Industry Standard Repair Rule Change to REAC

HUD REAC released a notice on their website this week (July 5, 2016) entitled "Industry Standard Repair", which indicates a new standard that details that all repairs made to properties must be "made in a good and workmanlike manner with materials that are suitable for the purpose and free from defects". This new standard outlines a series of specific items and deficiencies that will be determined to be "good and workmanlike".

Before we detail these new changes, it should be noted that this is a significant departure from previous interpretations of the UPCS (Uniform Physical Condition Standards), which typically focused on the existence of a qualifying condition instead of evaluating for the manner of repair or design.

This new standard outlines the following standards to all items in the inspection item list:

(a) Ensure that all components, as repaired, perform its intended purpose and function; and

(b) That all repairs are finished in manner reasonably compatible in design and quality with the original and adjoining decorative materials

"Each repair shall be made in accordance with the industry standard for that particular inspectable item (e.g. hole in the drywall be repaired using the same or equivalent materials, have the same texture, and shall have minimal deviation from and/or have an indistinguishable difference from the original appearance."

Inspectors are now instructed to record a deficiency for any sub-standard repair observed based on the size of the area affected and/or the item inspected.

REAC Provides a "Partial List" of inspectable items that are frequent "incorrectly" repaired:

  • Using a piece of plywood to cover a hole in drywall
  • Filling cracks in brick wall with caulking instead of tuck-pointing with mortar
  • Drywall Repair - covering the damaged area with laminate, plywood, instead of filling the damaged area with drywall plaster, tape, and sanding and painting to finish
  • Door Repairs - repairing doors with plaster or plywood on wood/wood veneer doors
  • Downspout Gutters - using a different material, such as PVC on aluminum pipes, instead of correcting with materials that are similar to the materials in place
  • Erosion - Covering affected areas with hay, straw, or other materials instead of repairing the eroded areas with soil, gravel, or other approved fillers
  • Electrical Panels - Using caulking or expandable foam to fill in gaps or cracks instead of correcting the panel cover
  • Refrigerator Gaskets - Repairs using tape, adhesive, or other materials is not acceptable and any such repairs will be cited as a deficiency
  • Window Locks - windows can no longer be secured with a post or stick in lieu of a manufactured or aftermarket lock

HUD REAC goes on to say that this is a response to the industry embracing the minimum standards of the inspection code instead of using the inspection code standards as a way to ensure that all repairs are done to appropriate industry standard. The objective nature of the UPCS inspection code had the drawback of allowing these repairs, as the standards were defined, precise, and avoided subjective determinations. Inspectors will now be required to determine if there is (a) a deficiency that meets the specific objective deficiency code, and/or (b) a repair was made to the area that was not done according to "industry standard" for each and every component.

The notice does go on to detail that property owners/managers will still have the ability to file an appeal after an inspection if they feel that their repairs had been done to the industry standard and they had been incorrectly cited for a deficiency. However, supporting documentation will need to state how the repairs met industry standards and must be justified by a licensed expert in the subject matter.

This notice provided to REAC inspectors creates a difficult standard that will likely be interpreted differently by each REAC Inspector. Preparation for REAC Inspection will invariably become more difficult and likely in many cases - more costly for many.

We recommend that all properties start to look at REAC Compliance as an annual or even semi-annual event, even if you are fortunate enough to receive a score that affords you multiple years between inspections. With these new exacting standards, ongoing maintenance and the qualify of repairs will need to be a major concern for everyone.

As always, we recommend working with one of our professional consultants who will help you navigate the process and get the best possible result.

Useful Tips for Assets and Verifications

As compliance consultants who review thousands of HUD and LIHTC files, we have put together some frequently asked questions regarding assets. We are hoping that the following FAQ's will provide you with some guidance when calculating or verifying assets for a household.

Q. I have an applicant who disclosed to having no assets. How do I verify this?

A. A household with no assets is highly unlikely. It is recommended that management discuss with the household how expenses are paid to determine if assets have been inadvertently omitted from (such as cash, debit cards, etc). Social Security requires the use of direct deposit, so if the applicant receives Social Security benefits, inquire as to how this income is received.

Q. We sometimes see applicants who have their government benefits or other forms of income deposited directly onto a debit card that is just a cash card, it doesn't connect to a checking or savings account. How do we verify the amount of money on these cards?

A. There are three options to verifying debit cards:

  • A print out from an ATM or similar machine which shows the card number and the balance on the card making sure that the document identifies the account and the account holder and that the information is no more than 120 days old. Identification will have to be provided by the tenant as ATM receipts will not show that information.
  • Statement obtained from the online account service; or
  • Paper statement

The balance in the account is considered an asset and should be reflected as a savings account.

Q. An applicant had a Certificate of Deposit (worth $100,000) she divided it in half, distributing the other portion to another person outside of the household, and keeping the other half for herself. She did this one month prior to moving into our property. How should we value this asset?

A. Include the entire amount of the CD when determining the applicant's income, but separate it into two different asset categories. The amount the applicant currently owns ($50,000) should be counted as a regular asset and the earnings calculated accordingly. The $50,000 that was given away should be counted as an asset that was disposed of for less than fair market value. It should be counted for two years from the date of disposal, so count the $50,000 at initial qualification and at the first annual recertification.

Q. When valuing an asset, do I need to determine the resident's original investment?

A. No. To determine the value of an asset, start with the current value of the asset (annuity or IRS balance) and deduct any fees and penalties for converting to cash, plus any tax penalties.

Example: Mr. Johnson has an annuity with a current value of $68,000, earning annual interest of 3%. If Mr. Johnson withdraws the balance, he would need to pay $2,000 in surrender fees plus $3,400 in tax penalties. The cash asset value of the annuity for purposes of determining total assets is $68,000 minus $5,400 = $62,600. The income from Mr. Johnson's annuity is $68,000 x 3% = $2,040.

Q. Do I need to count the Required Minimum Distribution (RMD) on an IRA account as income?

A. It depends on the State Agency. Like HUD, some State Agencies consider RMD as income, even if it's received once per year. If this is the case, the asset would not be reflected as an asset on the certification; rather, the RMD would be reflected as income on the certification.

If a person chooses to take the annual RMD as periodic payments or received periodic payments, then the RMD is counted as income. In this case, the account the RMD is drawn from would not be counted as an asset. (Note that RMD's are required when a person reaches 70 ½ years of age.)

Q. Are all 401(k) accounts considered assets?

A. No. If a person has a 401(k) account, it is necessary to verify with the employer of whether or not the person has access to take a distribution. If there is access (even if there are penalties), then the cash value of the 401(k) needs to be verified and reflected on the certification. If there is no access, or the person can only take loans or the person would need to prove hardship in order to take a distribution, the 401(k) is not considered an asset.

Q. Do I need to get a market analysis to verify the value of real estate owned by an applicant?

A. The goal is to obtain approximate market value and to document your reasonable attempts to get this information. Copies of real estate tax statements (including those obtained from online county property value tools); a Realtor's record of recent comparable sales in the real estate's vicinity, and letters from realtors can all be used to establish the market value of real estate. Zillow and Trulia may also be utilized to establish market value.

Q. Does market value equal the asset's cash value?

A. No. You must deduct the total amount of mortgages plus the cost of selling the real estate to determine the cash value of an asset. Documentation of estimated costs to sell the real estate is necessary.

REAC Industry Standard Repair Clarifications
Interim Recertifications & New Overtime Rules

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