Addressing the Unsold InventoryMonte Franke, Franke Consulting

COSCDA ConferenceUnder contract to HUD

• Current rules affecting unsold projects• Projects must be completed in IDIS within 120 days of

final draw… 24 CFR 92.502(d)• If not, incomplete projects; HUD can disallow cost and

require repayment by PJ from non-federal funds

• Homebuyer projects not closed out• Started, not finished – repayment likely• Finished, not sold – the focus of this presentation• Sold, not closed out – why not?

HOME Context

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• FY 2012 Appropriations • 4 years to expend after commitment; 1 year extension

possible (waiver?)• 6 months to sell or convert to rental• Applies to 2012 ConPlan projects• Expect implementing notice in March

• Proposed Rule• 4 years to expend; 1 year extension (not waiver?)• 6 months to sell or convert to rental• Comment period closed; final rule later this year?

Legislation & Proposed Rule

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• Soft for-sale market• Buyers are wary of further declines• Lenders imposing higher standards• Supply is great, foreclosures flooding the market

• Financial pressure on CHDOs/developers• Carrying costs often unfunded• Delayed/reduced developer fee income

Market Context

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• Assess project status & take steps to complete • Strengthen efforts to market units for-sale; and/or• Consider alternative uses: lease-purchase or rental

• It is not a regulatory issue; it’s a market issue; seek the fresh eyes of market experts

• Realtors, lenders, appraisers, counselors, developers• Are your problems unique or are they generic to the

market as a result of current market conditions?

Time to Act

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• Why aren’t homes selling? Is it…• Not the right price?• Not enough subsidy?• Lack of buyer access to credit?• Not a competitive product?• Ineffective marketing?

Analyze the Problem

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• Evaluate current pricing & consider reductions• Is it competitive? Does it generate lookers?

• Increase the availability of buyer assistance• Sweeten the terms

• Recapture instead of resale• Deferred instead of amortizing• Forgivable instead of fully repaid

• Convert HOME into 1st mortgage to bypass restrictive lending

Price & Deal Structure

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• Examine/enhance curb appeal• Compare amenities; offer modest “upgrades”• Get a realtor or a new realtor• Seek free media opportunities... counter story

to foreclosure focus• Mine other programs… counseling, Sec. 8

homeownership, nonprofit pipelines

Product & Marketing

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• Lease Purchase?• Conversion to HOME rental?• Caution: Both require:

• Understanding of local market conditions• Negotiations with all parties (thru local recipient?)• Financial restructuring• Different developer/owner skill sets• Long term obligations/risks for all parties

• Repay HOME funds?

What Are the Alternatives?

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• Technically homebuyer for HOME purposes• But hybrid rental in practice• 36 month limit; requires near-creditworthy buyer

• Not simply a “fall back” option if you can’t sell• Must design program, policies, financing & supports• NSP toolkit:

http://hudnsphelp.info/index.cfm?do=viewToolkitsHome&programtypeid=2

Lease Purchase

1. Budget for feasibility in all 3 stages – dev, l-p, sale2. Select the right buyers: near-ready3. Develop a lease specific to lease purchase 4. Establish asset management5. Provide ongoing support to lease-purchasers6. Prepare an exit strategy if sale not achieved

Elements of Good L-P Design

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• Can be accomplished faster than LP• Required by Act and proposed rule after 6 mos.

• But triggers all HOME rental rules • Rent limits, leases, property inspections, reports• Handout: Conversion Checklist• Get HUD approval to amend wr. agreement, legal

documents, IDIS

• And requires different ownership, management, budgets & permanent financing

Rental Conversion

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• Need to replace sales proceeds with new source of permanent financing

• Lenders, other funding sources, more HOME? CHDO proceeds from other deals?

• Cash flow won’t support much hard debt• Evaluate need for reserves

• Plan exit or reinvestment strategies• 92.255: can sell to tenant during affordability period

Repackaging the Financing

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• Who will own and operate it?• Different skills & financial capacity• Property management

• Who do you seek to serve?• Different incomes levels; different marketing

• How will it be feasible?• Rents, operating budget• Financing

• What are the compliance requirements?

Making Scattered Site Rental Work

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• IDIS re-setup: HOMEFacts vol 4 no 1• Affordability period:

• Deed covenant• Period based on total HOME $, 20 years for new constr

• Ongoing compliance• Annual income certification, updated rents/utility

allowances, reports, inspections, etc.

• PJ monitoring process, schedule, capacity• State or local recipient?

Compliance

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• Markets/political environment changing• First, is everything being done to sell (pricing,

subsidies, amenities, direct financing)?• Then, look at alternatives (rental/LP) carefully

• Assess capacity to implement alternatives• Start over with underwriting and compliance review• Always have multiple exit strategies in mind

Final Thoughts

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• Final questions• MLFranke@aol.com• Watch for:

• Guidance on implementing 2012 Approp. Act• Unsold Inventory Webinars • Final rule

Wrap Up

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