I’ve been diligently tracking the high-end Honolulu property market 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.
As of 1Q2019, luxury home inventory is up 11.6% YoY and the average price/sqft is down an aggressive 19.7% YoY according to Elite Pacific Properties.
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.
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:
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
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!
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:
Point 1) 4534 Aukai is a brand new looking designer home built in 2015.
Point 2) Estimated land value $1.82mil
Point 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
Point 8) All-in total is $6.28 million, and no one develops for free.
Point 9) Developer took eight years to build this masterpiece.
Point 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.
Point 12) Aukai avenue is a first-class desired street by families, corporations, CEOs, and government dignitaries.
Point 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.
Point 14) Well desired property in well-desired neighborhood by Hawaii Five-O.
Point 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.
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.
In conclusion, I encourage all buyers to do the following:
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.
Refinance your mortgage: Check online for the latest mortgage rates and refinance into a mortgage that has a fixed duration matching where the longer term yield is inverted. This means looking for 5/1 ARM – 10/1 ARM rates. LendingTree has one of the largest lending marketplaces today. They have lenders competing for your business.
Look into real estate: As interest rates decline, demand and buying power for real estate goes up. Take a look at real estate crowdfunding to find value in the heartland of America where valuations are cheaper and net rental yields are higher. Fundrise is the top real estate crowdfunding platform today. It’s free to sign up and explore.