Documenting Applicant Real Estate & Tips for REAC Preparation

In the affordable housing industry, asking the right questions and obtaining proper documentation are imperative when ensuring real estate owned by an applicant/tenant is handled in accordance with HUD and LIHTC requirements. This article focuses on the intricacies involved with properly documenting applicant/tenant files in an effort to accurately calculate the cash value or net income on real estate. (For Low-Income Housing Tax Credit owners/managers, please refer to your state monitoring agency for specific guidance.)

Terminology you should be aware of

Market Value - Market value is an estimate of the value of real estate based on what a knowledgeable/willing buyer would likely pay for it. There are a number of factors that would affect the market value of real estate, including location and condition of the real estate. Documentation that may be utilized to verify the market value of real estate includes:

  • Appraisal
  • Statement from real estate agent
  • Current tax valuation or assessed value from the Assessor's office only if 100% valuation is used.
  • On-line resources (such as Zillow and/or Trulia)

Costs to Convert - In order to determine the cash value of real estate, it is necessary to verify how much it will cost to convert the asset into cash, e.g., settlement costs, real estate commissions, etc. This needs to be done regardless of what the applicant/tenant intends to do with the real estate. The verification of costs to liquidate real estate should be obtained from an attorney or local realty agent on at least an annual basis. Please check with your local state agency for further guidance.

Mortgage balance - Another factor that affects the cash value of real estate is whether or not the applicant/tenant owes any money on it. To verify the amount owed, a current statement showing the principal balance owed is sufficient.

Joint Ownership - If the real estate is jointly owned by a person or persons outside of the household, the income/asset must be divided amongst the owners. For example, if verified that real estate is owned by two people, 50% of the net cash value or net income from asset needs to be reflected on the HUD 50059/TIC. The file must include documentation that verifies the % of ownership if not 100%, e.g., copy of the deed, mortgage statement, etc.

Determining the status of the Real Estate is key

The question of what applicants/tenants are doing with or intend to do with real estate is important to document since this intention determines whether or not real estate is considered an asset or an asset earning income. Options for what is being done with or what will be done with real estate include, but are not limited to:

  • Selling or intending to sell
  • Selling it as a short sale in lieu of foreclosure
  • Keeping it
  • Allowing someone else to stay and take over the monthly mortgage payments
  • Renting it out or intending to rent it out
  • Letting it go into foreclosure status or including it in a bankruptcy claim
  • An ex-spouse is keeping it

Once the intentions are established and documented, then you can proceed with determining the cash value or income on the asset.

Selling or Keeping - If an applicant/tenant is selling or keeping the real estate, even if it's considered a short sale, the asset is calculated as follows:

  • Market Value Minus
  • Liquidation Costs (attorney fees, closing costs, etc.) Minus
  • Current Principal Owed on Real Estate Equals
  • Net Cash Value of Asset

Sale of real estate must be documented for two years following the disposal to determine if the asset was disposed of for less than Fair Market Value.

Renting - If an applicant is allowing a friend or family member to take over the mortgage obligation, this is considered income, just as if renting it out to someone else. For real estate rented out, the cash value is also considered an asset. Rented real estate is calculated as follows:

  • Determine Net Cash Value of Asset (above) and reflect this as an asset on the certification form

To calculate rental income:

  • Total Rental Income for the Next 12 Months (obtain a copy of the current Lease Agreement) Minus
  • Expenses in Renting the Property for the Next 12 Months (this includes taxes, insurance, maintenance, utilities paid by the owner and mortgage interest) Equals
  • Net Income and needs to be reflected as earned income on the asset on the certification form.

Supporting documentation of rental income includes Form 1040 with Schedule E (Rental Income), rental lease, if applicable, tax/insurance/utility bills, and current amortization schedule showing mortgage interest.

For example, if the net cash value of the asset is $100,000 and the net rental income is $6,000 per year, $100,000 would be reflected as the cash value of the asset and $6,000 would be reflected as income on the asset on the certification form.

Foreclosure/Bankruptcy/Divorce/Separation - How is real estate handled in cases of foreclosure, bankruptcy, divorce or separation? The HUD Handbook 4350.3, REV-1, Chg 4 specifically states that assets disposed of for less than fair market value as the result of a foreclosure, bankruptcy, divorce or separation agreement are not counted as assets because these are involuntary dispositions. However; owners and agents should clearly document inquiries with applicants/tenants as to why the disposition was involuntary and collect supporting documentation (such as foreclosure documents, divorce agreements, estrangement certifications) to support the involuntary nature of the disposition.

If bankruptcy, foreclosure or divorce is in process as of the date of the move in or certification, the real estate is still considered an asset or income to the applicant/tenant until the process is finalized.

Reverse Mortgages - A reverse mortgage is a special type of home loan that lets applicants/tenants 62 years of age or older convert a portion of the equity in the home into cash. Many seniors use it to supplement Social Security, meet unexpected medical expenses or make home improvements. There are no monthly principal and interest payments. When the home is sold or no longer used as a primary residence, the cash, interest, and other finance charges must be repaid. It will be necessary to verify the costs to convert in order to determine the cash value. The calculation of the cash value for reverse mortgages would be:

  • Market Value Minus
  • Costs to Convert (attorney fees, closing costs, interest, and other finance charges, etc.) Minus
  • Current Outstanding Loan Balance Equals
  • Net Cash Value of Asset

Please contact US Housing Consultants Compliance Department if you have any questions regarding the content this article.

The Inspector Started Pushing Buttons

At a conference recently a client rushed up to me with a photo in her hand, and a question at the ready. In her hands was a picture of a long fluorescent light in a hallway, and at the end of the fixture, there was a little black test button. "This inspector came to our property and he pushed the button on every one of these lights. I have been through dozens of inspections and no one has ever done that before."

Sadly, this was not the first time that I'd heard this question, and it was the sort of answer we all hate to have to give: bad news. The light fixtures in the common areas of their property all had auxiliary battery back-up, and while this may not be a "normal" design, any lighting with a battery back-up, must function as emergency power system. In short, if there is a button and you push it, it must function as designed.

However, the larger point that should be taken from this example is a very common thread that we hear at our office every day. In one form or another, property owners tell us the last inspector didn't say anything about this, or in some way indicate how well they did on their last inspection.

While we understand that common sense leads all of us to believe that what we see on one inspection, audit, or review should be an indicator of what to do in the future. In an ideal world, when someone in a position of authority performs an inspection; we all would hope for some level of consistency, knowledge, and accuracy. This is a laudable aspiration, but it does not leave any room for any inconsistency or mistakes made by inspectors. And, to be blunt: there is a considerable amount of inconsistency and mistakes made during most REAC Inspections.

So, what can be done? The largest lesson to remember is that an audit or an inspection is not intended to be a training session. It is about compliance with training that you should have already received. We recommend that all owners conduct thorough Pre-REAC Inspections of your properties with a qualified professional. This can be someone on your staff who received training (make sure the training isn't simply attending inspections, as this is merely anecdotal experience not training) or an experienced consultant. No matter how new, clean, attractive, etc - all properties need to be thoroughly inspected regularly to seek out issues such as the auxiliary light discussed above.

Call us at any time to discuss what so many of the country's best management companies have discovered: that relying on the expertise of US Housing Consultant's inspection team removes the uncertainty, reduces costs by targeting repairs, and eliminates stress and anxiety from your REAC Inspection. You may have a chance to improve your REAC Inspection score.

Quick Tips for REAC Grounds Preparation

When we receive phone calls about REAC Inspections that went poorly, more often than not, the issues are about some small detail that was overlooked, some component that isn't used anymore, or part of a building where no one is allowed. Most of these issues don't require large outlays of funding in order to no longer be an issue; what they typically require is some basic maintenance to either make the item work or completely remove it for the day of the inspection.

Suddenly the Fence Gate You Never Use Isn't Working

If there is a gate on your property that isn't working or, for instance, the spring to make is self-close mechanism function does not work, then a quick fix for the day of the inspection is to remove inoperable hardware or remove gate entirely. You must also remove all associated hardware, including hinge brackets on the fence poles. Remember that even if you can see the fence poles present in the ground in any way, this is considered evidence of an existing fence, and can count against you as being inoperable or missing. Always remove the entire item if you do not intend to use it any longer.

That Wire Fence is Leaning

In a pinch, sagging cyclone fencing can quickly be mended by using plastic zip ties to tighten it back into place. This is only a temporary hold and the fence will need to be re-stretched around the posts and struts to correct the issue. Consider placing the posts into concrete to lessen the likelihood that the issue will happen again.

This same method can be used to temporarily mend small holes in the mesh of cyclone fencing, but you must also make sure that you use pliers to bend back and eliminate any sharp edges caused by the fencing, which unmanaged could lead to a health and safety violation and could be a danger to residents and visitors. Again, this can only act as a short-term hold and knowledgeable site staff or a fence puller should properly tend to the hole as soon as possible.

A Tree Branch or Hedge is Touching Something It Shouldn't

If bushes or other various forms of vegetation have become overgrown before the time of an inspection, twine and stake them back, keeping them off of the walls or fencing during the inspection and properly maintain them afterward. Best practice is to have a regularly scheduled pruning schedule to control vegetation before it becomes overgrown.

Wintertime playground inspection tip

Despite the season, a playground on your property missing its swings or other equipment will be considered to have inoperable equipment. If your REAC Inspection is scheduled during the winter season, reinstall any equipment that would typically be removed to protect it from the weather during winter. You can remove seasonal equipment again after the inspection is complete, but will have saved yourself an unnecessary and lengthy appeal process.

Don't neglect the rubbish

For various reasons, it is important that the area in which your trash and recycling are kept relatively neat. Not only will excessive buildup be considered a deficiency during an inspection, but it is also a common place to lose points for the health and safety violation, sharp edges, due to broken glass and other debris. Trash buildup can also lead to loose pieces making their way to other parts of your property, appearing as litter, also a potential deficiency during an inspection.

These are just some overlooked items and potential temporary solutions that our inspectors often see during final preparations for a REAC Inspections. While these ideas can be useful in many situations, they are not fix-all solutions, and the only way to ensure that you are prepared for your inspection is by proper preparation and understanding the UPCS inspection code. If you do have an inspection scheduled and you are unsure if your property is ready, contact us today to speak to someone about our Pre-REAC Inspection services. 

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