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If you never heard about ‘RERRR‘, it’s because I just made it up.
It is the final “R” that sometimes gets overlooked. It stands for “Responsibilities,” and if neglected, it could negatively affect Risks & Rewards in Real Estate.
Every real estate opportunity comes with certain risks associated. How the risk is perceived is in the eye of the beholder, and, as we will see shortly, risk can shift quickly.
Today we share three real estate stories. May you benefit from identifying the responsibilities so that you might mitigate risk and avoid the same pitfalls.
Consider these stories to be entirely fictional although inspired by recent true-life events. Any character resemblance to real individuals is purely coincidental.
We don’t take sides. We are not attorneys and we don’t give legal advice. Whether you are a buyer, a seller, or a realtor, the actions of the characters can reveal some useful lessons.
Perhaps you can relate. Share your experiences in the comment section below. We love to hear from you, and others could learn from it too!
“The only real mistake is the one from which we learn nothing.” ~ Henry Ford
Fictional Story #1
The local newspaper ran a story showing a picture of a Hawaii Kai home:
“A mainland investor who bought this home at XXXXX Loop for $2.3 million sued the seller, broker, and property manager in October 2019 for not disclosing that home is an illegal transient vacation rental.”
We don’t know all the details of the story. The home had a history of ‘lucrative’ short-term vacation rental income with existing future bookings. However, the home is located squarely in a residential neighborhood where short-term renting has been illegal!
The buyer bought the property on 6/14/2019 either ‘in spite of’, or perhaps ‘because of’ the perceived continuation of future income.
Eleven days later on 6/25/2019, Bill 89 was signed into law as CO 19-18, reconfirming residential zoning laws in existence for decades, but for the first time ever with one significant change: the imminent risk of enforcement and steep fines.
Anybody that pays attention to local real estate can attest that the proposed Bill 89 had been discussed in the news for months prior. It was designed to regulate and curb rampant illegal short-term renting.
Although the final details of the new rules were difficult to predict, it is hard to comprehend that neither the seller, the seller’s agent, the buyer’s agent, and the buyer didn’t know that the existing short-term rental activities had been illegal all along. – There is a storm brewing somewhere.
- Do you think that the buyer really thought that short-term renting in a residential neighborhood was legal?
- Do you think that the buyer did not realize the uncertainty of future short-term rental income in spite of the already existing residential zoning laws plus the potential for future rental regulation?
- Or, do you think that the buyer might have known the existing risk of illegal short-term renting in a residential neighborhood and took a gamble anyway based on the lack of prior enforcement?
- Do you think that the buyer, realizing that the gamble did not pay off and the investment will no longer have the financial benefit as a result of CO 19-18, could have been searching for someone to blame and finding an opportunity to claim damages based on the seller’s vague disclosure?
- Do you think the seller’s disclosure might have been carelessly too ambiguous?
We don’t know the answers to these questions. We just ask to see what we can learn from it.
Sellers of Hawaii real estate are obligated to disclose any “fact, condition or defect, past or present, that could measurably affect the value of the property for sale to a reasonable person.”
Realtors representing sellers require their clients to complete the Seller’s Real Property Disclosure Statement (SRPDS), a multiple-choice questionnaire used throughout the Hawaii real estate industry.
Question #13 on the SRPDS reads: “Is this property licensed for any transient accommodations (e.g. TVR, B&B)?”The seller may have checked any of 5 multiple-choice answer options: “Yes”; “No”; “NTMK” (Not To My Knowledge); or “NA.”
- Do you think it would have been most accurate and prudent for the seller to answer “No”?
We don’t know which multiple-choice answer box the seller checked. We do know that many sellers are taking their disclosure obligation way to lightly. Sellers habitually tend to select conveniently what they perceive as the safest default answer: “NTMK.” – Really? The seller doesn’t know?
According to the newspaper, the listing brokerage claims that “everything had been properly disclosed.”
However, that’s in the eye of the beholder. After all, the buyer is an attorney who might not have sued unless he thinks he has a winnable case.
See related article: The Seller’s Obligation To Disclose
The danger for the seller is that an incomplete or inaccurate disclosure could conceal important facts for the buyer to know, and the lack of prudent disclosure could get the seller sued.
The danger for the buyer is that a vague “NTMK” disclosure versus a definitive “Yes” or “No” could get overlooked by the buyer and create a false impression of it being a non-issue, especially on a disclosure statement where the majority of questions might have been loosely answered with “NTMK.”
- Do you think that the seller’s selected answer to question #13 could have been a simple innocent but careless mistake?
- If yes, do you think it would have been prudent for the seller’s agent to advise the seller to check the correct box “No” for improved clarity and to mitigate the risk of a lawsuit?
- Or, do you think that the seller did know and properly disclosed that the property was not licensed for any transient accommodations, and that it might have been the seller’s knowledge of the looming new short-term rental rules that triggered the seller to sell?
- Do you think that it would have been prudent for the buyer’s agent to follow up with getting clarification if indeed the seller answered “No” or “NTMK”?
- Do you think that the buyer’s agent should have been spotting any ‘red flags’ while reviewing the disclosure statement together with the rental bookings and advise the buyer about potential risks?
A sloppy and ambiguous seller’s disclosure is risky for the seller and the buyer, but what about the realtors?
Realtors have six fiduciary obligations towards their clients, including always acting in their client’s best interest, excluding all other interests, even the self-interest of the agent!
See related article: Realtors’ Fiduciary Duties – “OLD CAR”
The seller’s agent’s responsibility to the seller includes explaining the importance of the disclosure obligation and mitigating the risk of the seller getting sued.
The buyer’s agent’s responsibility to the buyer includes identifying ‘red flags’ and mitigating the risk of the buyer getting the short end of the deal.
A lack of either agents’ responsibilities can cause the buyer to purchase under the wrong assumptions. Asking the right questions can add clarity and reduce risk.
“What we observe is not nature itself, but nature exposed to our method of questioning.” ~ Werner Heisenberg
In his book “Skin In The Game,” Nassim Taleb explains the ‘asymmetry of risk’ in transactions where one party has knowledge over another party. That’s why disclosure laws are so important.
However, the same risk asymmetry exists where a service professional get’s paid but has no skin in the game.
“Beware of the person who gives advice, telling you that a certain action on your part is ‘good for you’ while it is also good for him, while the harm to you doesn’t directly affect him.” ~ Nassim Taleb
We don’t know if the realtors involved were acting responsibly or not. We do know that what is presented as ‘good for you’ is actually not always good for you. Instead, could it possibly be good only for the presenter? What is your realtor’s ‘skin in the game’?
Taleb restates the Golden Rule of ethical conduct: “Just as you should treat others in the way you’d like to be treated, you would like to share the responsibility for events without unfairness and inequity.”
Whether you are the seller or the buyer, it is crucial for you to get a full understanding of the details of the transaction. Don’t fly blindly just because your agent hasn’t raised any concerns. Are you asking all the right questions?
Humans are driven by greed and fear. If there is an opportunity for profit, even by way of filing a lawsuit, then taking the responsibility for flaws in our decision making and the due process can become secondary. The attorneys will step in and work out an amicable solution for the parties involved.
Perhaps all parties might have taken their responsibilities too lightly. We can all learn from it and ask ourselves:
- Right at this moment, am I doing the best I can?
- Am I always doing the right thing?
- What is the greatest value today that I can contribute for others?
- Am I asking all the necessary questions?
- Do I take full responsibility for everything in my life?
Which brings us to our 2nd fictional story.
Fictional Story #2
Last month I received the following email:
“I have been following your blogs and appreciate the information you provide for the public on short term rentals and TVRs, especially in Waikiki. It has been very useful.
My wife and I are owners of 4 units in Waikiki Park Heights.
At Waikiki Park Heights, the building was in the “H-2” zone when constructed, and when the occupancy permit was signed by the Dept Planning. The building was constructed specifically as a hotel, with apartment units, and was operated as a hotel until the owners sold the individual units as condos. Union Air Service and affiliated individuals bought multiple units and began operations as a hotel known as Unipack.
In 1996, the zoning for mauka Kuhio Ave and Waikiki Park Heights changed to Apt – Mixed-Use, essentially disallowing hotel and short term rentals without NUC at our building. The building itself never had a NUC. Yet hotel (Unipack) and short term rental activity have continued uninterrupted. No units nor the hotel have currently valid NUCs per the Dept Planning. Apparently, there were only a handful of individual NUCs for WPH units over the years, none of which were renewed.
Since you are a real estate expert, I wonder if you would be kind enough to comment on the responsibility of Building Management (in our case, WE Denison Corp, since 1983) to provide disclosure to potential condo buyers regarding whether the building is within a zoning district which does not allow for short term rentals. Do you believe full disclosure to buyers since 1996, when the zoning changed, should have included this fact? The condo disclosure forms we have for our units, all purchased over the last 6 years, describe a hotel as operating in the building, and nothing more.
For the record, I am not a WPH Board member. The Board has recused itself from becoming involved in short term rentals / TVRs issues at WPH apparently on the advice of their attorney and has refused to comment on whether hotel and TVR activity in the building should stop.
Thanks in advance for your comments and insight. ~ Mahalo”
We would love to help everyone. But our top priority is assisting clients that want to buy or sell real estate.
Regretfully, due to volume we are no longer able to answer every email question individually, except when you need help with buying or selling.
I responded: “Aloha! – For the benefit of many, please post your question on the blog as a comment and I will respond in earnest within the next 72 hours. ~ Mahalo & Aloha”
Not everyone is comfortable posting a comment on the blog. Instead, the owner replied by email: “I’ve retained legal counsel and they are working with me regarding our particular situation at Waikiki Park Heights.”
Life is full of beautiful lessons to learn. For the benefit of many, I might as well share my answer here:
I regret, we are unable to comment on what AOAO disclosure the gentleman received to base his purchase decision on. No documents were provided to us.
However, we do know that short-term renting at Waikiki Park Heights hasn’t been allowed for three reasons:
- Apartment zoned
- Not exempt from the NUC requirement / no more NUCs
- Does not meet the LUO’s definition of a hotel to have a ‘grandfathered hotel use status.’
Check all ‘Requirements For Short-Term Renting’ in our related article: Guide To Condotels & Short-Term Rental Condos
The overriding authority is the Department Of Planning & Permitting (DPP) which enforces the existing zoning rules. Whatever the AOAO’s condo documents, the house rules, or any realtor might have implied at the time of purchase is subordinate to the DPP’s zoning rules.
Ongoing illegal activity does not become legal by observing and tolerating it.
The board’s refusal to comment based on their attorney’s advice, “whether hotel and TVR activity in the building should stop” might be because, that is for the DPP to decide. Who do you know at the DPP that might be able to answer the question?
- All owners of Waikiki Park Heights condos that originally applied and maintained a NUC (Non-conforming Use Certificate) failed to renew them, therefore relinquishing their right to legal short-term renting.
- Ongoing and unenforced illegal short-term vacation renting activity gives owners a false sense of legality.
- Many buyers that purchase condos with the intent to do short-term renting base their buying decisions on wrong assumptions due to flawed interpretations of inadequate information.
Anecdotal evidence is not sufficient. Relying on “it seems to be ok” can get you in trouble.
It comes down to this:
- Do you think that asking the single most important question: “Is short-term vacation renting legal here?” might have been better than misinterpreting irrelevant or incomplete information?
- Do you think that the better time to “retain legal counsel” and clarify the answer to the single most important question would have been before finalizing the purchase?
The 1980s song “Once In A Lifetime” by the Talking Heads repeatedly proclaims: “Same as it ever was.”
Just as in the previous story, the attorneys will work it out for the parties involved.
We share these fictional stories because:
- We care. We empathize with you if you had a less than exceptional real estate experience.
- And we want to keep you and others out of trouble.
Call us before you buy or sell, not after you received bum advice.
Which brings us to our 3rd fictional story.
Fictional Story #3
Cliffhanger! To be continued.. — currently editing. Check back soon