Section 8 Reform: Small Area Fair Market Rents. Good or Bad?
/What is a SAFMR?
This is a quote from one of HUD’s memos explaining the breakdown:
A family with a voucher pays about 30 percent of its income for rent and utilities, and the voucher covers the remainder up to a payment standard set by the state or local housing agency. The payment standard generally must be within 10 percent of the FMR, although agencies may set higher or lower standards if they meet certain criteria and get HUD approval.[1] Families may rent reasonably priced units above the payment standard, but they must pay the extra rent themselves, on top of the 30 percent of their income they would otherwise pay.[2]
Why Landlords Deserve Premium Rents from Section 8 Tenants
I buy distressed properties in Detroit, renovate them, and rent them to Section 8 voucher holders for ABOVE fair market rent. I feel I should be paid extra because I am asked to do more than a regular landlord:
Fill out a lot of paperwork once I find the tenant.
Keep my house vacant for 1-3 months longer than it would take to place a cash paying tenant
Endure yearly inspections that usually require me to front the expenses of tenant caused damages
Endure unfair inspections.
HUD is saying I’m not being fair
HUD does not want me to charge higher rent than fair market rent. They feel they are being ripped off by me.
HUD also feels that the amount of rent HUD is willing to pay to landlords is not enough for tenants to move to neighborhoods with better schools and better opportunities to leave the circle of poverty. So HUD is going to offer to pay extra rent to get tenants the ability to move out of Detroit and into the suburbs. At the same time, HUD is greatly reducing the amount of rent it will pay to Detroit landlords.
Detroit is on the chopping block
Detroit has already rolled out it’s new SAFMRs. The housing commissions are welcome to implement it now (which it seems they are doing), but they have to officially implement it in January of 2025. HUD is determing rent based on zip codes. I really don’t like this because a zip code does not define the quality of a neighborhood. Detroit’s quality is very much block by block. There are excellent desirable blocks in every zip code as there are scary areas no one should be living in in every zip code in Detroit.
Note: We are all set with our tenants already paying the top amount (our rents won’t be reduced), but any new tenants we will have to accept sometimes $200 less per month depending on the zip code.
Good Luck Moving out of Detroit!
My personal observation is that when tenants move out of Detroit, they are met with a landlord or property manager who is convinced Section 8 tenants destroy houses. Or the landlord or property manager does not have enough experience with Section 8 to know that we sadly sometimes have to take tenants to court to incentivize their housing commission to process their income adjustments or rental increases. A suburb landlord will see a court action and not know to ask the prior landlord if it was because the tenant was bad or it was a tool to get a slow housing commission to do their job.
Suburb landlords and property managers are usually also strict about credit scores. I’m used to Section 8 tenants who have been in “survival mode” and have not had the privilege of even thinking about improving their credit scores. I do not look at credit scores. I look to see how they live so I know if that particular person is one who destroys houses.
Also if a tenant moves into the suburbs where rents are higher, that means the security deposit is also higher. It’s hard to come up with that much cash to move.
What is the new rent?
Here is a link to the new zip code rental amounts or SAFMRs: LINK. Take each zip code and minus from it the utility allowance. I am using the utility allowance chart fo Wayne County detached single family homes. Here is a link to it under Current MSHDA PHA Utility Allowances : LINK If you want to see the memo that inspired the blog and video, here it is: LINK.
Below are amounts for any of my houses that I would use from the utility chart. I added together the following columns: Heating natural gas, cooking natural gas, hot water natural gas, other electric, water, sewer, natural gas service charge, electric service charge, range, refrigerator. The trash comes out of our taxes so I didn’t have to include that. Most of our houses do not have air conditioning so I didn’t include that number. What I included is the utilities the tenant has to pay; gas, electric, water, sewer. The tenant also has to provide their own refrigerators and stoves in my properties (and most Detroit properties).
Utility Allowances: A two-bedroom is $259. A three bedroom is $349. A four bedroom is $438.
48205 is a place where we invest a lot so I will use that zip code for this example. A two-bedroom in 48205 is $1,250 less $259 = $991. A three-bedroom is $1,530 less $349 = $1,181. A four-bedroom is $1,660 less $438 = $1,222. But each housing commission has a 20% discretion in their policy to pay us more. We just know they won’t pay us LESS than these amounts.
If I add 20% to each rental amount, I could get for a two-bedroom $1,189, a three bedroom I could get $1,416, a four-bedroom I could get $1,466. Before the SAFMRs, I was getting more! A couple hundred more.
Beware of Relying on that Supposed 20% Discretion
There are a multitude of factors that affect the amount of rent we really can get. Each housing commission is run differently. Each housing commission has its own separate funding besides from HUD, from what I understand. And each housing commission has its own policies.
I was able to ask one of the housing commission directors about these new SAFMRs. He is trying to get the housing commissions to work together on developing their policies so the housing commissions rents they will allow don’t vary widely. We don’t know yet how much lower our rents are going to be. But it sure seems they will be because we’re already seeing lower than usual rents being accepted by the housing commissions.
My Guess How This Will Play Out
If we do not get a premium for renting to Section 8 tenants, it will be far less desirable to rent to them.
Just because HUD’s goal is to get tenants to move out of the city, it doesn’t mean they are going to do that or that tenants even want to do that. Section 8 tenants are usually single mothers who rely on their families to help them. My best tenants usually rent because my property is near their relatives.
And there is the whole prejudice barrier that suburb landlords have against Section 8 tenants. I’m involved in my local REIA group that meets outside of Detroit in Oakland County. I can tell my peers until I’m blue in the face that their prejudice is on false notions, but they do not believe me. Even with the new law being passed in Michigan where we landlords cannot discriminate against source of income, all the landlords are good and ready how they will bypass that. They will use credit scores and income. They will say they need the full rent on move-in day. The State can’t make us wait up to three months before we see the first rent in our bank account. So why would we rent to Section 8 tenants if we don’t want to?
My houses are all in Detroit. I prefer Section 8 but it comes with a cost to me. I have to wait an extra month of not collecting rent while I get through usually two inspections. It’s really hard to pass their inspections on the first try. It’s rare for even the best landlord. There’s one-three month’s lost rent on a vacant house. Then I have to pay my taxes, insurance, and mortgage out of my pocket for the first one to three months until rent hits my account. Then every year I have to pass another inspection and fix things typically a tenant damaged that I wouldn’t normally fix until after that tenant moved out. Why fix something for them to damage it again? And when a tenant puts in their notice to vacate, I know what day Section 8 will stop making payments to me. But that doesn’t mean the tenant will move. I’m often stuck with a tenant in my house who is not paying a dime of rent because all her funds are going to fund their move. The tenant doesn’t make enough money for me to collect that missing rent through the courts. That has been a significant price I’ve paid.
I’m waiting to see how much “discretion” or rent I’ll actually be allowed to charge before I decide if I’m renting to Section 8 tenants or not. If there isn’t a premium, I doubt I will favor them over cash tenants anymore.
Although I do like those monthly reliable Sectoin 8 rental deposits. I do like that I’m only chasing rents on the tenant’s portion which is usually around 25% of the full rental amount. And I do like that Section 8 tenants tend to want to abide by their lease so they don’t lose their voucher. But if I’m not also paid a premium for those former things, it’s hard to say.
If other landlords feel as I do, it could become really hard for Section 8 tenants to find houses. Tenants are only allowed a limited time to find a place to live. After that, the tenant loses their voucher and the tenant is faced with homelessness. I thought HUD was there to prevent homelessness.
I’m NOT a fan of basing rents on zip codes. It’s too bad the “discretion” isn’t based on who the good landlords are and matching them up to the good tenants on the good blocks. But can you imagine the Fair Housing fiasco that would cause?
I’m eager to see how this plays out. Meanwhile, I’m still favoring Section 8 tenants because the rents are still at a premium, just not as much as it was.