate faster than inflation.
Excellent points.
By the way it was pretty amusing to me that moving to Honolulu would be a geographic arbitrage in the right direction for anyone but I guess its true for moving from SF to there.
I had figured now that the Chinese government started limiting what its citizens could invest outside of the country that it would have a ripple effect on luxury real estate.
I think you have been wanting to go to Hawaii for such a long time (if money was no object I would jump there as well) and you have put yourself in a position where you buy for consumption and pleasure now and really don’t have to always have the business gears working in terms of what you may end up selling it for (if ever).
Wow. The generally poor degree of professionalism in the RE industry never ceases to amaze me. Hard to believe that a person entrusted with shepherding transactions involving THIS much money is effectively illiterate (as evidenced by the sloppy writing in that justification), as well as being of questionable integrity. Honestly, if I had the kind of money that folks in this market have, I would demand the highest degree of professionalism from my RE agent. And yet, there are so many sloppy realtors! I just don’t get it.
Seems like you are overreacting by calling the seller’s agent dishonest. The agent gave a list of reasons that they think listing price is fair, just because you don’t like the answers doesn’t make them lies (dishonest).
I wrote “borderline dishonest.” I feel it’s borderline dishonest b/c I asked her what type of remodeling or expansion was done to warrant a 20%+ increase in price in two years while the market had continued to soften.
She did not know I had already seen the property during its previous sale until I told her after her explanation. So she lists all this stuff that was done to make it seem like it was done after the last sale. But it was really done before the last sale.
Don’t let people take advantage of you when it comes to buying property or anything SFmitch. Be smart and critical when you’re going to spend big bucks.
Nobody with millions of dollars to spend on real estate is clueless anymore. The availability of information to everyone is unlimited. The only advice I have seen from you that is based on any logic whatsoever is that you make money when you purchase not sell. True. Just because a real estate agent touts the attributes of a property is not being dishonest, borderline or otherwise. None of the agents comments are false.
High end real taste is not a matter of cash flow or some other short term financial metrics. It is a matter of emotion and then logic. You put logic first in this case and emotion somewhere far down the line. People who can afford high end real estate do so for many reasons. Number one they can typically afford it and want to make a statement. Status is important.
Bottom line this property will not sell to a clueless foreigner but a well informed family. Properly represented. Sales price between 5.2 and 5.4 million. In 5 years that will be seen as a good buy. That is the nature of all real estate in Hawaii.
The people I want to sell to our people like you. Just being honest. It’s very easy to manipulate people who don’t do their due diligence and who are overly sensitive.
In the workplace, people who are too afraid to negotiate and are overly sensitive always get paid the least and get promoted the slowest. Is that you?
A property is only worth as much as what someone is willing to pay for it. I’m having a hard time with my condo too. Unfortunately, we’ll have to drop the price. The condo market is really slowing down in Portland.
Exactly Joe! Value is in the eye of the beholder. You could do all the research in the world but if someone wants something bad enough and is willing to pay an “absurd” price for it, then that is what it’s worth AT THAT TIME.
Ultimately it’s how much we want something that determines its worth.
Portland real estate is softening some. That also affects how the market is out here on the coast where I live. It’s a good thing I don’t plan on selling soon.
Joe – We missed the peak of the market by a year here in DC as well. We had a terrible agent that overpriced our duplex so we cut our price then got killed at the negotiation table.
My advice would be to pull your listing before reducing the price. Relist in 3 months with a new agent and a price point that is 2%-3% below comparable listings. You want your condo to appear to be a relative bargain, get a quick offer, hopefully bidding war. Reducing your price shows that you are desperate and are willing to take further reductions.
Looks like someone bought it – says sale pending and off market :)!
Oh yeah? Send me the link where you see that because it still says it’s available when I look. Happy to also make bets on where you think the price will ultimately sell for. I feel really bad for the buyer (has to be international) who didn’t see the property before and doesn’t know the history. thx!
https://www.coldwellbankerhomes.com/hi/honolulu/4534-aukai-ave/pid_28006920/
Dang, this is going to be interesting. Thanks! Where do you think it sells for?
I wonder why Redfin or Zillow doesn’t say pending, and still says available after 141 days. Hmmm. Gotta get to the bottom of this.
I wouldn’t be that surprised. Stock market is up over 30% since the last sale and there’s only more and more ultra wealthy across the globe. Maybe the overall trend there is down recently, but this one property could sell high regardless of the trend.
The days of rational real estate pricing and sales are long gone. I’ve seen hundreds of listings over the years where I’ve said out loud “nobody is going to buy that POS at that price”. 3 days later, ‘sale pending’.
Hot money from every corner of the globe has been pouring into real estate and stocks for 7 years with wildly fluctuating interest rates, new tax laws, gov’t regs.
Who knows what the hell anything is worth anymore? Certainly isn’t you or I. I recently checked the price of the Lady Gaga show in Vegas and the nose bleeds are going for $1,000! A nice dinner in DC or SF? $250+ per person. A high end hotel somewhere nice in the offseason? $700+ per night.
Part of the problem is we are starting to get old and we vividly remember a time when everything wasn’t insanely overpriced. This explains why your valuation on this house is off by 25%. You grew up in an era when the Fed wasn’t dumping money out of helicopters and doing everything in it’s power to create 10% per year real estate inflation.
Part of me thinks that inflating real estate prices to drive consumption and create the “wealth effect” is a ponzi scheme. But on the other hand, can’t the Fed just continue to drive down rates and keep this going for years? What will happen if the Fed manipulates mortgage rates down to 2.5%? Will real estate double in value again?
https://www.zillow.com/homes/4534-Aukai-Ave,-Honolulu,-HI-96816_rb/?
It still says it is on the market for over 140 days!!!
-E J