Is reliance on Section 8 an increased risk?

Question

A recently trending thread started by @Brandon Turner discussed accepting section 8 from an existing tenant but having to accept a reduced rate as a consequence.  One of the comments made by Jonathan Cope recommended

"Enjoy the decrease in credit risk offered by government now assuming the payor position."

Is this really a decrease in credit risk?  Changes in legislation and even rule implementation within a department has been a major mover of markets.  Think Tax Reform of 1986 and the recent Safe Act and Dodd Frank.

Personally, I choose to not accept Section 8 due to the quality of tenant and the regulation and complexity of the contracts.  If I were in Brandon's position, that would admittedly involve a very different conversation with myself.  However.  adding compliance to yet another layer of government bureaucracy is not something I would seek, and I question whether reliance on a government program is just another type of entitlement.

If a landlord had mostly  Section 8 tenants, and the program funding was suddenly removed or reduced, how would that impact the landlord.  And the market?  I prefer to rely on my ability to screen for good tenants than on the government's ability to continue to pay me.

What do you think?

Bradley Bogdan · Answer

Ultimately, the reliance on any single segment of the market leaves you at increased risk in any kind of investment. There are government contractors in every sector that specialize in nothing but government contracted work. Every time there is a budget battle, they scream the loudest, because they are entirely committed to a single funding stream. Separate from government programs, your tenants could be mostly employed in the same sector, all your properties could be in the same neighborhood, or laws regarding your rights as a landlord could change.  Diversity is the (not so) secret to reliable income from investments. This could be properties in different markets, across different income brackets, or in different areas of REI (notes, properties, etc.).

I would like to point out that FMRs aren't something that are fixed in stone. PHAs are tasked with using the initial number and tweaking it to best suit the needs of the program in their area. This could mean lowering it for certain neighborhoods, raising it for others, or lowering/raising it across the board to allow more tenants find suitable housing. They have a wiggle room of about 10% over the calculated FMR. The instance of the Raleigh PHA lowering HAP (the subsidy portion of the monthly rent) across the board by 10% is a crazy rare occurrence, despite the fact that its brought up on this site almost every time the subject of Section 8 comes up. I can only find one other instance of this ever happening, even during sequestration, so needless to say, this shouldn't be a prominent fear.

Most PHAs, when faced with a budget shortfall in their voucher program, do one of two things. First, they reduce the number of vouchers they issue locally. Second, they lay off staff.  Over the past decade, HUD funding for Section 8 vouchers has been reduced to about 73% of what HUD calculates each area needs to fund and administer its vouchers. Most PHAs had found work arounds to fund additional vouchers, but HUD severely restricted those work arounds with rule changes during sequestration. I can't imagine most PHA heads/boards would think such a move would be a good idea, nor can I imagine more regional HUD supervisors would give it the OK. I can only imagine that there was a severe breakdown in judgement at the Raleigh PHA or a severe budget shortage, or both, during sequestration to bring such a move around.

Ultimately, your decision to work with the Section 8 program should be based on your local PHA. They have wide latitude to administer the program how they see fit in their area to produce the best results. Some are great, some are pretty mediocre. I don't blame a single person in the Raleigh area for not wanting to work with the program, but ultimately the program's issues in that area aren't very reflective of the program in just about any other area.

Chris Martin · Answer

I was not worried about the credit of the US Department of Housing and Urban Development. I was, however, very worried about the local Housing Authority policies regarding implementation of the HAP (Housing Assistance Payment) Contract. Your local HA can implement policies that impact the HAP Contract. An example is here: http://www.rhaonline.com/SEQUESTRTION-REDUCINGHAPCONTRACTRENT.pdf

Their letter said their "...Department will immediately implement the reduction of current HAP contract rent amounts which are over the minimum reasonable rent comparable amount. This cost saving measure as supported in the Housing Assistance Payment (HAP) contract, Part B, Section 6(c) , which allows the PHA to re-determine the reasonable rent at any time in accordance with HUD requirements." Unfortunately, they made up the "reasonable rent" value. It had nothing to do with FMR (Fair Market Rent) which is used to establish what the "going rate" for an area (an MSA) will be. And their number was lower by 8%-14% every time, even on a house that was already below market rent. So the decision was easy... we left the program.

Les Jean-Pierre · Answer

I have two Section 8 tenants. Each one had their subsidy reduced by $100 per month. While I could see further decreases to the program, I doubt it is going away. The paperwork is a burden but it is really upfront. Once, you are in the system, you are set going forward.  In terms if a risk, I get a direct deposit from the govt on the first of the month. I actually see the program as a safety net I can always rely on.

Marcia Maynard · Answer

Our experience has not been significantly different with Section 8 tenants as compared to non-Section 8 tenants.  Our rents are the same, our tenant screening is the same, our rental agreement is the same, our enforcement of the terms of the rental agreement is the same.

When we need to raise the rent, we just give notice to both the tenant and the public housing authority (PHA). Sometimes this results in the PHA increasing their share of the rent and sometimes it results in the PHA increasing the tenant's share of the rent.

We maintain the habitability of the unit and easily meet the housing quality standard (HQS)  because our standards are higher than that of HUD and the PHA.

If a Section 8 tenant veers from abiding by the terms of our rental agreement we have the additional benefit of being able to contact the tenant's case manager at the PHA and they will put pressure on the tenant to come back into compliance. This alone keeps most Section 8 tenants on track... paying their share of the rent on time, taking care of the property, and abiding by the terms of the rental agreement.

As stated in the Section 8 materials... "The goal of the housing choice voucher program is to provide “decent, safe and sanitary” housing at an affordable cost to low-income families." That is in alignment with the mission statement for our business. I don't find the PHA requirements onerous nor the contracts to be complex, so it works for us. I also like the ease of receiving timely payments from the PHA via direct deposit, which lands in our bank account before rent is due.

So, my answer to the thread question would be no. Reliance on Section 8 does not increase my risk. This is because I do not rely on them any more than I rely on other payors following through on their contractual obligations. I partner with them as best I can and they have been a good, stable partner. If it wasn't working for me, I could choose not to continue the relationship.

Chris Martin · Answer

Regarding "Can they do this mid lease?" I am not familiar with your HA, but read your contract. Mine is based on form HUD-52641

Part B of HAP contract under "Lease of Contract Unit": 'The lease for the contract unit must include wordfor-word all provisions of the tenancy addendum required by HUD (Part C of the HAP contract).'

Part C of your HAP contract says under 'Rent to Owner': 'During the term of the lease (including the initial term of the lease and any extension term), the rent to owner may at no time exceed: (1) The reasonable rent for the unit as most recently determined or redetermined by the PHA in accordance with HUD requirements, or(2) Rent charged by the owner for comparable unassisted units in the premises'

I the local HA implementation, they "redetermined" per the link I provided, but only after their annual inspection. I guess they were thinking to themselves 'how can we make sequestration as painful and miserable as possible for the landlord? Let's cut their contract rent way below market rate... but only after making them suffer through our inspection! Great! Let's do it!' So we started giving 30 day notice to the tenant in advance of the HA annual inspection....

Ann Bellamy · Answer

@Jeff  S. , that's scary.  It's not the case in NH yet, although I think it is in MA (I don't have MA rentals).

In NH there was a recent bill to add two new protected classes:

1.  Public assistant applicants (section 8).  This bill required that if you had an existing tenant who qualified for section 8 while they were your tenant, you were forced to accept the government contract.

2.  Domestic violence victims (both sides of the dispute, and the person had only to report to the police that they were a victim, no investigation, no determination, just a report and the original proposal was that person was protected then forever.)  This could then protect both sides of a dispute, and if they were both your tenants, you can now do nothing if they are causing issues with the other tenants.  You now keep your disputing tenants, and lose your good ones.

The bill died, but there was of course a strong response from landlords, or it would have passed.

Jeff S. · Answer

@Ann Bellamy that is interesting because here in Oregon they are forcing us to accept Sec 8 applications. They have to qualify but with the rent relief they generally can (at least financially). The interesting thing is they can qualify for some pretty high rents when you have 4 bedrooms as they could with a recent ad I had for $1425. Luckily they lied on the app so I rented to someone else who is an excellent tenant.

Rob K. · Answer

Can they do this mid lease? In my area, I sign the lease with the tenant for a year. Before the year is up, Section 8 asks if I will be renewing the lease and if there will be a change in rent. If they tried to do this during the lease, I think I would be able to charge the tenant the difference or evict her, as I have a signed lease that would be enforceable in court.

Is reliance on Section 8 an increased risk?

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