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HIGHLIGHTS FROM THE PODCAST: 0:37 - Introduction 1:27 - Overview of Section 8 4:05 - How Section 8 residents find the houses 6:58 - Differences in private pay vs Section 8 residents (Pros) 8:50 - Cons to renting to Section 8 11:46 - RFTA meaning 17:58 - Next step after submitting the RFTA 19:43 - Once the inspection is approved ... 26:39 - Is Section 8 good or bad? FULL TRANSCRIPT OF THE PODCAST AUDIO: Matthew Whitaker: Whether you're Section 8 or you're private pay, there's great Section 8 people, there's great private pay people. Section 8 is just a way that they receive their income and so we really have the philosophy of we need to definitely screen that resident just as hard as we screen other people. Spencer Sutton: All right, everybody welcome back to another episode of The Birmingham Real Estate Investor Podcast. I am one of your hosts, Spencer Sutton, and I've got Matthew Whitaker with me today. Matthew, welcome to the show. Matthew Whitaker: Thank you. I'm really pumped to be here and really excited about our guests. Why don't you introduce her, Spence? Spencer Sutton: All right, so today we have with us our Birmingham team leader, Holly Atchley, so Holly, welcome to the show. Holly Atchley: Thank You so much. I'm excited to be here. I appreciate you having me. Matthew Whitaker: It's always a special place in my heart when the Birmingham team leader does something because as you know, it was a position I ran for quite some time, so now Holly is crushing it, doing a much better job might I add than I was doing ever. Spencer Sutton: Things improved as soon as you stepped out of the role, things just like shot through the roof, it's incredible. Matthew Whitaker: Holly's one of the nicest people you'll ever know. So it definitely got nicer. Spencer Sutton: Which is rare in this industry. Matthew Whitaker: It used to be a big joke around me, not liking people, but we'll save that for another day. But Holly is an incredible person. She does a great job leading the team here in Birmingham and works very hard to do that. So she is a Section 8 process expert, and in Birmingham you kind of have to be, right? We have a number of homes, especially in our low to moderate income neighborhoods that we rent through the Section 8 program. So Holly, just 20,000 foot view, give us your thoughts on Section 8. Holly Atchley: So we do deal with a lot of Section 8 in Birmingham. So what Section 8 is for anyone that does not know, this is going to be a government funded program that provides vouchers for rent for low income individuals or families. Section 8 is basically going to provide vouchers to the landlord to cover that individual's rent. This could either cover a portion of the rent or the full amount, and I know throughout this podcast, I'm sure we're going to go into the details, the nitty-gritty of what that entails as well. Spencer Sutton: Yeah. Matthew Whitaker: Yeah. There's a lot of misconceptions I think with Section 8. Guaranteed rent, I hear that a lot and it's not guaranteed rent, but it's pretty darn close. We're going to dive into some of that. Spencer, I cut you off. Spencer Sutton: No, I was just going to say, you mentioned varying amounts of rent. I remember having a resident in one of my houses and she started out, the rent was something strange, like 724, but she was paying a very small portion of that rent and Section 8 was paying a large portion of that, maybe she was paying $24 and they were paying 700. Over the course of 2, 3, 4 years she was paying a vast majority of it. So that is really the way the Section 8 program is supposed to work. So it can vary from year to year, even how much they pay. Holly Atchley: I've seen it vary. So starting out where Section 8 is paying the full subsidy, so paying that full amount and then the next following year, depending on that residents income that they're making, the resident might have to pay a portion of the rent and that, like you said, it can definitely vary year to year there. Matthew Whitaker: I think one of the things that's important to note is there's some kind of like local Section 8 knowledge that would be Birmingham and then some federal processes that every Section 8 program has to go through. So what happens is there's a housing authority that is created and they get awarded Section 8 vouchers and they essentially get paid. I'm pretty sure it's not for profit type entity. These housing authorities get paid based on the number of vouchers that they can handle, so the more vouchers that they're able to handle through this government program, the more money they make. And so they have a director of this housing authority and they also administer other programs, like there's a veterans program that's very similar to Section 8. And then there's another number of other programs that they administer. Matthew Whitaker: But Section 8 is by far the most popular one and the one that everybody knows in this industry and, I think, the one that probably people have the most questions about. So I think the first question is a lot of people think, "Hey, I want to put this house on the Section 8 program," or "I don't want to put this house on the Section 8 program." And I think that's kind of a misconception and how they see it. So Holly, tell a little bit about how the residents that are Section 8 residents find the house and that it's not just, "Oh, we just put it on the program then all of a sudden the Section 8 person rents it." Right? Holly Atchley: Yes. So we're going to market our property. So let's say an owner wants to market with Section 8. So we're going to include it on our general websites. So through our website, evernest.co, through Zillow, Trulia, all the major websites, but it's also going on GoSection8.com. So this is going to have every property that's available for the Section 8 prospects, so saying, "Hey, this is available for you to apply as well." So it is advertised on that as well. Matthew Whitaker: And I think one of the important things is in some markets that we're in, I think how people get their income to rent a home is actually a protected class. That is not the case currently in Alabama when we're recording this. So you don't have to accept Section 8, and so if a Section 8 resident comes, we do have some, albeit very few, and I'll tell you why, but very few landlords that don't take it, but you don't specifically have to take it, although we certainly suggest taking it because they're not a protected class. In these low to moderate income neighborhoods where these vouchers are very popular, my best guess is that about 60% of the residents are what we would call private pay and about 40% are Section 8 residents. So when you think about it, "Hey I don't want to participate in this government program," you're basically eliminating 40% of your potential applicants or potential renters. And so I think it's really important that... You could almost eliminate that and then eliminate dogs and you would have like 2% of the population that could rent your house. Spencer Sutton: Three people that are available to rent a house. Matthew Whitaker: So I think it's really important that if you're going to invest in low to moderate income houses, and when I say that I'm talking about generally 11, $1,200 and less in the Birmingham neighborhoods so. The other thing... Go ahead. Spencer Sutton: I was going to say, we get a lot of investors who call us and they're wondering, they're asking, "Hey, should I put my house? Should I allow Section 8 in my property in Birmingham?" So it's a question we actually get a lot. Whether they understand it completely or not, they really want to know what the pros and cons are. Matthew Whitaker: And I think that's important. Holly, highlight some differences in a private pay resident versus a Section 8 resident? Holly Atchley: So the pros are going to be just that rent. I know getting that rent at the beginning of every single month, Section 8 is guaranteed to pay that rent every single month. Another pro that a lot of owners see is going to be a yearly inspection. This could either go pro or con depending on the property, but every single year, Section 8 is going out to make sure that property is still up to those standards, so that could also be a pro for some owners. And then also Section 8 does screen their candidates before they allow them to get that voucher. Obviously with Evernest, we do the screening process as well. So we're doing the credit check, the background check, income verification, but Section 8 is also screening those applicants on their end as well. So those are some definite pros for the Section 8. Matthew Whitaker: Well, before you get into the cons, hold that thought. I want to just add some color because I think it's important right here. Some people that we consider our competitors say, "If you have a Section 8 voucher and you can fog a mirror, in other words, you're living, then we're going to move you into our house." And that's not how we look at it. We look at it as whether you're Section 8 or you're private pay, there's great Section 8 people, there's great private pay people. Section 8 is just a way that they receive their income and so we really have the philosophy of we need to definitely screen that resident just as hard as we screen other people. Matthew Whitaker: Now, we do some income verification, but we do rely a little bit on the Section 8, the housing authority to help us with that income verification. But everything else, we want to make sure we're not moving somebody into people's houses that might destroy the house or be a threat to the neighborhood or the neighbors. Matthew Whitaker: I think just to some other pros that I thought about was you mentioned the inspection on an annual basis, there's also a pre move in inspection. We try to manage all of our homes to that minimum Section 8 standard just because we feel like it's probably a great minimum safety standard, but you have essentially an inspector that'll come in and make sure the house is safe for the resident, another set of eyes that are going in and making sure that it's a safe home for the resident. And so that's also a benefit, I would say, to renting the home Section 8. All right, what are some cons to renting Section 8? Holly Atchley: The leasing process is going to be a lot longer than the regular applicant, the regular private pay applicant, because there are going to be additional steps that are required. So with that, like Matthew was saying, we're screening all applicants the exact same, whether they're Section 8, whether they're private pay. But then also, after we screen that applicant and get them approved with Section 8, we're having to submit paperwork to the Section 8 for their approval then they're having to schedule that inspection. If that inspection does not pass, we're having to complete repairs. So there is a longer period with the leasing process, which can cause just some frustrations with owners, just how long it takes to get that resident moved in. Spencer Sutton: Do you have an average of how long it might typically take in Birmingham if you have a couple of repairs? Holly Atchley: Yeah, I would say anywhere three to four weeks. We have seen it go a lot longer, honestly. One thing that we do in Birmingham, after three weeks, after submitting that RFTA paperwork, which is the Section 8 paperwork, we're going to reach out to the owners and say, "Hey, do you want us to remarket the property for private pay?" Just because we know how long the process takes, we don't want the owners to continue to lose out on money just due to the length of the process so we can begin pre-marketing. Matthew Whitaker: Let's talk about that process, because I think it's really important if you're going to rent the Section 8, how the process works. So we stick a house out on the market, we go put it on GoSection8, we're showing it to private pay and Section 8 residents and so we're getting applications, we're underwriting those applications equally and we get an approved Section 8 applicant. So we send out an email to that applicant and say they're approved. The thing that we want is a signed lease typically, and a deposit for move in. So take it from there and I'll provide some color on what the process is once the applicant's approved. Holly Atchley: Yes. So once a Section 8 applicant is approved, we require that deposit paid in full as well as the RFTA paperwork. Like I said, that's going to be the Section 8 paperwork. Matthew Whitaker: Yeah. Let me just say this, the RFTA stands for the request for tenancy approval. That's our R-F-T-A. And basically what we're doing is, in addition to filling out a lease, although we don't sign the lease, we're also filling out paperwork that this resident has received from Section 8, right? Holly Atchley: Yes. So the resident as well as the landlord is going to be filling out this paperwork. So this paperwork is going to include a lot of property information as well. So what's the requested rent amount? The number of bedrooms and bathrooms? The appliances? What the resident is responsible for utility wise and a lot more. So once we submit this paperwork to Section 8, they're going to review the paperwork for approval. That's probably going to be a few business days just to get that approval. Matthew Whitaker: Let me provide some color on the approval. So what happens too is that they take all that paperwork back to the Section 8 office, and then the resident essentially gets underwritten from an income standpoint. So we talked earlier about what portion does the resident pay versus what portion does Section 8 pay, and then also the house. So there's all these kinds of underwriting that goes on, and it really boils down to number one, can the resident afford the house based on the amount of income they have and the amount Section 8 is willing to pay? Are you overcharging for the house? So they also underwrite the house based on the amenities, like Holly was just saying to say, "Hey, are you asking too much for this house?" Matthew Whitaker: So they have all these kinds of formulas that the federal government's put together. And then it basically spits out a yes answer or it spits out a "no, but here's what we can pay". So there are times which I think can be kind of frustrating, that we've submitted paperwork, we've waited a few days. We might be lucky. It might be a week or two, and then all of a sudden we get a document from Section 8 saying, "Hey, maybe this resident can't afford that much, but would you be willing to take less?" So pick it up from there and just talk about that process. Holly Atchley: So if we do get that, obviously we're going to be reaching out. So if we get that notice that, "Hey, this is the max rent that we're willing to pay on this property," we're having to go back to the property owner saying this is the only amount that they're willing to take for this. So the owner can either approve or not approve. If they do not approve, we're going to have to go to private pay for that property as well. Matthew Whitaker: And, this may be a resident issue. So maybe another Section 8 resident could afford that amount. So it's not always your property, it may be that the resident can't afford it. So each voucher has a certain number of bedrooms based on the total number of people in that resident's family that are dependent on them. And so it may just be an affordability issue from the resident, but you're exactly right. This is one of the most frustrating piece times. There are times where we may say, "Hey, we a thousand dollars," and then all of a sudden they came back and they say after two weeks, and they say, "Well the resident can only afford $925. Will you accept that?" And so then the owner has a decision whether they want to rent to this resident. Matthew Whitaker: But that doesn't stop the process. If they say no, then that does, but there's still other steps in the process too if they say yes. Now that doesn't always happen. I would say that probably happens in one out of five cases. They're getting a little bit better because they're being a little more transparent about how much the vouchers are for, so it cuts down on this go between. It used to be almost everyone we'd send in, it felt like they were coming back with this lower rent. Spencer Sutton: So when I was renting houses myself back in the Stone Ages and when I would have the situation come up, sometimes a resident would approach me and I'd find out that they were only approved for 900 of the thousand dollars. And then they would come and say, "Well, hey, I'll pay the additional thousand dollars out of my own pocket." Spencer Sutton: So what's the danger? Now we don't accept that. We don't do that at Evernest, but some landlords may be tempted to do that. What's the danger in doing that, Matthew? Matthew Whitaker: Yeah. I think it's a federal crime. I don't know exactly what it is, but basically what we sign is some sort of lease or attestation to say this is what we're getting paid and we're not getting paid for anything more. And we used to see this all the time. It happened so much. I think one of the things, because you and I have been doing this for a long time, the government at one point was paying 100% of what they considered, I forget what the right word is, but the rent of that house. And then there was a season we went through where they only paid 90%. I think there was some funding cutbacks in Section 8 and so on an $800 house, it's not like they cut the people that were already receiving rent, but the future people, any new residents that moved in there were only paying 90% of what they considered to be average rent because of funding cutbacks. Matthew Whitaker: So if you had a house that would all day be an $800 house to a private pay resident, they started at 800 when we first got started and then at one point they would only pay up to 720. And then, I don't know when this was, during, I think the Obama administration, it went from 90% up to 110%. So they're willing to pay more than market rent. I don't know why I couldn't think of that word, but market rent. So then they were willing to pay more than market. And I think today it's still at 110%. I think they're actually willing to pay more than what they consider to be market rent for homes. So that might be another benefit to people. Matthew Whitaker: All right, so let's say they underwrite the resident and everybody's a go, we're like, "Yeah, let's all do this," whether we agreed to less or they accepted the original amount we sent in." What's the next step after that, Holly? Holly Atchley: Yes. So the next step is going to be an inspection. So each Section 8 is going to have an inspector. They have a checklist that the inspector reviews for every single property. So this inspection is going to be checking for the safety and sanitary conditions of the property. So just some examples of what they're checking for, for example, heating and cooling. Is this working properly? The plumbing, is there hot water? Are there any leaks in the property? The electrical, are the outlets all working, are the light fixtures working? The security of the property is a very big deal, so do all the windows open and close properly? Do the doors latch properly? Those are just a few of the items. Holly Atchley: They have a whole list of items that they are going through. Let's say your property fails inspection. Let's say one of the windows is not opening, closing properly. It fails inspection. The owner is required to complete this and then a re-inspection will incur. If that work is not completed by that re-inspection, then the property is going to fail Section 8 completely. So it's really important to get the repairs done, if any, in that case. Spencer Sutton: And if you really want to slow down the process, have an inspector go out there without your utilities on or not prepared for that inspection. That will delay it big time. Matthew Whitaker: And make for a mad inspector, which is never good. Spencer Sutton: Yes. Holly Atchley: Exactly. Matthew Whitaker: Yeah, so let's say, so there's an inspection, potentially a re-inspection if there's something that needs to be done. Once that's done, then we basically have to wait for the caseworker to tell us to sign a lease, right? Holly Atchley: Yep. So once we get approval that the property has passed inspection, we reach out to the caseworker to get that move in date and then that's when we're sending that full lease for that resident to sign. A lot of the times. They'll give you the same day move in, just depending on the situation, I know we've ran across that recently in Birmingham, the Section 8 inspection will pass and then they'll give us that move in date for the following day or whatnot. So we send that lease out as soon as we get that date from the caseworker. Matthew Whitaker: So I'm going to go back through the process real quick. I know we jumped around. We didn't really jump around on the process, but we provided a lot of color. So first thing is, listen, we're opening up to everybody. We want everybody to apply. Every now and then, maybe 40% of the time so I guess that doesn't qualify every now and then, a Section 8 resident applause and they get approved and then we submit to the Section 8 or the housing authority what's is called a request for tenancy approval. You'll hear us call that a RFTA. Once that's submitted, then there's an underwriting essentially of the resident based on their income and they have to come provide proof of income to the housing authority, and there's also a underwriting of the house, market rent of the house. Once all that is taken care of, that was the point where you might get them coming back and saying, "Hey, we can't pay you X but we can pay you X less $25 or whatever." Doesn't generally happen, but it can happen. You need to be prepared for that. Matthew Whitaker: Once we get all that done, then we have an inspection. The inspector goes out there. If he or she finds anything, then they send us a list, we go fix it and then there's a re-inspection just to make sure that that is complete. And then once that's done, we get an approval and a move in date to sign a lease and we signed what's called a HAP contract. And I forget what hap stands for. Spencer Sutton: Housing Authority something. Matthew Whitaker: Yeah, like HAP. H-A-P is what it is. And basically what we signed as we signed our lease with their addendum, and their addendum says, "Hey, anywhere the lease in the addendum are different, then the addendum obviously supersedes our lease." So we do buy into the way they do business. Now listen, some things people have heard that I think are myths or could be missed is that a resident tears up the house, can they get kicked out of the Section 8 program? How would you answer that, Holly? Holly Atchley: I know based on my experience with this. So whenever I have annual inspections, let's say the inspector goes out, we see that a resident has severely damaged the property. We get the list of repairs. The owner then has the choice to either make these repairs or that property is going to get disqualified from Section 8. Section 8, just based on my experience, they're not responsible for these resident damages. That's going to be on the owner. I know with Evernest, if there are any resident related damages, we will charge that to the resident but ultimately that owner is going to be responsible upfront for those repairs. Matthew Whitaker: I think this is a really important thing, while we screen residents really hard before we put them into houses, and not to say that it's a perfect science by any stretch. Grading someone's housekeeping skills are really hard to do, but if a resident destroys the house, you got to think the reason they're on Section 8 is because they can't afford a house that that big or that much money. And so when they destroy the house, they are also not going to be able to afford the repairs. So I think that is a little bit of a risk that we run. Now, a lot of owners I've heard say is, "Yeah, but they'll get kicked off the Section 8 program." And in theory, that is how it's supposed to work. I've just never seen that work in reality. I heard a housing authority person tell me one time, our goal is not to have people kicked off the program because where are they going to live? But right, wrong or indifferent, it is a potential risk renting Section 8. Matthew Whitaker: Now look, 98% of the residents are awesome but I want people to be definitely aware of what can go wrong and we get to see it because we see it at scale and we get to see the one or two bad residents that make it tough on everybody. But I think it's just important that people know that there is a possibility that something bad happens. Now, this is the same thing though with private pay. It's possible that a private pay resident tears up the house and can't afford to pay you back to fix it. So part of that's just the risk of landlording. Spencer Sutton: But also think, let's say you have one of the 98%, one of the great Section 8 residents in your home, there is going to be more wear and tear on the house. So some people might look at that as a con because they're going to live in the house more. If they don't have a job, they'll live there more, they'll flush more toilets, they'll flip the light switches more. There's just more possibility to wear the house down. So during the term you might have a little bit more work to do, so that's something to consider. Matthew Whitaker: Yeah, totally agree with that. It makes total sense, right? People that are living in home. It's the same way we experience more work orders in the summer when it's really hot and when the winter when it's really cold, because people are in their house more, they're using the facilities more. So if somebody has only a part-time job, may not have a job and listen, there's a lot of Section 8 residents that have full-time jobs so I don't want to throw everybody into that one. But if you have a Section 8 resident that does not have a job, yes, they are probably flushing the toilet consistently more. So a great point. Matthew Whitaker: In Birmingham, there's four housing authorities and I tried to name them on my notes that I'm saying I can, but you want to try it. Spencer Sutton: Yeah. Well, I definitely can get probably three of them. You've got Birmingham Section 8, which is the largest. Matthew Whitaker: Yep. Probably 80% of all the vouchers come from Birmingham. Holly Atchley: The majority, for sure. Yes. Spencer Sutton: You have Jefferson county Section 8, which I loved to work with them back in the day. They were awesome to work with. Bessemer Section 8, and- Matthew Whitaker: It starts with an F. Fairfield. Spencer Sutton: Fairfield. Matthew Whitaker: Since this is only a 30 minute show, I'm going to help you out here. Spencer Sutton: Well, I never have used Fairfield Section 8. Holly Atchley: I have not worked with them recently, so I was stumped on that one as well. Matthew Whitaker: Yep. There you go. That's why I'm the salty veteran. So let's wrap this thing up. I think the important thing is, is Section 8 good? Is Section 8 bad? I don't think it's either one of them. I think it just is what it is and I think people need to understand the positives and negatives and it definitely has its fair share of both of them. We receive a ton of checks every month, not just in Birmingham, but across the country from housing authorities that are putting money into our account on behalf of residents for our clients. So any final thoughts Holly, before we go on Section 8? Holly Atchley: Yeah. So I think it's just important for the owners to know those pros and cons. So making sure to weigh those prior to going into it. So knowing that if there is work that's needed, that it's going to have to be done to get approved for Section 8 and that that leasing process is going to be longer. But then at the end of the day, if you do have a Section 8 resident, you are going to be getting that rent at the beginning of the month. So I think it's just making sure, weighing those pros and cons prior to signing up. Spencer Sutton: And my last thing I would say is from my experience, now we might have to dig into the data to prove it or what, but my experience is once you have a Section 8 resident, they tend to be longer term residents, in my experience. I've had private pay residents that have lasted a long time as well, but I've also have some Section 8 residents that have been long-term and that's just great. The less you can turn that house, the better it's going to be for you as a landlord. Spencer Sutton: All right. Matthew, any final words? Matthew Whitaker: Yeah, last thing I would say is you and I get so much fan mail from this. I'm shocked at all the people that actually listen to this, two bozos in Birmingham putting on a podcast. The last thing I would say is while we love the fan mail because it does our hearts good, will somebody please also, when you send that, leave us a five star review. I think it's so super helpful to get our message out and so if you're taking the time to send us emails and thank us for the show, please also take the time to rate us on Apple or Stitcher or wherever you get your podcasts. I think number one, Spencer has a real low self-esteem. Spencer Sutton: I need it, people. Matthew Whitaker: So yeah, he really needs to feel good about it, but it would really help us get the show out to a lot of people when you do that. So thank you very much in advance for doing it, whoever does it. Spencer Sutton: Yep. Awesome. And share it with your friends. So that is it for this episode of The Birmingham Real Estate investor. Thanks for joining us and we'll be back next week with a new episode.