Spencer Sutton - Thursday, February 25, 2016
Do you want to know how to work with Section 8?
There is a right way…and there’s a wrong way!
In this post I am interviewing one of our property managers, Wayne McGinnis. The great thing about Wayne is that he is not only a tremendous property manager, but he’s also a former Birmingham Section 8 Inspector.
This gives him what I like to call ‘Street Cred‘.
Here’s the transcript of our conversation where he will discuss ‘How to Work with Section 8‘ in depth:
Spencer: Back when I was involved in buying/selling houses as an investor, and eventually managing rentals, I had a love-hate relationship with Section 8.
When I would buy houses and keep them for rental, Section 8 always sounded great…but I always ended up jumping through a lot of hoops and waiting on paperwork.
I’m not a very patient guy in that regard, so it was tough.
But once I got the tenant in the house, I knew that subsidy is going to be paid every single month.
I even had a tenant on Section 8 where she was getting a majority of her $724 rent paid through Section 8. But slowly she worked herself out of the system and she was paying 95% of the rent herself.
I believe is the whole point of the program.
But Wayne was an inspector with Section 8, so I know that he probably inspected some of my houses back in the day.
There are a lot of questions that investors have when it comes to working with Section 8. So I’ve asked him to talk to us how investors need to work with Section 8.
Okay, Wayne…I’m an investor, I buy a house, what do I need to know about working with Section 8?
How can I best work with Section 8?
1. Build a relationship with them – If you want to have any kind of success within Section 8, you’ve got to build a relationship with the caseworkers and inspectors. The inspectors you’re going to be able to get on the phone. They are your gateway to the caseworkers and how best to deal with Section 8.
Through that relationship, they’re going to be able to get you in front of those people first hand. They will line things up for you that you would normally not get lined up. So that’s first and foremost what I say, is have a relationship.
2. Do your homework on their guidelines – You can go online and you can research the guidelines. You can research what the housing quality standards are. You can research what the housing choice voucher is, and how it works. You can even research for your area what Section 8 is paying every February based on the bedroom size, based on the subsidy size, based on the tenant’s voucher. So you can see max subsidy averages, like the most they’re going to pay.
So if you’re working with Birmingham Section 8, you’re going to see federal guidelines that come out every February. When they roll out every February, you’re going to see the guidelines that the government has said is an appropriate standard for a two-bedroom, a three-bedroom, a four-bedroom, a studio, or one-bedroom. Whatever the case may be, you’re going to see what the maximum amount of rent is you’re going to get for that place, regardless of what the tenant’s income is.
So there is a cap on each one of those. But that helps you understand when you’re looking at what I could potentially get through my house through Section 8 subsidy. You’ll know there’s a max there, so if you get the right tenant maybe you’ll get the full subsidy.
Spencer: So does it depend on the tenant? That’s how you get the max amount, or does it depend on some other variation?
Wayne: Well, actually anybody will tell you there’s a formula that not even the case workers or the directors understand. You know, they plug it into a program and the program spits them out a number.
But the best rule of thumb is if you have a tenant who has money, who has income, Section 8 is going to pay at least 1/3 of what they have coming in. So let’s just say your house is $700 dollars, the tenant may pay $400 of it and the subsidy may be $300 of it.
Or the less amount of money that a tenant has coming in, the greater the subsidy. So sometimes a tenant who falls on hard times will go below that standard and the government will have to raise the subsidy, or the housing authority, in order to meet the tenants needs so that the two can come together.
I used to call it the magical formula. There is nothing dead set it stone about any of it. That’s why a lot of people get confused because when they receive a voucher from someone, they receive a RFTA (Request for Tenancy Approval) and see that the tenant has a two-bedroom or three-bedroom voucher. They may be asking $750 for the house but they don’t know if the tenant can come up with $750 for the house.
The main point is you always want to pay attention to the max rent subsidy for that tenant.
This prospective tenant will be able to show line item by line item how much they are subsided for utilities, how much they are subsidized for their portion of what the government is going to pay, and it will show you what their portion is towards the house contract. And they total that number up at the bottom so you see a max subsidy.
So if someone comes in and they say they want to rent a $1,250 house and they have a $1,250 max subsidy, then you know that there’s no way they’re going to be in the ballpark of that $1,250 that you’re looking for.
Then you have a choice. You can drop the price or you don’t have to work with them at all because Section 8 is not a protected class.
Spencer: I remember when I was renting out my own houses, Section 8 tenants would come to me and say, “I really want your house but I’m only approved for $650. Your house is renting for $750. I’ll pay you the additional $100 per month above and beyond the subsidy and what I’m approved for.”
Why is that not a good idea for owners to take?
Wayne: Definitely not a good idea for owners because it is illegal. It is breaking a federal law and you can be fined and you can serve federal prison time for breaking that law. A tenant cannot pay over and above what their subsidy is for anything.
Everything has to be clear-cut.
What the lease is and what’s in the HAP contract have to match. Everything you do needs to be upfront, ethical, and legal!
If you accept payment above and beyond the agreement, the tenant will lose their portion, they will lose their voucher, and you will end up with a tenant squatting in your house for a while until they find somewhere else to go.
And they don’t have anything to lose because there’s nothing holding them to the house anymore.
Spencer: What are you going to do if accept that extra $200 because you want a certain amount for their house…and then all of a sudden the tenant stops paying that extra $200 every month?
You really can’t do anything about it because it’s not in the lease, it’s not on record with Section 8, and it’s against the law…at this point you’ve got a problem. That’s when you go ahead and accept a lower payment every month because you can’t evict the tenant for non payment when it’s not reflected in the lease and HAP contract.
3. Make sure your house is rent ready before the inspector visits the property – There’s nothing that makes an inspector more upset than when an investor calls and says, “My property ready for inspection.” but it’s not near ready to be inspected.
The inspector will go out and the utilities are off. Any utility; gas. water, power, anything that’s going to be on in your name, the owner, has to be on at the time that they do the inspection.
Most inspectors, if one of those utilities is not on, is going to turn and walk away because they’re going to feel like you didn’t really take the time to do your job, so why should they take the time to when they know they’re going to have to come back three or four times?
Essentially you’ve just wasted their time.
There are so many inspections that need to be done by the section 8 inspectors. Some of them do 20 a day and they don’t have time to keep coming back to the same property over and over.
If your house is ready, even if it’s just 90% ready, they’re going to see that you are trying to work with them.
The main thing that offends a lot of the inspectors is when they really feel like you don’t care about working with them, and you treat them like they’re an unimportant piece of the puzzle.
Again, it’s going back to building a relationship. If you don’t care about their part of the puzzle, they’re not as likely to care about your a part of the puzzle when it comes down to it.
So make sure your house is ready.
We have Section 8 Pre-inspection list that we give all of our maintenance guys that simplifies what they need to pay special attention to when completing the work.
Here’s how you work with Section 8:
- Build a great relationship with your section 8 inspector and department, whatever municipality, whatever section 8 officer you are working with.
- Do your homework. Understand what is required of Section 8. Understand all of the max subsidy for your particular Section 8 offices. Do your homework. Understand these things on the front end.
- Make sure your house is ready before you ask an inspector to visit your house.