This is a step by step guide to the process of purchasing real estate on Oahu – single-family homes and condos.
Before we get to the guide, let’s review some ‘good to know’ items for homebuyers:
What is the MLS?
Real estate agents on Oahu subscribe to a service called the MLS (Multiple Listing Service), which enables real estate agents to share their listings online with all other real estate agents on Oahu – we refer to as Oahu’s MLS listings. This means real estate agents who subscribe to the MLS can see all properties for sale on Oahu, listed by other real estate agents.
Real estate agents are also allowed to display MLS listings on their own website, subject to certain rules, and on Honolulu HI 5’s website – www.honoluluhi5.com – we display the entire Oahu MLS, which is updated even 19 minutes with the newest listings. On rare occasions, a Seller may instruct their agent – the Listing Agent – not to display their listing online, in which case we aren’t allow to show on our website. Since all agents have access to the same MLS listings, it is most common that a Buyer works with just 1 real estate agent.
Who Pays the Real Estate Agent’s Commissions?
Buyers do not pay their real estate agent a commission on Oahu. Seller pays the real estate agent commissions to both Seller’s agent and Buyer’s agent. The amount agents get paid is determined in a contract between Seller and Seller’s agent.
What is Dual Agency?
This is a situation where the same real estate agent, or 2 different agents within the same real estate agency, represent both Seller and Buyer. When dual agency occurs, the agent (or agents) becomes a facilitator rather than an advisor. Why? Because the agent has to remain neutral and that has consequences. An obvious example would be that the agent (or agents) aren’t allowed to offer a Buyer advice on price negotiations.
Is it Easy for Foreigners to Obtain a Mortgage?
Foreigners typically don’t have a US credit score and that makes it is more difficult to get a mortgage in the US, since US banks, as part of the loan application procedure, want to review a borrower’s credit score – a score indicating how well a potential borrower manages credit lines (such as current mortgages, auto loans, credit cards etc).
In lieu of a credit score, banks will typically expect foreign borrowers to show they have current monthly liabilities and are paying off such liabilities on time. Expectations on types of liabilities, number of liabilities and length such liabilities have been ongoing varies by bank, but as an example, a bank recently (February 2017) requested 3 credit references, which could be a letter from a bank official stating the potential borrower has been paying rent, electricity, cable tv on time for the past 24 months (does not have to be rent, electricity and cable tv – just 3 examples).
Banks will typically expect a minimum 30% cash down payment and as the loan amount increases above certain figures, banks will expect an even larger percentage down payment. Example: A bank recently, February 2017, would lend up to $636,150 with 30% down and if a Buyer wanted to borrow more than $636,150 the percentage down payment would increase.
When it comes to condo hotels (short-term vacation rental condos) banks aren’t always that keen to lend and they will at a minimum require a full kitchen. A bank will typically also want to review the hotel rental pool agreement to ensure it doesn’t negate the bank’s first lien position.
Buyer’s Estimated Closing Costs Paid via Escrow ($1,000,000 Cash Transaction)
Note 1: Below figures are approximate and only meant to give a rough idea on closing costs when purchasing a property on Oahu. If you plan on taking out a mortgage there are typically additional costs associated with the loan, such as loan points, appraisal & lender’s title insurance.
Note 2: If purchase price is $500,000 (1/2 x $1M) the closing costs tend to decrease by less than 50%. If the purchase price is $2,000,000 (2 x $1M) the closing costs tend to increase by less than 100%.
Title Insurance: ~$1,500
Escrow fee: ~$1,600
Deed Recordation: ~$50.
Transfer Fee to Property Management Company (condos only): ~$350
Prorated Property Taxes: Seller will have paid for a 6 month period, Jan – June or July – Dec in advance. If Buyer takes ownership, say October 1, then Buyer will credit Seller for property taxes Seller has already paid October – Dec. If a Buyer takes ownership February 1 and Seller hasn’t yet paid for property taxes for Jan – June, then Seller will pay property taxes for January and Buyer will pay property taxes Feb – June.
Maintenance Fees: Typically Buyer will pay maintenance fees for the remainder of the month of closing (the month Buyer takes ownership) plus 1 additional full month advanced maintenance fee payments for the following month. Example: If closing is March 17, then Buyer will pay maintenance fees from March 17 through April 30.
New Development: There are some distinct differences in closing costs between new construction purchased before completion and existing properties. The biggest financial difference being the developer of new construction typically will have Buyer pay for the conveyance tax, which is otherwise for existing properties paid by Seller.
Here is a list of conveyance tax rates (as of February 2017) – the lower % is for owner occupant and the higher % is for owners who do not intend to occupy as primary residence:
A) 0.10% or 0.15% if purchase price is up to $599,000
B) 0.20% or 0.25% if purchase price is $600,000 to $999,999
C) 0.30% or 0.40% if purchase price is $1,000,000 to $1,999,999
D) 0.50% or 0.60% if purchase price is $2,000,000 to $3,999,999
E) 0.75% or 0.85% if purchase price is $4,000,000 to $5,999,999
F) 0.90% or 1.10% if purchase price is $6,000,000 to $9,999,999
G) 1.00% or 1.25% if purchase price is $10,000,000 or more.
Note: There may be some property tax benefits with new construction, as you can learn more about in this Oahu real estate tax write-up.
CONDOS: Owners typically take out an HO6 insurance policy where coverage may include – but not limited to – personal property & improvements (new kitchen, new flooring, furniture, TV’s, clothing etc), deductible from the condo association’s insurance policy & personal liability.
SINGLE-FAMILY HOMES: Owners typically take out a homeowner’s insurance policy, where coverage may include fire, hurricane, water damage & more.
Now that we have reviewed some good to know points, let’s proceed and review the actual property purchase process on Oahu.
Step by Step Process to Purchasing a Property on Oahu
- Your Requirements: Give us an idea of the type of property you are looking for – condo, house, size, location, price range etc. If you know exactly what property(ies) you want to see, you can skip step 2 and go straight to step 3.
- Our Research: We will research for best possible property ideas and share these property ideas with you. Depending on your feedback we may suggest alternative or additional properties and we discuss until we have established the most relevant properties to show you.
- Showing Tour: We will arrange a showing tour of properties. Sometimes we can view properties on a short notice – especially true for vacant properties – but in many cases we need 24 hours notice – often the case with owner-occupied properties – or 48 hours notice – often the case with tenant occupied properties – or sometimes even longer for condo hotels – Ritz-Carlton, Ilikai etc – which typically can’t be viewed when occupied with vacationers.
- Offer to Purchase: If you would like to make an offer to purchase, we will prepare a contract – a standard 14 page Purchase Contract by the Hawaii Association of Realtors – to make a formal written offer, which we forward to the Listing agent (Seller’s agent). Each situation is unique, but in many cases we will suggest writing up an offer, which expires within 48 hours.
- Acceptance or Counter Offer: The Seller may accept, counter or ignore your offer to purchase. If you get a counter offer back, you can then accept, counter or ignore Seller’s counter offer and it can go back and forth like this until Seller and you reach an agreement on contract terms.
- Opening Escrow: Once an agreement on contract terms is reached with Seller you are under contract, which we refer to as opening escrow. We use a neutral – impartial – 3rd party company, to work as kind of the administrator of the transaction, which is called an escrow company (hence ‘opening escrow’). The escrow company plays a number of important roles during a transaction:
a) Order a preliminary title report and have a title officer review the report for any potential title issues, such as liens and other issues that need to be resolved before you take ownership.
b) Order the deed (conveyance document) from an attorney, which is the legal document making the transfer of ownership official.
c) Hold your deposits and final payment in their bank account until recordation.
d) Prepare a final closing statement (outlining all costs itemized) and other documents requiring your review and signature.
- Initial Deposit: In most cases, a Buyer will pay an initial deposit shortly after opening escrow. You can wire funds or write a check (personal check will suffice). There are no rules as to how much the initial deposit should be, but around 1% of the purchase price is not uncommon – all agreed in the purchase contract.
- Property Inspection: We recommend you hire a professional home inspector to do a thorough inspection of the property to check for issues, even if the property is brand new. Our experience tells us you just never know if something is wrong and it is therefore not recommended to take such unnecessary risk and skip having a professional inspect the property, just to save a few hundred dollars. If the inspector identifies issues your options are:
a) Request Seller to fix, though Seller is not obligated to fix.
b) Request a credit from Seller, though Seller is not obligated to accept.
c) A combination of a) and b) – Credit & Repair request.
d) Accept inspection results and not request anything from Seller.
e) Cancel the contract, within certain contingency deadlines, and get your initial deposit back, except the cost of the home inspection.
- Second Deposit: If you decide to proceed with the purchase after the home inspection, this is normally the time you will pay a 2nd deposit. There are no rules as to how much the 2nd deposit should be, but around 2.5% of the purchase price is not uncommon – all agreed in the purchase contract.
- Documents: During escrow, you will receive some important documents:
a) Preliminary Title Report – Typically, a few days after opening escrow you will receive a preliminary title report, ordered and delivered by the escrow company, which outlines who are the owners on the title and if there are any liens or other issues with the title that needs to be resolved before transferring ownership. The escrow company will typically work with the Seller to resolve title issues.
b) Seller’s Real Property Disclosure Statement – This is a standard 5 page document with several questions Seller has to complete. The questions will be answered with Yes, No, NTMK (not to my knowledge) or NA (not applicable). When Seller answers Yes to a question, Seller has to write an explanation. If Seller’s Disclosure reveals something you aren’t comfortable with, you may cancel the contract, within certain contingency deadlines, and get deposit(s) back.
c) Condo Documents (applicable for condos only) – Ordered and paid by Seller. This is typically a lot of documents, including the declaration, bylaws, house rules, meeting minutes from board meeting, association insurance summary, financial statement, reserve study, project information form (a document filled out by the condo’s managing agent answering questions such as if there are any owners delinquent on paying their maintenance fees, if there is any litigation going on, what maintenance fees cover etc). If the condo docs reveal something you are not comfortable with, you may cancel the contract and get your deposit(s) back.
d) Survey (applicable to houses only) – Ordered and paid by Seller. The Survey is done by a Land Surveyor licensed in Hawaii. The survey involves marking property corners and creating a map that shows layout of the land and any man made improvements on the land such as house, pool, fences, walls, garage, roof overhang etc. The biggest objective with the survey is to confirm if there are encroachments across property lines onto neighboring properties. If an encroachment – such as a fence running on your neighbor’s lot – is less than 6 inches (15.24cm), that is considered de minimis and does not require an encroachment agreement by law. If an encroachment is more than 6 inches then Seller must remedy the issue, which can be done by either making a written encroachment agreement with the neighbor, which spells out the parties are aware of this encroachment and they will leave it in place and only if the encroachment gets destroyed by more than 50% it shall be re-constructed along the correct property line.
- Appraisal: Required by banks in case you plan on taking out a mortgage. If you are a cash buyer, no appraisal is required. Banks will lend you a certain percentage based on the appraised value, not based on the purchase price.
Example: If you purchase a property for $1,000,000 with loan terms that spell out 80% loan to value, then if the appraised comes in at $990,000, the bank will only lend 80% of $990,000.
- Termite Inspection: Paid by Seller, selected by Buyer. If there are live termites then Seller has to pay for treatment to get rid of the termites. If there is damage to the property that can be considered material, a Buyer may cancel the purchase contract based on later discovered information within certain contingency timeframes and get refunded any deposits paid into escrow.
- Final Walk Through: A few days before recordation – the date you take ownership – you will typically have the opportunity for a final walk through of the property to ensure it is in the same condition as it was during the home inspection, that Seller has removed garbage and personal belongings that are not part of the contract and in case we negotiated with Seller to fix certain items after the home inspection ensure such issues have indeed been fixed.
- Signing: The deed – the legal document that transfers ownership from one person to another – must be signed in front of a public notary, which can be accomplished at the escrow company’s office in Hawaii, the escrow company’s office on the mainland, a mobile notary or at a US embassy in whatever country you may be present. There are other ways to handle the process too, but these are the most common ways. There are several other documents that need to be signed too shortly before recordation, though not in front of a notary and those documents include: Tentative Buyer Statement, Preliminary Title Report, Conveyance Tax Certificate, Termite Inspection Report & Satisfaction Waiver. The original signed deed and all other documents must be with the escrow company by 12pmish 2 business days prior to recordation.
- Payment of Final Balance: The final balance of the purchase price plus closing costs must be in escrow latest 12pmish 2 business days prior to recordation. Sometimes overseas wires takes 1 business day or longer, so keep this in mind.
- Ownership & Getting Keys: On the date of recordation escrow will be informed by the Bureau of Conveyance – the government office where the deed is recorded – that the new deed has recorded and escrow will following alert us real estate agents – typically before 9am – that we have successfully recorded. At this point we can get you the property keys and you may move in – congratulations!
We hope this overview has been helpful. Keep in mind, each buyer’s situation is unique and the purchase process doesn’t necessarily follow the above steps to the dot for each and every transaction.
We’d love to hear your thoughts in the comments section below.
Disclaimer: The information in this article is deemed reliable, but not guaranteed, and should not be relied upon in deciding to purchase or sell. Always verify any and all information before making a decision to purchase or sell.