Cash investors are buying up luxury bank-owned properties and flipping them into Section 8 rentals for the guaranteed, at- or above-market rent checks issued by the government. It’s a boon to Section 8 renters who find themselves with amenities many working, middle-class Americans can’t afford, such as granite countertops, pools and community racquetball courts and fitness centers.
Winners and losers of government rental assistance
The federal government helps low-income families in need of housing by way of a program named Section 8, which issues rental vouchers for qualifying recipients. The vouchers can be used to pay rent on any property that accepts Section 8 renters.
Many factors determine what a monthly stipend rate will be, but household income and headcount are the primary factors.
In general, to qualify for Section 8, the family’s income may not exceed 50 percent of the median income for the county or metropolitan area in which the family chooses to live. Public housing agencies, or PHAs, collect information on income, assets and family composition.
Like many well-meaning programs, Section 8 comes with unintended consequences. Here are the winners and losers of the Section 8 program.
Winners: Real estate investors
It’s understood that landlords want tenants who pay at-market rent on time and in full each month. And finding renters who won’t destroy property is icing on the cake.
Section 8 is serving up such renters to real estate investors.
Backed with generous government housing vouchers, Section 8 renters are cash cows for their landlords.
And Section 8’s ample waiting list means that recipients who aren’t playing by the rules and doing the bare minimum required for maintaining property can be replaced by other recipients who will comply.
“If property is destroyed, the landlord can go to Section 8 and report that tenants are breaching the contract,” says Brian Korte, P.A., Partner at The Law Offices of Korte &Wortman, a foreclosure defense law firm in West Palm Beach, Fla.
Section 8 will come in for remediation, and tenants would have a set time to comply, and if they didn’t, Section 8 could put another renter in. Real estate investors have much more recourse with Section 8 renters than they would with regular renters, where they’d have market their properties on their own.
“Why is every house being gobbled up and rented out by investors with ridiculous rents? Because they can hand them to the Section 8 tenants,” says Korte.
Winners: Section 8 renters
The design of Section 8 is to provide extremely low-income families with decent, safe and sanitary housing in the private market.
But a handful of Section 8 renters are getting all that and then some.
Cash investors are buying up luxury bank-owned properties and flipping them into Section 8 rentals for the guaranteed, at- or above-market rent checks issued by the government.
It’s a boon to Section 8 renters who find themselves with amenities many working, middle-class Americans can’t afford, such as granite countertops, pools and community racquetball courts and fitness centers.
What’s more for Section 8 renters with a housing stipend, there are no lifetime limits on the benefits.
“As long as you qualify, you qualify,” says Korte.
There are annual checks on recipients to ensure they still meet eligibility requirements as set forth by the program, and recipients are required to report changes such as a child moving out or an increase in income. Rental reimbursements would decline if headcount declines or income increases.
Losers: Regular renters
According to Korte, Section 8 rentals play a role in driving up prices in the rental market. Section 8 vouchers are not below market value. They pay market rates, and sometimes offer even more than rental asking prices. This puts upward pressure on rents.
“If you look at a two-bedroom, two-bath Section 8 rental reimbursement, it’s about $1,700 in Palm Beach County,” says Korte. “That’s more than the advertised price for some luxury apartment complexes in the area.”
Regular renters who pay out-of-pocket for their place are getting priced out of the rental market, and Section 8 works to their disadvantage.
“The program’s desire to be at the equal playing field of all rentals creates a self-fulfilling prophecy of what rent is,” says Korte. “It’s going to continuously move up.”
Losers: Section 8 applicants on a waiting list
Section 8 has a finite budget. According to the 2013 proposed budget published by the U.S. Department of Housing and Urban Development, or HUD, $19.1 billion is slated for tenant-based rental assistance.
“This is not an entitlement program with an unlimited budget,” says Korte. “Once the money runs out, it’s out.”
Also included in HUD’s proposed budget is a clause that families currently receiving rental assistance will see no reduction in payments.
The program could get more “bang for the buck” and help more people by paying lower rental reimbursements.
Losers: Neighbors of Section 8 tenants
Section 8 rentals have a direct impact on their surrounding communities.
“You’re seeing destruction of the underlying neighborhood because you’ve got rental communities in areas where they shouldn’t be,” says Korte.
In general, the average homeowner has an emotional and financial stake in their home. But the typical investor who buys and rents out homes in bulk doesn’t care as deeply about the properties.
The incentive for Section 8 landlords isn’t to keep the home in mint condition, but to simply extract as much cash out of a house as possible.
“It’s destroying property values,” says Korte. “Owners of Section 8 housing rentals are doing the minimal amount of maintenance required.”
Homeowners who see their property values decline due in part to Section 8 housing rentals are helpless for the most part. It is illegal to discriminate against Section 8. Neighborhoods can avoid government-subsidized rentals in their community by banning all rentals.
Losers: First-time homebuyers
“Section 8 has created its own industry for acquiring foreclosed homes just to rent out to Section 8 tenants,” says Korte. “Investors can get way above-market rents from them.”
The program creates market conditions that draw in cash investors in droves, much to the detriment of typical first-time homebuyers.
Because there are no contingencies at closing, cash buyers have the upper hand when it comes to snatching up short sales or bank-owned properties. Non-cash buyers have to go through the rigmarole of financing, and even with a higher bid, their offers are often rejected in favor of the cash deal.
“We’re seeing buyers get frustrated,” says Korte. “The bank-owned home is now owned by an investor who will rent it to those same people who were bidding on the house.”
Korte says that if Section 8 had more cost controls in terms of rental vouchers, the program could have more people in need receiving benefits, and perhaps cash investors would be less incentivized to snatch up distressed properties, creating room in the real estate market for everyday buyers who require financing.