Buying a Section 8 property: what HUD has to approve

Buying a building with a project-based Section 8 contract means buying the contract too, and HUD has to approve you before it’s assigned to you. If the property also carries an FHA-insured loan, HUD reviews the transfer of that as well. Neither approval is a formality, so the purchase contract has to make room for both.

The contract assignment

The contract pays rent for the assisted units to the owner. When the owner changes, the contract has to be assigned to the buyer. Under HUD’s previous participation rule, 24 CFR 200.218(a)(4), “a request for consent to an assignment of a housing assistance payment contract under section 8” is one of the events that triggers HUD’s review of the people who will control the property. HUD looks at your principals’ record on other HUD-assisted and insured properties.

If you’ve never owned a HUD-assisted property, expect questions about who will manage it. Bringing in a management agent with a HUD track record is one way to answer them.

If there’s an FHA-insured loan

A property with an FHA-insured mortgage also goes through HUD’s transfer review whether you take over the loan or pay it off and refinance. The rules are in HUD Handbook 4350.1, Chapter 13. The deal screen marks contracts on properties whose FHA loan appears in HUD’s insured-loan file.

Recorded use agreements

Some assisted properties also carry recorded use agreements, from older preservation programs or from tax credits, that limit rents and incomes for years beyond the contract. They run with the land. Ask the seller for every recorded agreement and have your title company list them before you price the deal.

The notice rules don’t change with the owner

Federal law, 42 U.S.C. 1437f(c)(8), requires an owner to give HUD and the tenants at least one year’s written notice before a contract ends without renewal. If the contract is near its end when you buy, the seller’s notices, or the lack of them, become your problem. HUD’s Section 8 Renewal Policy Guidebook adds that a request to opt out goes in at least 120 days before expiration.

What to put in the purchase contract

HUD’s consent to the contract assignment as a condition of closing, with an outside date you can extend.
The seller’s cooperation with HUD’s review, and copies of the contract, its renewal history and the last rent comparability study.
Copies of every notice the seller has sent tenants or HUD about renewal or opt-out.
The physical inspection history, since HUD inspects assisted properties.

Working out a price

Value the property twice: at today’s contract rents, and with contract rents at market. The offer calculator does both from the units, rents and HUD’s rent-to-FMR ratio. Which renewal path the property can take decides which number is real; what an expiring contract tells a buyer walks through the six options.

When you have a deal, send it to the desk for acquisition financing quotes.

About the author

Janover Capital desk, Commercial mortgage desk, Janover Capital LLC. The commercial mortgage desk at Janover Capital LLC arranges acquisition and refinance loans for apartment buildings. Notes here are written from public HUD and agency documents, which each note links.