Am I overlooking something while in DD?

Question

Hey BP,

I have a property under contract right now and I'm in the DD process.  Since this purchase isn't as straight forward as all of my other vacant property purchases, I figured it'd be a good time to invite my "message board of directors" to chime in and provide help, guidance, and feedback.

I have contracted a property outside of the Charlotte metro area that is currently tenant-occupied, with the full $775/mo rent paid by HUD under Section 8.  They have been there for 7 years and appear to have taken pretty good care of the house.  In addition, the home has a newer 200A electrical service, new roof, but an old HVAC system.

I have been researching Section 8 here on BP and found my way to HUD USER and the 2020 FMR Guide for my area.  The guide states that the projected FMR for a 3BR house to be $1190.  Are these rates later adjusted by the local/county housing authority?  Is there a way to have that value re-evaluated?

The tenants are on a month-to-month lease.  I have no plans for displacing them (not my business model) but at the same time I don't want to purchase this house if it won't cash flow or doesn't make sense financially, or leave meat on the bone in terms of having the rent rates adjusted.

I have a major blindspot with the section 8 process and I'm trying to wrap my head around what my best next steps would be in order to maximize this opportunity, provide a great place to live for the tenants, and make sure I won't find myself in a trouble spot due to over looking something up front.

I look forward to and appreciate any help and guidance you guys and gals can provide

Thanks,

Jay

Kevin Stringari · Answer

There is likely a HAP contract for a set term. Once that term is up you can request a re-evaluation for an increase. Do you know when the current term is up? They usually renew each year.

Jay Chekansky · Answer

Hey Kevin, The existing lease was up in October and automatically went to a month to month arrangement

Jay Chekansky · Answer

Thanks for the help @Paul ChapeyThis is exactly in line with what I was hoping for.

Rick Pozos · Answer

You would have to see what the tenant is qualified for (or whatever term they use). Sometimes the housing authority will pay up to 1000 anything higher and the tenant pays. If they found a deal for 900 they are happy that they dont have to pay. If rent goes to 1000, they are still in the game. When it goes higher, now you are collecting from housing authority AND from the tenant. 100 or 150 might not seem like a big deal to you and me, but if they are paying utilities and food AND it was really cold for a couple of months you might not collect anything from them.

Find out what the tenant is qualified for in terms of rent assistance AND what the building is qualified for.

Jay Chekansky · Answer

@Michael Noto Thanks for the feedback.  The tenants do pay for the utilities.

I'm hoping to hear back from the local housing authority to get a clear picture (sooner than later!)

Thanks for the feedback.

Michael Noto · Answer

@Jay Chekansky Something else to look into is the higher section 8 rents sometimes are for apartments/houses that include utilities like gas, electric, etc. If your home has tenant paid utilities the max rent section 8 will cover may be lower, I would look into that also.

Paul Chapey · Answer

Contact the Charlotte Housing Authority and ask what the Payment Standard is for a 3-bedroom house. That will be the maximum they will approve. It's probably $1300 or so. If your property is equivalent to or better than rental comps at the max price, you'll be able to get the Payment Standard. If the house would rent for some price below the Payment Standard, then you should be able to get whatever the fair market value is.

If the current tenant is on a month to month lease, just give her 60-day notice and inform her and the housing authority of your rent increase.

I live in Mooresville, NC, but I have a Section 8 tenant in Oceanside, CA. The housing authority there is exceptionally professional and easy to work with. Their inspections are not nitpicky in any way. I receive $2600 a month and the max for the Payment Standard for a 4-bedroom in Oceanside is $3460. My rental would only command $2500-2700 on the fair market. The tenant has been there for five years and is an excellent tenant.

Jaysen Medhurst · Answer

@Jay Chekansky, I'm no Section 8 expert, but I believe that $1190 represents the maximum HUD will pay. Specific properties are then slotted at a certain rent after evaluation. It's not like you automaticall get the maximum.

Kevin Stringari · Answer

They will also come in each year and do an inspection and make you fix any (even seemingly minor) deficiencies. They are typically pretty picky similar to how a general home inspector will be. I have always jokingly told people that if they came into my own residence they would probably come out with a repair list as well...even though I keep my home in good order. It is their job to find things!