Prepare for your Real Estate Assessment Center inspection
“Making sure you don’t fail in the first place is the best approach.”
It can be a dreaded day for a property owner: failing a HUD REAC physical inspection. However, there are some ways you can deal with a failing score as well as strategies to make sure it doesn’t happen again.
Prepping for a REAC inspection is kind of like preparing for the Super Bowl or the World Series – you have to know the rules, train for the big day and work as a team to come out on top. But most of all, you need a sound coach to run you through the motions. If that coach had a playbook, it would look something like this.
The Official HUD REAC Inspection Playbook: Simple Steps to a Passing Score
In an ideal world, your property would be ready for a REAC inspection on any day of the year. To reach this level of readiness, conduct your own inspections at regular intervals throughout the year. We recommend going through every unit and the common areas once per quarter and fixing any deficient conditions on the spot. Your site staff should be educated about REAC inspections and urged to appreciate the importance of them.
You can estimate when to expect the inspection based upon the previous score of the property. If the REAC score was 90 or above, the property gets a three-year break until the next one. Scores between 80 and 89 trigger an inspection two years out. If the score was between 60 and 79, the property will be inspected just one year later.
Once you’ve estimated your next inspection date, be sure to communicate it to your staff so that they can prepare throughout the year.
Know the Rules of Play
As you may know, HUD has established a point system to score your property. You should know the value of each finding. Some deficient conditions result in more point deductions than others. Once you know the value of each, it becomes much easier to concentrate your efforts on what counts most.
You should plan to focus 65-70% of your attention on the site and common areas of the property. While important for sure, the units themselves typically produce just 30-35% of the point deductions.
HUD puts out data on the most common REAC findings. We’ve crunched the numbers and determined how much attention to devote to each area of your property. Download and review our REAC Preparation Checklist with your team and focus energy on the areas that cause big point deductions. Start with the highest severity items first and go on to the rest as time permits.
Special Teams & Too Many Men on the Field
Does your property have enough maintenance staff? If your budget permits, it can make a world of difference to add another maintenance member to your team. If it’s not in the cards, consider bringing a carpenter or handyman on your staff for a month or so before the inspection. In football, it’s a penalty to have too many men on the field but not in the HUD REAC world. It’s perfectly acceptable.
Pre-Game Warm Up
About three to six months before the anticipated inspection date, identify any work that may require a contractor or the ordering of special materials. Be sure to act upon these longer lead items well before the inspection date. Time flies.
Once your inspection date is set, make a plan to run through every unit and the common areas about a week before the inspection. Use our checklist to uncover deficiencies before the HUD inspector does.
It’s a good idea to have a fresh set eyes perform the inspection with your site staff, which can grow accustom to seeing certain defects and become unable even to notice them. Larger management companies should consider bringing in regional supervisors or maintenance staff from another property to look for possible findings.
Be Ready on Game Day
Roll out the red carpet for the inspector. Make sure lawns are edged, mowed and free from litter. Common area bathrooms should be clean and stocked. Have a place ready for the inspector to sit and work on a laptop. A pleasant experience for the inspector sets the right tone for the day.
Bring a notebook for the inspection to write down findings as they are being called out. Carry along a bucket with light bulbs and a lighter to start gas stoves. The inspector shouldn’t object. You can also bring sink stoppers, cover plates and a screw driver to tighten hardware. But be a little careful using these items in the presence of the inspector in case he is opposed to it.
Show Deference to the Referees
It all starts when you receive a call from the person scheduling the inspection. Treat this person with respect. Try to resist making it too difficult to set a date for the inspection.
It’s never a good idea to get off on the wrong foot with the inspector or the scheduler. Here’s a tip: These two people may know and talk to each other. You don’t want them souring on your project even before the inspection.
If you receive requests for information from the inspector prior to the inspection date, be sure to respond in a thorough and timely manner.
Keep in mind what’s at stake here: the health and safety of your residents and even the economic viability of your real estate investment. It’s incredibly helpful to think in terms of an analogy to games and sports, but remember that REAC inspections are serious business.
Guard Against the Long Bombs
There is nothing more frustrating than spending a lot of time, money and energy repairing your property only to lose BIG points on just a couple findings.
As a general rule, focus more time on the site and common areas and less in the units. This comes as a surprise to many. The scoring system places huge importance on health and safety findings. These usually show up outside of the units. To get maximum results, focus on electrical hazards, trip hazards (3/4” or larger), graffiti, damaged foundations, retaining walls, plumbing, block egresses, mechanical systems and plumbing leaks.
Remember that the inspector is doing his job. Tough calls are a part of the game. When a close call works against you, stay calm and keep the conversation professional. Feel free to ask the inspector to read the definition for that finding out loud. This will make it clear what HUD is looking for and may convince the inspector to reconsider or take back a finding.
Be sure to keep a running list of the findings as the inspector calls them out. Take photographs of each deficiency either during or right after the inspection. If you need help interpreting a definition, feel free to contact us for assistance.
The inspectors are paid to be thorough. They will look for deficiencies in places where your tenants almost never go. Some even bring binoculars, mirrors and flashlights to aid in inspecting hard to see areas. Don’t be surprised by the level of scrutiny applied.
Common areas are often a source of unexpected point deductions. These include obvious places such the rental office, hallways and community spaces. But they also include areas only accessible to site staff, including storage rooms, closets, maintenance areas, mechanical rooms, basements and roofs that are accessible without a ladder.
Instant Replays & Coach’s Challenge
So the REAC report came out and you failed: a score under 60. Ouch! And there’s a letter behind the number. What’s that?! It may seem important, but don’t worry about it. It’s the number and not the letter that matters.
Get some coffee, or preferably some scotch, and start going through the report line by line. Figure out what caused the point deductions. It’s normal for your blood to boil as you do this.
It’s also common for the inspector to have called out a bunch of findings for little stuff you could have fixed in five seconds flat. So frustrating. Undoubtedly a few of the findings were entirely bogus. And there’s almost always a tenant who decided to put a bunk bed in front of window the day before the inspection: blocked egress deduction. It may be a good thing, because you’re about ready to jump out that window.
So what’s next? There must be a way to get those points back. Sometimes it’s possible to do.
Unless you happen to enjoy administrative headaches, it may be a better use of time to start preparing for the next inspection. If you’ve failed two or even three times in a row, you may have no choice but to break out the boxing gloves. That’s where appeals, database adjustments and technical reviews come into play.
You may know how the coach’s challenge works in football. Most of the time the referees get it right to begin with. But every once in a while, a call is overturned. Owners have about same odds of getting points restored by REAC. In other words, it’s not so easy. It really depends on the situation, though.
If you’re going to challenge the score, you have to do it right to have any success. Going it alone without professional help rarely works. Your best bet is to hire an attorney who specializes in these appeals. Be warned. It’s infuriatingly expensive. The good ones will give you an idea of whether you can prevail before too many seconds tick away on their billing time clock. We can recommend a lawyer who specializes in these appeals if you want to go this route.
Communicating with HUD
If the property receives a failing score, be prepared to communicate with HUD asset managers. You will be required to perform a survey of 100% of the units at the property. This involves going through every unit and trying to assess the deficient conditions in each. It’s essentially an owner-performed inspection of every unit, different from a REAC inspection that covers just a sampling of units. Make it a priority to respond to all HUD letters within the indicated timeframes. HUD will schedule the next inspection sooner rather than later if you miss the deadline to report back on your efforts to correct deficiencies.
HUD asset managers will be speaking with ownership to understand why the property is struggling with its REAC inspections. They will be looking to develop a viable plan to correct the situation.
It’s a critical juncture if the property fails two REAC inspections in a row. HUD will be looking for concrete plans to address the problem. With a third failing REAC, HUD may require a change in ownership or may even abate the HAP contract in the case of rent-subsidized properties.
Breaking the Bank & Other Options
Do like the owners of the New York Yankees. Spend a mint, and you’ll get results. Sometimes your property just plain needs a big rehab. It may need up to 25K per unit of renovation work, and sometimes more, to replace major building systems, dated finishings, parking areas, etc.
You have a few options here. Perhaps the easiest solution is to refinance your property and use some of the loan proceeds to fix it up. This assumes that you’ve built up equity in the asset.
If your project serves low-income households, you can try to win an award of 9% low-income housing tax credits. It’s a time consuming and costly process. And it’s competitive, meaning the chances of winning can be pretty low. However, the tax credits are very valuable if you can get them.
If your property offers affordable housing and has annual gross potential rent of about $800K or more, you can look at doing a 4% tax-exempt bond, tax-credit transaction where the tax credits come automatically without having to compete for them. It’s not easy getting these deals done. Tax credit investors prefer doing 9% deals, and the numbers usually don’t pencil out for smaller properties because of the soft costs associated with the bond issuance.
We have done these transactions a bunch of times. Let us know if you’d like to talk about them.
Hire a Good Agent
If your property is struggling with low REAC scores, but you want to retain the financial benefits of ownership, consider hiring a professional third-party management company. We offer that service, so please feel free to inquire.
Sell the Franchise and Go Play Golf
You may decide that life is short, and you’ve had enough of HUD’s administrative web. Retiring from the game is an option. Michael Jordon did it from basketball a few times. He was only 30 years old the first time. It may not be too early for you. You too can try baseball if golf isn’t your thing. The HUD administrative rules can suck the life out of any owner. If you’re at that point, consider selling the property. We may want to buy it from you. Just give us a call.