When determining the income of a household at an affordable housing complex with income limitations, the valuation of resident owned assets and the calculation of real or possible income from those assets is critical to the process. Assets are items of value, other than necessary personal items. Asset information (asset value and income from the asset) should be obtained at the time of application.
While standard bank accounts and cash-on-hand are the most commonly held assets, a fairly high percentage of affordable housing residents own real estate; this is especially true in the case of seniors. Knowing how to value and determine income from real estate is a required area of knowledge for affordable housing managers.
Normal Valuation of Real Estate
When deriving the asset value of real estate that is owned but has not been sold, management must determine the actual cash value of the property, and if the value is more than $5,000, income must be imputed to the property – even if it is not actually rented (the only way to receive “actual” income from property is rental). If a property is being rented, and the cash value of the property exceeds $5,000, the rental income must be compared to the imputed income, and the higher of the two figures must be counted as asset income.
To determine the cash value of real estate, the market value must be determined. This can be done through the use of tax assessments (if the assessment is at market value), appraisals, brokers estimates, listing agreements, or as illustrated by a bona fide sales contract. Once the market value is established, the cost of sale may be deducted to determine cash value. Costs relating to the sale of real estate include commissions, broker fees, closing costs, principal mortgage balance, etc. Many state agencies allow an assumed 10% cost of sale for commissions/broker fees/closing costs, but managers should check with the agency on exactly what they will permit. Once the costs of sale have been deducted, the remaining amount is the cash value of the real estate and is the value that should be shown on the Tenant Income Certification (TIC). If the value is a negative amount, the cash value should be shown as zero.
Real Estate Used As Rental Property
If real estate is being rented, the value of the property is derived as outline above. The income for the asset will be the greater of the net rent collected or the imputed income (if the total cash value of household assets exceeds $5,000). However, managers should remember that income is only imputed when the total cash value of a household’s assets exceed $5,000 – not individual assets. For example, if the cash value of real estate is $3,000 and the average six-month balance of a checking account is $2,500, the total cash value of the assets is $5,500 and income will be imputed on the $5,500 – not separately on the individual assets.
If rent is being collected on real estate, it is considered asset income, but only the net rent must be counted. So, if there are verifiable operating expenses associated with renting the real estate, those expenses may be deducted from the gross rent in order to determine the net rent.
E.g., an applicant owns a house that is being rented for $1,000 per month ($12,000 annually). The applicant provides documentation showing annual taxes and insurance of $5,500, homeowners association fee of $800, and mortgage interest over the next 12 months of $2,200. These are all valid operating expenses and may be deducted, leaving net income of $3,500; this is the income from the asset. Remember – only the interest portion of mortgage payments may be deducted as an operating expense – not the principal.
Foreclosure
A foreclosure should be treated as a zero value asset in most cases. Usually, following a foreclosure, an owner will receive no proceeds from a sale. If proceeds are received after a foreclosure, the proceeds themselves will be considered an asset, but not the real estate, since it is no longer owned by the applicant. Also, a foreclosed property is not an asset disposed of for less than fair market value. However, until the final foreclosure documents are provided, the house is sold at auction, or the title transfers to a new owner, the real estate is still owned by the applicant and must be valued as an asset.
Short Sale
If a tenant engages in a “short sale” in order to avoid a foreclosure, this is not an asset disposed of for less than fair market value. A short sale is a financial option that is sometimes available to homeowners who are distressed borrowers. They are behind on their mortgage payments and have a home that is “underwater.” In other words, the home is worth less than the outstanding balance on the mortgage.
Reverse Mortgage
A “reverse mortgage” is a loan against a home that does not have to be paid back for as long as the homeowner lives there. Once the owner moves out of the home, the loan will become due (with very limited exceptions). The homeowner still owns the home!
The real estate is the asset and the market value, less the amount owed plus a cost of sale on the real estate, is the cash value of the asset.
(As a practical matter, since the loan must usually be paid off when the homeowner moves, this would rarely, if ever, be an issue.)
In most cases, the valuation of real estate and the determination of income from real estate is straightforward and relatively simple. The procedures outlined above will work in the vast majority of cases, but if there is a complicated owner structure involving real estate (e.g., real estate owned as part of a partnership), professional assistance may be required in valuing the property.