By Tricia Morris President,
Premiere Mortgage

Condotels and Condominiums on Maui

When making the decision to purchase a condominium or a condotel on Maui, it’s important to understand the difference between the two types of properties and the lending qualifications that may apply to each one.

A Condotel is a condominium complex that has a rental program where the units can be rented out on a short-term basis. The income may collected and distributed to everyone the investment pool or the rental may be operated as an individual program where your unit is rented and recieve the income from that unit.

A Condotel generally has amenities such as maid service. It usually has a front desk to make it easy for guests to come in and pick-up their keys. There may also be a desk where guests can purchase vacation activities. Management fees will vary according to the degree of on-site management and the amenities offered.

A Condominium is individually owned and is either occupied by the owner or rented on a long-term basis, generally six months or longer. A condominium complex that does not have short-term rentals will generally not have amenities such as those in a condotel complex.

In both cases, the interior space of the property is individually owned with the balance of the property (both land and buildings) owned in common by the owners of the individual units. The size of each unit is measured from the interior surfaces of the exterior walls, floors and ceiling. The balance of the property is called the common area. Some properties may also include the area of a parking space(s) in the definition of the individual owner’s property. Condotels and condominiums can either be fee simple or lease hold properties.

On Maui, most owners rent their units out on a short term basis during the time they are not going to be using the property. They may be using the income to help pay for a more upgraded property than they would have otherwise purchased, or they may be using the rental income to assist them in their retirement planning. Others only rent out their unit during high season, such as Christmas, and utilize IRS guidelines that allow the owner of a second home to rent their home for up to 10 days a year without taxing the income.

As a result, individuals that are only going to spend a part of their time in the unit own a high percentage of the condominiums on Maui. This is in contrast to properties on the mainland that tend to be owner occupied. The unique characteristics of the Maui condominium real estate market increase the importance of working with a qualified mortgage broker who is familiar with the various programs and requirements of local lenders regarding condominium financing.

Mainland lenders will generally decline to loan on condominium in a complex that is not at least 60% -70% owner occupied unless they have specific programs geared to these types of loans at significantly higher interest rates. This is because most mainland lenders will follow the guidelines of independent national agencies known as Fannie Mae and Freddie Mac that buy loans from individual lenders. This process allows the lender to insure their profit on a loan and to protect themselves against interest rate fluctuations and foreclosure.

Both agencies developed stricter rules on condominium lending as a result of the Savings and Loan crisis of the 1980’s and the high rate of foreclosures in Florida real estate following an over building and boom period. If a lender cannot “sell” this type of loan to Fannie Mae or Freddie Mac it will stay with the lender as a portfolio loan. This is a loan that stays in the lender’s portfolio as opposed to a mortgage backed security sold to the agencies. Due to the cost of managing the portfolio loan, and the higher risk factor, the interest rate can be slightly higher.

Local lenders on Maui are much more familiar with the condominium market and the specific conditions that drive it. As a result, they are more willing to make loans on condominiums and condotels because they are often quite familiar with the individual properties. They know which ones tend to be more upscale and they have a clearer picture as to the potential rental income that might be derived from the property.

Purchasing a condominium or condotel can be easier if you work with a lender who is familiar with resort properties as opposed to one that specializes more in the first time home buyer market. Generally you can expect to put 20% down for your purchase and (depending on your need for rental income to offset the monthly mortgage payment), you may be able to obtain an interest rate that is only slightly higher than a second home mortgage.

It’s also a good idea to work with a real estate agent that has experience in this area. Discuss your goals with them. Are you planning to retire in a few years, or will this be a long-term investment? Are you making a second home purchase or will you be using the property for only a few weeks out of the year? A qualified real estate agent can also assist you in locating a mortgage broker who can find the right lender to meet you individual needs. As always working with a mortgage broker often saves you money and doesn’t ever cost you more than going to a lender directly.

The market on Maui is unique. It is different even from Honolulu where the rate of owner occupancy in condominiums is more like the mainland. In today’s strong market the prepared and knowledgeable buyer, using local expertise in the selection and financing of their property, will almost certainly do well and enjoy a great property with the peace of mind that comes with owning real estate on Maui.

Premiere Mortgage has offices in Kihei and Kahana. Tricia Morris may be reached at 808-874-8800 or toll free at 800-813-7711.