WHY I WALKED AWAY FROM A 40 UNIT DEAL

Last week I was in contact with an owner of a 40 unit apartment building in Independence, Missouri. The property was under a HAP program. To be honest, I was not familiar with the HAP program. All I knew is that the HAP program is another subsidized program and is comparable to the section 8 program.

At first, I was excited because, based on my rent analysis, we could push the rents by $176 per unit if we converted the HAP units to market rent. Additionally, I was salivating that the price per unit asking price was close to my $40k-60k range that I could pay to get my 7% return. However, information about how to convert HAP properties to market rents was limited online. So I had to contact local property managers and investors to determine if it is feasible to convert HAP restricted rents to markets rents.

I learned that when dealing with properties under the HAP program, you should get a copy of the HAP contracts from the owner. You want to know when do the HAP contracts expire and how much notice to give HUD you will not be renewing the HAP contract. From my understanding, if you miss the window to notify HUD you will not be renewing the HAP contract, then you will need to wait for the next window as the HAP renews automatically. In addition, be prepared for it to take a year and a half extra on top of the HAP expiration date to get old tenants out. HUD requires additional time to get HAP tenants a new place to live in. There are two kinds of HAPs. There is project-based HAP and tenant-based HAP. Under project-based HAP, a fixed number of units of a building must remain under the HAP rules for a fixed amount of years until the contract expires. This is contradictory to Section 8, where the landlord can discontinue the program after the tenant moves out. Also, project-based HAP requires a certified individual to be compliant. Most HAP contracts are project-based The property we were considering was confirmed to be project-based.

The last thing to consider regarding HAP properties is that many HAPs are on a rougher side of town, even if it is in a good zip code. You need to coordinate with your property manager to make sure the block meets your crime tolerance. Although the property we were considering was on a decent block, we backed out due to the red tape needed to get through. Patience is a virtue. The right deal will come along if we keep looking at deals, putting in offers, and stick to our numbers.