Documenting Applicant Real Estate Assets
Asking the Right Questions About Real Estate Assets
In the affordable housing industry, asking the right questions and obtaining proper documentation is 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.)
The terminology you should be aware of:
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 the location and condition of the real estate. Documentation that may be utilized to verify the market value of real estate includes:
- Statement from Real Estate agent
- Current tax valuation or assessed value from the Assessor’s office only if 100% valuation is used.
- Online 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.
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.
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 keyThe 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
The 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.
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.
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 the 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