By Leedara Zola
December 2009: With the recent downturn in the residential real estate market, communities and affordable housing advocates have been looking for ways to take advantage of the lull in housing prices and the glut of foreclosed properties. A Housing Buy-Down Program can provide such a mechanism, using subsidies (including CPA funds) to bridge the gap between what is available on the open market and what is affordable – in essence, “buying down” the market rate home price to an affordable home price.
These programs create permanently affordable homes by using existing, established housing stock. This allows communities to integrate affordable homes into established residential neighborhoods, contribute to their upkeep and betterment, and generate win-win real estate solutions; opportunities are created for market-rate sellers; and diverse housing options are made available for families in need of affordable homes. From the point of view of the low-income buyer, the homes are all unique. They may have larger yards than a typical new-construction affordable homeownership opportunity, or other special features such as built-in bookcases, extra rooms, dens, garages or workshops.
Buy-Down Program Types
There are two different program types: 1) programs where the housing entity actually buys (takes title) to the home, then rehabilitates and re-sells it at an affordable price, and 2) where the housing entity assists in the transaction, providing a substantial subsidy at the closing, with the title going directly from the seller to the affordable home buyer.
Housing Entity Takes Title: Key to the success of this type of program is the creation of an open and fair mechanism for home purchase selection. If the entity is a Housing Trust or Housing Authority, proper procurement practices must be followed. In this case, a Request for Proposals (RFP) is issued, seeking real property. A successful RFP will have a detailed and quantifiable scoring mechanism. Pricing must take into account the rehabilitation work needed and costs of getting the home ready for the qualified household. The purchase process then involves appraisals, inspections, lead test, etc.
Importantly, clear construction standards must be set. The program should quantify a specific amount of time for completion of rehabilitation, and include in pre-sale rehabilitation plans any non-routine maintenance items that are likely to fail during the initial period of homeownership The concept here is that the low-to-moderate income family taking ownership should not be saddled with extraordinary home expenses early on (for example, needing a new roof in year three of homeownership.)
Another critical element for this model is to make sure the housing entity has sufficient capacity for rehabilitation and property management.
Subsidy Model: With the subsidy model, the main difference is that the prospective buyer does the “home shopping” instead of the housing entity. In this case, setting clear program parameters is critical: What is the maximum home price? What is the maximum subsidy amount the buyer may receive? What will be the range of buyer contributions, and, importantly, what are the construction quality parameters? Other issues that must be determined in advance include how it will be determined when the seller needs to complete repairs (versus the program), what process can be set up to oversee the needed repairs, and what repairs prospective homeowners can reasonably take on. Again, construction standards need to be clearly articulated. A program does not want to invest a substantial amount into a “black hole” house that doesn’t create quality housing stock and that drains the finances of the buyer family in the future. In this model, the program administrator serves in a key counseling role, assisting the buyer through shopping, negotiations, rehab analysis, contingencies, escrow accounts, etc. Programs may even manage the rehabilitation work post-closing (similar to a typical housing-rehabilitation program).
In both cases, if communities want to take advantage of the Local Initiative Program perpetual deed rider, and if communities want the homes to count on the Department of Housing and Community Development (DCHD) Subsidized Housing Inventory (SHI), a Local Initiative Program Local Action Units application will need to be submitted to DHCD, and a full Affirmative Fair Housing Marketing/Lottery will need to be conducted.
As part of the marketing, a considerable amount of up-front buyer education will help the program run smoothly further down the road. Some participants have initial trepidation about a buying an older home. This typically goes away quickly once they understand the high construction standards and actually see homes and work through home inspection reports, rehabilitation, etc.
Details, details, details!
With both these models, managing the details is critical. In addition to all the details inherent in both property purchases and property rehabilitation, issues such as how to address a fully functional, but older-style bathroom (think total pink: pink tub, pink toilet, old-fashioned pink pedestal sink, old pink tiles.) Does this type of room require rehabilitation, or maybe not? How should the program deal with a home shopper who makes repeated, perhaps un-realistic offers, and incurs additional transaction costs? Or how will the program handle the task of walking buyers through the myriad of details involved in the mortgage approval process? With the “take title” model, the housing entity will need to address issues such as tax assessments and insurance. For example, in closing, is the entity exempt from Deed Stamps, etc.? Successful programs will be prepared to provide assistance to prospective buyers all along the way.
While buy-down programs involve a considerable amount of program management, and investment is high, rewards are high as well. Buyers get high quality homes that all involved can be proud of.
A buy-down program is, by nature, a one-at-a-time housing solution. But these different, varied and sometimes one-at-a-time solutions can combine as a housing mosaic. And it is this mosaic, this variety of housing initiatives, that works to strengthen and preserve the fabric of a community.
Leedara Zola was part of the entrepreneurial staff team that spearheaded the Nantucket Housing Office (NHO), a partially CPA-funded housing non-profit. Leedara now works with Bailey Boyd Associates as a Senior Housing Consultant, advising Trusts, Municipalities and Non-Profits across the Commonwealth, as well as running housing programs. Through Bailey Boyd, Leedara serves as a consultant to the Yarmouth Affordable Housing Trust and runs their highly successful Housing Buy-Down Program. This program leveraged CPA funds, Trust funds, and local HOME funds, is targeting 12 – 14 homes over a 2 year period, and has successfully purchased 4 homes to date.