Buying Your First HUD Property

Back in the good old days, buying a HUD property was much like buying a conventional property. HUD was not really involved in the process and would allow the transfer of the HAP to take place with any new owner as long as they had a pulse. To manage a property required a little bit more, but HUD pretty much approved a management company as long as they demonstrated basic competence.

The only time HUD made you crazy to take over a property was when there was a HUD loan on the property. There, HUD was very concerned that they don't lose their money and required a lot more to get approved (Transfer of Physical Assets or TPA).

All that changed in recent years. The changes came gradually but at this point getting approved to purchase/manage a HUD property is a very big deal. The list of things that HUD now requires for a simple purchase is growing longer each year. HUD says (and unfortunately they are not wrong) the reason for these changes is because they have seen too many new owners come in motivated entirely by profit, while neglecting the tenants they are suppose to be helping. HUD realized that they need to make sure that the new owners and managers are not only qualified to take care of an affordable housing property but they they have the resources necessary to invest in them if the need arises. This is why, for example, they began demanding the Personal Financial Statement (HUD Form 56142*) for new owners. On the management side they want to see management companies with experience managing HUD properties. If a management company has no prior experience, they will often require the owner to first hire an experienced management company too oversee the management for a year or two and only then allow the newbie to take over.

All of this is obviously most important when an owner/manager is starting with their first HUD property. Then next properties are relatively simple, assuming that no red flags or other concerns come up during the Previous Participation process (2530).

ARO Resources are experts at this approval process and have gotten many owners/manager approved for their HUD properties (we were able to get a few approved even though they had no previous HUD experience!). So we would like to offer some tips for those entering these waters for the first time. Of course, you are always welcome to reach out to us directly if you need help.

1: Work with People who have HUD Experience:

You may be tempted to go at this by yourself. Don't. I assure you it will only cost you more time, money, and headache down the road. Find someone who has done this before. Whether it is a colleague, friend, lawyer, consultant (shameless self-promotion), you will need someone who can guide you along, share knowledge and documents, and in general help you make sense of some of the more complicated things in Affordable Housing. This is important in the underwriting stage of course (a different time I'll write about the guy who bought a HUD property and a year later learned that he would have to spend 50K on a REAC, and about the guy who did not know that he had limited distributions on his property - investors were not happy), but vital in the approval process. Just knowing how to access the census data in order to fill out an AFHMP is a big deal, not to mention the 2530 process. You will need help with the Management Entity Profile (HUD 9832) and the countless policies and procedures that you will need to provide (EIV, TSP, Transfer Policy, Reasonable Accommodation, LAP & LEP, VAWA - to name a few. If you had to search what any of those are - you prove my point).

It is not only a matter of the time you'll waste trying to learn how to fill this things out properly. For documents like your resume and 9832, the way you fill these out will determine whether HUD will trust you to own/manage a property. Knowing how to do this properly could mean the difference between approval or rejection.

2: Get your Documents Right the First Time

Okay, no one is going to get everything right the first time, but there is a big difference between rushing documents off haphazardly, and trying to get things right. If HUD is going to need to make corrections and revisions, your approval process will take that much longer. Although it is not always possible, I like to get as many of the documents ready as I can ready and send them all at once. This way the Project Manager at HUD can see everything and respond at once. Going back and forth can cause more scrutiny and more time, not to mention it will get confusing as you try to keep track of all the moving pieces. I also recommend creating a spreadsheet with a list of what you need to prepare, the status of the document, and a checkbox once it is approved.

3: Register Everyone Right Away

This may be the most important piece of advise you will get in your lifetime. If you are going to submit your 2530 electronically, you will need every entity to be registered in the HUD database. Do it right now. Seriously, I'll wait. Click on this link and register. Register every business entity and individual who will be listed on the transaction (Ownership entity, management entity, Owner, partners - everyone!). It will take up to 24 hours to be recognized. The next step is key:

Log in to HUD Secure Systems** and request partnerships between all these entities (you even need to request a partnership with your own social security number).

If you don't have the faintest clue what I am talking about - then hurry and find someone who does.This will save you a lot of valuable time later.

Another very important thing when registering. Partnership passwords and other important letters are mailed to address you provide when registering. If you have multiple partnerships to create I highly recommenced using one address when registering all entities. And of course make sure that you have access to this mailbox***. This way, all of the letters will come to one place and you won't have to get the activation key letters from all the different parties. You can always update the address in APPS later on.

4: Get Software Since this is your first HUD property, it is most likely that you don't have the software to manage it properly. Most of the software that management companies use (especially the smaller ones) do not have the capability to handle a HUD property. The most important component missing is the ability to create vouchers and submit them to HUD in TRACS. Even if you could figure out a way to create the certifications and manage the ledgers with your conventional software (which you probably can't) you won't be able to send it to HUD which means you won't get paid. But getting a new software and setting it up properly can be time consuming. So as soon as you sign that contract start figuring out which software you are going to use. If you need help with that - you will need to wait for my next post. And once you decide what software you want to go with - give them a call and start the process. As long as the current owner informs them of the sale they will be able to start setting you up.

There's more to this list and I hope to update it soon - but I gotta go for now.

Good Luck!

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* Although HUD has listed this form as the one necessary for the financial statement, they are likely to accept any basic financial statement. The form 56142 is, as the title on the form indicates, for their debt resolution program.

** If you don't have a WASS ID, the get one here.

I hope to write an entire post about this process but for now this will have to do.

*** The activation key letter comes in an envelope that is nondescript. I don't even think it says HUD on it. I can not count the number of times the letter was thrown by secretaries who assumed it was another piece of junk mail.