Section 8

[ThreeRiversREI]

An issue about Section 8 reimbursement rates came up in another thread I started here. (http://www.magicbullets.com/forum/showthread.php?p=31431#post31431)

Basically, I mentioned thinking about getting involved with a MAJOR rehab project that would result in about 60 row houses becoming available to sale or rent to low income tenants. In describing the deal, I described the Voucher Payment Standard for the local housing authority.

In response, KaosProperties (http://www.magicbullets.com/forum/member.php?u=1509) mentioned an acquaintance that had a bad experience who, unfortunately, can join the forums to give a better explanation as to what the problem was precisely. Here's the appropriate quote...

Rather than go into details that I don't have access to, I will say this: He lost quite a bit of money! The government for Section 8 had promised $575/mo per unit after rehabbed. It took our acqaintance almost a year of completing the rehabs. We were impressed with the workmanship. Well within the budget.

After it was all said and done, the goverment was a major disappointment. They only provided the vouchers for $395/mo per unit.

And no, there was no justifiable reason for the government to shortchange him.

In that thread, I posted two possible explanations for the $180 difference, and just thought of two more. All would be "justifiable reasons" but might not seem as such to a landlord who didn't pay attention and was getting caught by surprise, possibly with a negative cash flow.
Utility allowance (some or all of the utilties paid by tenant either directly or billed by the landlord in addition to rent)
Tenant contribution (the $575 was FMR, but the tenant was expected to pay $180 of that amount)
The higher amount was FMR for the size of the rental, but the family moving in only qualified for a smaller unit)
FMR may have gone down during the rehab process (unlikely, especially that much, but I suppose it IS possible in some markets)


Now, all reasonable but surprising reasons aside, has anyone experienced this personally or know of it happening to someone that would be available to provide more specific details as to what happened?

A lot of rehab deals are available locally in lower income areas that would make GREAT cash flow at Section 8 rates, but if reimbursement dropping by roughly 1/3 is a realistic possibility, then I won't have much interest in helping solve the shortage of Section 8 housing. (Locally, there are almost 1,000 vouchers approved to individuals who cannot find landlords willing to accept them and 2,000 more that the housing authority isn't issuing in part because of that shortage.)

[Aldo]

This may be a bit off-topic, but I think it's important to know that the HUD (Section 8) allowance can be successfully appealed. I've done that and got my price every time. It is a bit of work; but, if you can demonstrate higher rents for several virtually identical rental units in the immediate area, you'll succeed. A successful appeal will result in a HUD allowance comparable to the lowest rental fee presented which may or may not be the amount you seek.

[ThreeRiversREI]

This may be a bit off-topic, but I think it's important to know that the HUD (Section 8) allowance can be successfully appealed. I've done that and got my price every time. It is a bit of work; but, if you can demonstrate higher rents for several virtually identical rental units in the immediate area, you'll succeed. A successful appeal will result in a HUD allowance comparable to the lowest rental fee presented which may or may not be the amount you seek.

Thanks for the tip, Aldo. I hadn't considered the possibility of challenging the voucher allowance in an effort to increase it. The deals I'm looking at in neighborhoods where Section 8 would be likely are all neighborhoods where the reimbursement rates are about right.

Now, rentals in the better parts of town would be significantly higher, and I'm sure thats factor in the shortage of Section 8 housing. Now, would that appeal need to be done with a tenant in hand and redone for each prospective tenant in a larger complex? Or would that be something that could be done in advance and once (if) approved, allow me to advertise that the nicer place was accepting Section 8 and not have a major hassle renting 1,5, or even 50 units at that higher rate?

If the former, I suspect I'd only do it if the annual adjustment on payment standards dropped 1 or more tenants below an acceptable rent rate. Ie, get notice of new rates for the coming year, see a drop, get rental comps, and file an immediate appeal for each Section 8 tenant.

[Aldo]

I began by advertising a unit for, say, $500/mo. If a HUD applicant could afford it, including the subsidy, and met my other criteria, s/he got the unit. Otherwise it's "Next!"

I raise rents annually and, if HUD refused to accomodate my increase to $515 and only agreed to $507, I'd refuse to renew unless they met my requirement. This would apply equally to the lease renewal for an inherited tenant who is mid-lease at purchase.

The difficult part is satisfying HUD that your rental fee is truly at or below current market value. You'll need to prove that. Providing copies of timely ads for identical units within about a six block radius should do the job. It's a no-brainer if you have identical units in a multi which are renting for $515.

If you're considering pre-negotiating with HUD, it may work, but I've never done that. That aside, you can certainly advertise that you accept S-8. That doesn't mean that you must accept a S-8 tenant. If an applicant doesn't meet your rental criteria, which includes the ability to pay your rental fee (subsidy included), that applicant is history.

I hope I touched all the bases.

[ThreeRiversREI]

If a HUD applicant could afford it, including the subsidy, and met my other criteria, s/he got the unit. Otherwise it's "Next!"

My understanding is that if I accept a Section 8 tenant (using their subsidy, that is), total rent (subsidy & tenant contribution) cannot exceed FMR as defined by the local housing authority.

If the rent I'm charging is at/under the published FMR, this should be automatic resulting in a split contract obligating the tenant to 30% of their gross income and the local Housing Authority to the balance each month for the term of the lease.

If the rent I wish to charge (for either a new tenant, or an increase for a renewed lease) is above the published FMR, I have 3 options.
I can reduce the rent for that particular tenant to the published FMR
I can appeal to the local Housing Authority for my higher rent
Refuse to rent to the tenant if I'm not willing to accept the Housing Authority's best offer

What I can NOT do, is charge the tenant the excess.

As an example, the units I'm looking at acquiring have a published FMR of $517/month, but I'm planning to list them for $525/month.

I can accept Section 8 tenants at $517 and charge non-Section 8 tenants $525.
I can try to get the local Housing Authority to reimburse based on my $525 rate.
I can decline to rent to the Section 8 tenant.
But I can NOT charge the $8 difference to the tenant on top of their 30% contribution.


Do I understand yet? :newbie:

[Debbie]

As an example, the units I'm looking at acquiring have a published FMR of $517/month, but I'm planning to list them for $525/month.

I can accept Section 8 tenants at $517 and charge non-Section 8 tenants $525.
I can try to get the local Housing Authority to reimburse based on my $525 rate.
I can decline to rent to the Section 8 tenant.
But I can NOT charge the $8 difference to the tenant on top of their 30% contribution.


Do I understand yet? :newbie:

You haven't understood all quite yet. For example:

In many states/cities/counties---they do not allow landlords to charge Sucktion 8, er, Section 8 tenants above $517/mo (or whatever Housing set the value). That's a BIG NO-NO.

Not 100% positive but I'm comfortable saying that you can not charge different rent prices for properties that are identical. That would cause tenants to file discrimination charges.

Reimbursement? To this day, I've yet to hear any reimbursement from Housing.

It is illegal to decline anyone with vouchers, if they passed rest of your criterias. However, you certainly can say "Sorry, I'm not approved by Housing Authority (or whatever name your city/state/county is called).

[Aldo]

ThreeRiversREI, I won't pretend to understand it, but the percentage rate of the subsidies is all over the board. It's 50% in some areas and 5% in others. Go figger. If newly inherited tenants are mid-lease, you must honor the terms of the lease and negotiate, if necessary, any increase in rent at lease renewal. You can refuse to renew a lease, but you can't fire a tenant before their lease expires regardless of what they are currently paying. A side note is that you won't live long enough to see HUD reimburse anyone for anything.

FMR? Lemmee think. Okay, I got it. Failure to Meet the Real-world.

[Tim]

Section 8 is one of the welfare programs that I particularly dislike. Like all programs of its ilk, it is well intentioned but very poorly implemented.
My understanding is that if I accept a Section 8 tenant (using their subsidy, that is), total rent (subsidy & tenant contribution) cannot exceed FMR as defined by the local housing authority.
That is correct in most areas. In a few, they do allow a little flexibility.

If the rent I'm charging is at/under the published FMR, this should be automatic resulting in a split contract obligating the tenant to 30% of their gross income and the local Housing Authority to the balance each month for the term of the lease.
It is automatic assuming you and your property meet all of the other requirements.

If the rent I wish to charge (for either a new tenant, or an increase for a renewed lease) is above the published FMR, I have 3 options.
I can reduce the rent for that particular tenant to the published FMR
I can appeal to the local Housing Authority for my higher rent
Refuse to rent to the tenant if I'm not willing to accept the Housing Authority's best offer

What I can NOT do, is charge the tenant the excess.
There is one problem there. If you reduce the rent specifically for a Section 8 applicant you open yourself up to a discrimination suit.

As an example, the units I'm looking at acquiring have a published FMR of $517/month, but I'm planning to list them for $525/month.

I can accept Section 8 tenants at $517 and charge non-Section 8 tenants $525.
I can try to get the local Housing Authority to reimburse based on my $525 rate.
I can decline to rent to the Section 8 tenant.
But I can NOT charge the $8 difference to the tenant on top of their 30% contribution.


I don't rent to section 8 tenants because my rents are always above the published FMR and I will not agree to reduce my rent (and in most cases security deposit) to rent to an applicant who carries a much higher risk of loss to me as a landlord on almost every front you can imagine.

The percentage of section 8 properties in an area does affect how most lenders internally evaluate their risk in writing a loan. That can have a long term impact on your ability refinance. Also, when you go to sell to an experienced investor you can bet it will affect their analysis of the deal.

[Burke]

The percentage of section 8 properties in an area.....

Is this information readily available?

[Aldo]

Like all programs of its ilk, it is well intentioned but very poorly implemented.
I have to take issue with that, though I also do not accept S-8 tenants because I prefer tenants with a work ethic, but that's me and a whole other topic.

The real issue is the local administration of the program. Most S-8 policies are set at the local level. In my area there is a city S-8 office which is landlord-friendly and a county S-8 office which is tenant-friendly. This is common thoughout the country. I know owners who aggressively seek S-8 tenants for valid reasons and I know others who would walk away from their property(ies) if they were required to accept them. In most cases that is the result of the local admin of the program.

[jpopkin]

Section 8 can be your best friend or your worst enemy. I have been victim of their wrath first hand losing a couple hundred thousand and seeing about 12 forclosures in a 30 building development.

Much of it has to do with how much control section 8 has in a given area, and the type of market you are in. If you are in a renters market, you need to be especially cautious since that is the time that Section 8 has the most control.

Here is a summary of what happened. It was development know for section 8 housing. There were 30 3 bedroom 4plexs that were rentend almost 100% to Section 8 tenants. After requesting the city to get involved in improvements by providing low interest loans for building the city came in and required a lot of work to be done.(25k-30k per building) Since the city required it section 8 then followed and said we were not up to standard and cut off all rent payments until work was done. Nobody recieved a rent check for 2 months. Then section 8 decided that fair market rent was suddenly $825/mo (down from $1100-$1200). Again almost every unit was section 8rented, so that is 1200-1600 less per month per building. Some owners said ok and rented at the rediculously low rents others kicked the tennants out, but could not refill the units, because their were so many vacancies and not many renters. The building values went from $450k to $360k in about 6 months.

Many lives were ruined.

[Dan Auito]

Man that's ugly! Thanks for the insights Jay!

[ThreeRiversREI]

Section 8 can be your best friend or your worst enemy. I have been victim of their wrath first hand losing a couple hundred thousand and seeing about 12 forclosures in a 30 building development.

Much of it has to do with how much control section 8 has in a given area, and the type of market you are in. If you are in a renters market, you need to be especially cautious since that is the time that Section 8 has the most control.

Here is a summary of what happened. It was development know for section 8 housing. There were 30 3 bedroom 4plexs that were rentend almost 100% to Section 8 tenants. After requesting the city to get involved in improvements by providing low interest loans for building the city came in and required a lot of work to be done.(25k-30k per building) Since the city required it section 8 then followed and said we were not up to standard and cut off all rent payments until work was done. Nobody recieved a rent check for 2 months. Then section 8 decided that fair market rent was suddenly $825/mo (down from $1100-$1200). Again almost every unit was section 8rented, so that is 1200-1600 less per month per building. Some owners said ok and rented at the rediculously low rents others kicked the tennants out, but could not refill the units, because their were so many vacancies and not many renters. The building values went from $450k to $360k in about 6 months.

Many lives were ruined.

Oh that's ugly!

The particular project I'm looking at is about 60 units total (2 city blocks) of 2 br/1 ba row houses and is itself a smaller part of a 250-300 unit low-income housing project that HUD foreclosed on and which has been virtually abandoned for several years. The investor that bought the project from HUD split off this parcel (and possibly others) & resold it for enough to recoup their entire bid to HUD and has since been in the process of redeveloping and renting some of their remaining units.

Other groups in the are have similarly been working to improve the area including one project that is tearing down a block of row houses and replacing them with (fewer) detached single-family homes. (That project is ENTIRELY upside down save for the grants they're getting as a non-profit.)

My plan is to take the 60 units, rehab them, and then target some for sale to low-income persons and the rest to rent, presumably through Section 8. As the redevelopment grants & loans I'll be using require all code violations, lead paint, etc. to be abated, I don't expect to have problems with the local Housing Authority. Sales of units in the are project a 100% profit potential on the sale units. And area rents are at/slightly above, Section 8 reimbursement limits as well.

I'm also looking into the possibility of repeating the "divide & conquer" tactic the original investor used. Not many people in the area would be interested in taking on the entire 60 units, but I may be able to homes by 1's and 2's to resell to other investors or owner-occupants wanting to do their own rehab. After all, there's a limit on how many of the units my GC will be able to work on at one time and I'd like most/all of the units to be ready for occupancy by the end of August.

Part of the marketing plan also includes a special out-reach to the elementary schools (2 w/in 1 mile), police (< 0.5 mile away), and similar groups that are eligible for special FannieMae/FreddieMac financing. I'd be willing to offer a small discount on the price & allow selection of paint & carpet colors, etc. to get more employed, community-connected people as tenants. Not certain how well that would work, though. But it's in the stew pot!

[jpopkin]

Now if you ask me the question "would you rent to section 8 tenants again?"

My answer would be yes.

Why?

Because section 8 tenants arent necessarily bad. And non section 8 tenants aren't necessarily good. Its case by case. What I would do though.. Is make darn sure that section 8 is not dominant in that area. if more than 25% of the units in a given area are section 8, I would stay away. And if there is more than 50% section 8, I would RUN! They simply have too much control then. You need to make sure you have control of your unit at ALL TIMES. You want to have units that are desirable to everyone. So if you chose not to accept a section 8 tenant, plenty of non section 8 tenants would still want to rent.