HUD NSP Greatest Hits - Lease Purchase, 9/20/11

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1 David Cramer: We're happy to have two HUD folks with us, John Laswick and David Noguera, who have been very instrumental in the NSP program in regards to helping to interpret NSP and apply it and make it work for the many grantees that have used this program. So welcome to all of you. Our objective today is not so much to convince NSP grantees that they should do a lease purchase, but if they do is to arm them with the tool so that they can do it successfully. In hearing this presentation and what the panelist have to say, it might be that a participant might decide not to do lease purchase. And we consider that a success as well because we find too many nonprofits and others doing lease purchase without the appropriate tools and are not doing very well with them. So our objective is to arm everyone with the tools to do lease purchase successfully. Now, the way we're going to do this is I'm going to do a short summary which basically summarizes what we presented last spring just to describe these crucial elements, and then turn it over to our panelists to give a concrete example of what they're doing with lease purchase and using NSP as the funding source. And describing their program, then talking about some crucial elements that I will be reviewing and that is selection of the lease purchaser and the support provided. And then Bill Brett is going to address a very key element in the success of any lease purchase program and that is having the capacity to do asset management. And then we'll talk about other additional resources that you can look to to be successful with lease purchase. So we should start by defining what we mean by lease purchase because there are many definitions and many ways that lease purchase is used. And in this context we're referring to it as a clear leasing period where rent is paid and then at the end of that period or some point in that leasing period an actual transfer of title is made in a sale -- with a sale option. Now, there are various length lease purchase. There is one that we refer to as the "but for", which is less than a year. And it initially refers to an arrangement where there's just one more thing that the lease purchaser needs to nail down before going to closing and they will be able to do that, sometime within six months and certainly no more than 12 months. So typical short-term lease purchases, though, are one to five years. Please note that the NSP, because it follows the home affordability guidelines, only allows three years. There are also those lease purchase arrangements that are much longer and they're usually and actually are at times low income housing tax credit and they're 15 years. So there are different lengths that lease purchase can be. And there are also different types of lease purchase programs. Most are developer-driven, meaning that the developer goes out, purchases the property, rehabs it or builds it and then looks for a buyer or lease purchaser. Another type of lease purchase arrangement, where the buyer seeks out the property under certain guidelines, than the sponsor of a lease purchase program

2 purchase it on their behalf, leases it for a short period of time, and then sells it to them within the prescribed period. The example we're using today actually uses the buyer-driven approach. So just to give you background in terms of lease purchase in NSP, there's what we refer to as formal arrangements or informal arrangements. And what we mean by this is that because HOME is used as the affordability -- defines affordability and compliance period as the safe harbor as NSP. We follow HOME guidelines when it comes to lease purchase. And that guideline is found in the home ownership section of HOME because it considers lease purchase an actual home ownership program. And all the issues regarding the capture, how it's entered in DRGR follows pretty much standard HOME requirements. But others more informally may start out as a rental unit and that with some intention and sometimes more delivered than others of selling it either to the tenant that occupies it or eventually just someone who will buy it. And that's a more informal approach. And as we'll see in our example today, that's what's being used with the CDC folks. Mainly because in the beginning of the NSP program, there was some ambiguity around this and so doing it rental was a safe way to go. Now, as I mentioned, entering it into DRGR requires for the formal lease purchase that it be entered as a home ownership. And it's listed in notes that it's -- that it is lease purchase. Or if it's done informally as a rental unit, it's entered as a rental with some note that it may eventually be sold. So that's what you need to know in regards to regulations. Now, I want to talk about the seven major areas that need to be paid attention to if any sponsor of lease purchase is going to be successful. And they are seven. And it starts with clearly understanding marketing. And often groups are try out home ownership, and when that doesn't work, they reach for lease purchase without taking a closer look at the way they're marketing. And so the first issue is -- in lease purchase is then -- finding good lease purchasers may be problematic, too. So marketing is still key for lease purchase as well. Secondly, the worst thing to do is to back into lease purchase. Have a plan. Third is because not all lease purchases go to actually purchase it requires an exit strategy. Fourth, lease purchase requires as much diligence to selection as underwriting a home buyer. In fact, it's a little trickier, which we shall talk about. Fifth, have a lease option agreement that has the ability to terminate the relationship legally and fairly. Capture all costs because all faces of the transaction needs to be looked at up front to determine its economic feasibility. And that can be done with a three-part pro forma. And then finally, seventh, it have sufficient capacity. We're going to emphasize property management today, but this also applies to having the capacity to provide pretty intense home ownership counseling. 2

3 Now, I'm going to take each one of these and explain them a little more in-depth. The first is reinvigorate marketing. Thoroughly, our market has changed in the last three years and we need to decide whether we're going to keep following the market down or we're going to attempt to influence it to turn around. And that's a key decision to make in terms of how we position our marketing. It also influences how we set sales price. And this really requires going back to marketing basics -- things that happened that worked four or five years ago do not work today. So we need to rethink how we do our marketing. Despite our best efforts at marketing -- and lately, we've had added things for curb appeal; we've developed attractive financing where we developed good partnership relations, particularly with realtors who know how to handle affordable housing. If we are still unable to sell it, we do have other options of reducing the price -- although that's not good at meeting the market -- or we could increase down payment assistance. They might end up doing rental or lease purchase. And what we decide about either of these has their own implications. So the second important thing to remember about lease purchase is have a plan. The worst thing to do is to back into lease purchase out of desperation because we've had properties finished and sitting there for many months, maybe even years, and we want to get them occupied because we want to change that "vacancy" tab on our DRGR. That is not an appropriate reason to do lease purchase unless we have a plan -- a plan that helps make sure that all our partners or large organizations, all the staff are on the same page because it's all written out very clearly. And this plan or design, we think that's translated in a policy and procedures manual, which we will talk about a little later as to where you can find a model on the NSP website. A plan helps us to coordinate all the various variables. There are lots of various moving parts to a lease purchase program and it's helpful upfront to decide how they're all going to be coordinated. Having a plan also helps us address regulatory issues. For example, how are we going to do the sale recapture? How do we determine the affordability period? All that has to be structured in advance and laid out in a good design. And finally, we don't have to reinvent the wheel. We have a good example of a lease purchase policy and procedures manual in the NSP toolkit. We can just take that and adapt it to our own circumstance. So have a plan. Third is have an exit strategy. Even the best lease purchase programs in the country are only 95 percent successful. And it's more typically 70 to 80 percent. The best are at 95 percent. That still means at 5 to 10 to 15, 20 percent of the folks who start out intending to purchase actually do not. And so having a mechanism to terminate the relationship is important. And having the understanding that that may happen and everybody agreeing to that happening. The other thing, though, is to try to prevent having to go through this kind of action by careful selection, which we will talk about next. And then providing lots of support, which we will talk about by one of the panelists. 3

4 And then third, it's helpful to have good financial incentives. For example, in many of these purchase programs, they're going to accumulate it kind of savings or set aside a fund for closing. That kind of relief date being offered at sale is one example of one financial incentive. Obviously, if a lease purchaser does not go through to sale, they don't receive that incentive. Another one is how the PITI is structured in relationship rent. We want that PITI to be lower than rent so people can actually see a reduction of their housing cost. And there are many more, many of which we can think of. The fourth is, as I mentioned, is have very clear and predetermined selection criteria. They need to be written. There has to be some objectivity to them. For example, using the FICO score, which is used by lenders to underwrite homeownership, it could be used for lease purchase as well. For example, if the current market [inaudible] for FICO credit scores are 640, perhaps setting a lease purchase FICO score if that score is going to rise during the leasing period and reach 640 within the term so that they would then be eligible for a mortgage at the end. But at least we have some standard at which we will not go below. This needs to be a balance between prudent rental criteria, which usually are the foundation of lease purchase criteria and current mortgage standards. So it's not quite -- they're not mortgage ready and that's the reason that they are in a lease purchase situation. And so there needs to be something worked out that is somewhere in between. And each group needs to decide their own criteria based on their own circumstances. Sometimes this has something to do with their own goals. For example, if an organization sees lease purchase as part of their continuum of assisting families along a continuum of different credit and income needs, that will be different from someone who really wants to get the house sold as soon as possible and are trying to select folks that are near ready or almost mortgageable. Sometimes these criteria will relate to how much risk the organization is going to take and what kind of success rate that they expect. So having those criteria written down that whoever is making the selection have at their disposal is another crucial element. The fifth, as mentioned in the exit strategy, is having a lease that is legally and fairly terminated not only when the lease purchaser violates normal rental standards but if they are unable to fulfill program requirements and become the homeowner. Our recommendation is that a renewable lease can be helpful in dealing with local tenant [inaudible]. And we have a model of that in the tool kit. Usually in the option of purchase amount is determined at the beginning and expectations around maintenance and making progress in becoming mortgageable is built in. It's also to have a lease purchase guidebook so lease purchasers understand the difference between homeownership and lease purchase and what's expected during the lease period, and of course, whatever requirements are needed to avoid displacement. And six is it's important to understand all the economics of the deal so the organization is not losing money and it's actually hopefully coming out ahead when all is said and done at the sale of a property. This also helps us to develop those financial incentives and ensures how we determine affordability. 4

5 The seventh and final one is have the capacity to handle all this, especially homeownership counseling and scattered site property management which we're going to talk about -- Bill Brett is going to address as one of the panelists. So before we get to the panelists, we just wanted to see if there are any questions related to lease purchase so that we can be clear about the type of lease purchase that we're talking about. So we can take questions at this point. Kent Buhl: Very good. And let me remind folks how to ask your questions. You can click your raise hand button to ask verbally. You can also submit written questions. And we do have a question from Tayoni [ph]. And let me unmute you, Tayoni. Hello. Are you there? Q: Hi. Kent Buhl: Hi. Q: Yes. Kent Buhl: Where are you calling from? Tayoni: I'm calling from the Atlanta metropolitan area with the Atlanta Neighborhood Development Partnership. Kent Buhl: Terrific. And -- David Cramer: Hi, Tayoni. Kent Buhl: -- what's your question? Q: Hi, David. How are you? David Cramer: It's good to hear your voice again. Q: Thank you very much. Should I just go ahead with -- Kent Buhl: Yeah. Definitely. Q: Okay. Well, ANDP is a nonprofit developer. We have multiple NSP contracts in our metropolitan area, although majority of our work today has been for sale housing. And we're just now getting to the point where we've got some lingering properties in the portfolio where the jurisdictions, be either the city or the county government that we have the contract with, are beginning to be more open to allow us to move to a lease purchase or rent to own strategy. And so we are at the stage now of getting rent and we're having some trouble getting approvals from our jurisdictions, I think because they're afraid that they don't know what measure to 5

6 evaluate them by or how to determine whether the rent that is set was acceptable with NSP guidelines. And so we found some help on the HUD NSP help, that info website and have use that guidance with the home standards sort of going through the process of taking the lesser of the fair market rent and the 65 percent of AMI rent as a guidance. But I needed some help in going forward. David Cramer: This is an excellent question and comes up quite regularly. What's the first decision to be made is are you going to do this as a lease purchase program under the HOME homeownership rules or are you going to do it under rental? If you do it under homeownership -- the lease purchase section in homeownership under HOME -- then the setting the rent is not determined by FMR. It actually -- the PITI will be at the point of sale. And that's what determines whether it's affordable or not. Then the rent could be set at any amount that is reasonable to market. One of the pieces of advice that we give is set the rent higher than the PITI as a financial incentive. Now, if you decide that you're going to make this a rental agreement, then you'll have much more limitations as to how you set the rent and you have use the rental standards in home which is high and low rents. And depending on what incomes you're targeting, that will pretty much dictate how those rents are set. So the first decision is, is this lease purchase as a homeownership unit? Or is this a rental unit that you think you might sell at some point and call it lease purchase. And one determines whether you're using homeownership HOME guidelines or you're using rental HOME guidelines. Does that help? Q: Yes. Big help. Thank you. David Cramer: You're welcome. Kent Buhl: Very good. Let's go now to -- thank you for that, Tayoni. And let's go to Yanik [ph]. Hi, Yanik. Hello? Q: Hello? Kent Buhl: Hello. We can hear you. Q: Hello. This is Yanik Mendes [ph] from Neighborhood Housing Services of South Florida. Hi. Kent Buhl: Hello. David Cramer: Hi. Q: Can you talk a little bit more about the pro forma in a lease purchase program? You said it needs to have three parts? 6

7 David Cramer: Mm-hmm. Okay. Be very happy to. Basically lease purchase requires us to look at not just the development phase and not just the sales phase but what happens in between or the operational phase. And it's helpful to combine all three in one pro forma to see how when one variable in the development or sale phrase effects what happens in the operational phase. This will help us better determine how the economics work in the beginning all the way to sale because each phase will influence how we structure the subsidy, how we structure the sale price, how we structure the PITI, what money we have available during the operations for any debt service, if any. It helps us to determine whether an assumable mortgage that's advertising the principal and interest whether that works and often it doesn't at most markets. But that three-part pro forma will help us see that. There's actually an example of one on the HUD NSP tool kit. It's a little outdated and we hope maybe at some point we will be updating that. But if you want more on that, I can certainly do some follow up and provide a more recent example of the three-part pro forma. Q: Thank you so much. David Cramer: You're welcome. Kent Buhl: And at this point, that's all the questions I see. So shall we move on to Community Ventures? David Cramer: Let's do that. Kent Buhl: Okay. David Cramer: So let me just give a little introduction and introduce our two panelists that are going to talk about their NSP lease purchase program. This is a group that's been doing lease purchase for quite a while and have quite a bit experience with it. And when NSP came along, they wanted to use NSP with lease purchase as well. As I mentioned earlier, this is a good example of a consumer or buyer driven approach. And they are using the more informal arrangement with HOME whereby they're renting with the intention at some point of selling it. So we have two panelists that are going to be doing the presentation: Donna Major, who is senior executive and vice president; and Keysha Cuyler, who is the director of Homebuyer Education and Counseling. So Donna, why don't you take it from here? Donna Major: Very good. Good afternoon, David and good afternoon, participants. I'm Donna. The CVC started in the lease purchase business in 1997 when I was first with CVC and our first contract application was one page and a quarter and that's how we got in the lease purchase business. We were very active in the lease purchase through about 2007 and then things happened. In fact, there's somebody on this phone call I believe that knows our whole dark history. 7

8 So NSP came up. We were very excited. We consciously went into the program trying to do the maximum number of lease purchases because our motto requires us to have a client [inaudible]. We could not go out and just buy homes. That's not allowed in our agency. So by putting the maximum number of lease purchases into the program before we get Davis-Bacon was a serious intent from the beginning. Right now, I advise -- and what we had found is your PJ -- I happen to have the word "state" up here -- but your PJ has to be a critical partner. If they don't understand or don't believe in lease purchase, you've got an uphill fight. We're very blessed because our basic lease purchase design came from an employee who done went on to the state to become director of NSP. So she understood from the very beginning what we were trying to do and they really help us make it work. So I think -- we had somebody already mention that their PJ doesn't understand. Well, their PJ needs to talk to our PJ because they -- we definitely have -- our state understands what we're trying to do. We used our original lease purchase design or how it had been changed up through about 2007 as far as our NSP program, because as many as you know when we all jumped in, worlds were kind of scattered. Well, we knew what had worked for us, so we went forward with that design. We did set up a program using fair market when solidified. So the fair market rents was below the client's eventual PITI and we were able to fill that gap by having the clients pay the additional money and that went into a fund, so that at the end of their rental period, they'll have down payment and closing costs. So they basically are paying the same in rent that they will be paying when they buy the house. So it was really important to use to be able to set aside these funds which we had not been able to do in our original lease purchase. And I should say one of the things we're allowed to do is we have 100 percent financing from NSP in our lease purchase houses. So we're not paying interest. That has made it much, much easier to do this program. We do require -- our consumers do -- are [inaudible] the property. It was a little bit tough in [inaudible] lease purchase because they could only shop in a certain location and we had to have certain conditions. In our original lease purchase, we tried to buy as little as possible that needed a lot of work. Because we were buying foreclosed homes, we found that they needed a whole lot of work. The buyer had to submit their good faith deposit and had to sign a purchase agreement when they bought the house. And the sale price was included in the purchase agreement. So they knew from the get-go what the house was going to cost. Our lease agreement, our program right now is structured as according to the home was up to three years to qualify; leases are written in one year formats so there's an opportunity to check the clients and make sure things are going well. One of the things we're able to do because of NSP funding is we're able to set aside maintenance reserve. And even though we did extensive remodeling in some of these houses, we've had some interesting things turn up and we've had the funds to fix them. Now, our clients are required to handle all basic maintenance. They have to take care of the yard, the shrubs, the grass, broken 8

9 windows; fixing -- if they make a hole in the wall, they fix it. So they have a lot of responsibility in it. Now, we have to return program income to the state fortunately on an annual basis because it's constantly shifting. So at the end of the -- our fiscal year, we will return all program income to the state and we can do a mortgage for the client when they transition that we can have 50 percent of NSP funds in the house as a second mortgage. Okay. I'm going to turn it over to Keysha. And let me get her set up. We're changing seats. I have better a computer screen than she does. Keysha Cuyler: Hello, everyone. I'm Keysha Cuyler, director of Homeownership Education and Counseling. And in the selection of the lease purchase client, the requirement for purchasing including the cash and income level we're required a deposit at time of CVC's rental site contract -- $500 per client at or under 50 percent AMI and $1,000 for clients over the 50 percent AMI. Now, the income level we have at or under 120 percent AMI and then 38 percent of those were restricted to low income. So I have 38 percent of the 50 of the low AMI. On the credit, we looked at a minimum of a mid-score of 575 for the mid-score. Now, this is when the credit mid-score was at 620 when all they needed was a 620 to get a loan. So we were looking at 575. We looked at debt to ratio and I reviewed that with the in-house lender. And under that it was really a case by case scenario, looking at any liens or judgments that they had on them, looking at that what was actually on the credit. So our in-house lender and I, when it came to that point, we really studied the credit report a lot together to see if he thought that it would be okay in three years. Didn't want to put any stress on the client to try to pay off those things because that can cause people to drop out of the program. So when I looked at their income, even though they're approved under gross, we took their net and put it into the budget and showed them what money they actually had to pay off these items to get creditworthy. And a lot of times, a lot of people didn't want to be under that stress and we don't want to put that stress on them. Bankruptcies had to be discharged for at least a year, no foreclosures, and current on rent for at least 12 months. So a lot of the requirements were done under homebuyer under requirements that if you were purchasing a home with a little bit of leniency. Now, under the leasing period for counseling, the first thing that I require the clients to do was to take the financial fitness. Now, this was before they were even selected for our lease purchase. Because that's where I see if the client is even serious enough about it. If they're willing to come to a class on Saturday to find out how to budget and view their credit report, then that's the first step in showing how serious they are. During -- I don't know. I think you guys, a lot of you have your model under the developer first. You already have the home; e didn't. So during the period that the home was in rehab, we started the one-on-one counseling to get them used to meeting with a housing counselor once a month or every two months, depending on the case. 9

10 Once they're ready for the home purchase, then we do the home buyer education. They talk to the counselor on the phone to see if everything is still on track. I have ran into some hiccups with the economy. I've had someone lose their job so we just know that's going to take him a little longer. He has a job and we'll assist in helping him find a job. And he has a job so we just know it's going to take a little longer. With the post-purchase counseling, we're still working on trying to get people to come to that. I'm taking suggestions on that. Some people at the [inaudible] they purchase the house so we're trying to get them to come in and learn how to do home maintenance and that's something that we're currently working on. During the period of going through all of this, we did learn a lot. I know I learned a lot, some of the adjustments that we had to make we had to deal with. It was difficult in purchasing houses from services. And the quality of the houses, as Donna mentioned, trying to find foreclosed homes that didn't need a lot of work, it was difficult in that. We had difficulty in finding properties in the retired census track. Just the cost of the foreclosure, foreclosure rates; there were certain areas that were higher than others and we had to focus on those areas. And it was difficult finding houses that didn't need a lot of work in those areas. We had them -- sometimes the four rules had solidified, so there was constant change. So I think you guys are really getting a jump start from where we started from. We had a lot of rules change throughout our process, but it was a great learning experience. Because we had some new [inaudible] due to our program requirements -- [inaudible] -- we had people in the pastime that ultimately had to be removed. During the beginning of the process, we were building a pipeline of clients. And when I got in there and looked at some of the clients, we realized that those clients really didn't need to be in the lease purchase program. But it was something that we were able to adjust, and like I said, just a great learning experience. Another thing, since we have the clients in the lease purchase program and funds are being cut, we had to find a way to come up with them paying the closing costs. So we did find an IBA here in Kentucky that's offered in Fayette County in Lexington where we had our NSP lease purchase. And what we are doing, that money that Donna was talking that's over the fair market rent value, we're using that and putting that into an IBA account for the client and they designate that for homeownership. So when they're ready to purchase the home, they can put up the $2,000 in there and get a $2 match for every dollar. So that ends up with $6,000 at the end of the lease purchase period to help them pay the closing costs. And that's a great incentive as well, if you can find a program like that to help them with their down payment money. That's a great incentive for them to stay in the program and to be serious about working on their credit. Dave, that's all I have. David Cramer: Okay. Let's see if there's questions, then. Donna Majors: So Dave, we have an expert on the line. I saw Ann Cheney had come on the line and she was the original writer of our NSP program. So she may have something to add. Not the 10

11 NSP was under the lease purchase, but she sure recognized it when we sent it in on our application. Kent Buhl: Shall I unmute Ann? Donna Major: Only if Ann wants -- has anything to add. Kent Buhl: Okay. Ann, if you have anything to add, just click your "raise hand" button. Otherwise, we will keep you somewhat anonymous. Donna Major: I won't make her do it. But if any of you have any problems with your PJs, they really need to talk to our department of local government because they understand lease purchase. Kent Buhl: We do have a question here from Tayoni again. And let me unmute Tayoni. Hello? Q: Hi. Okay. Again, I'm with the Atlanta Neighborhood Development Partnership. We have a small lease purchase program where we've already acquired the properties. We're getting ready to expand to properties that we've acquired and renovated in the NSP program in various jurisdictions that perhaps have not sold as quickly as some of the other properties in inventory. And in our small pilot program we've had a hard time getting residents to be consistent about participating in their one-on-one training. We have a monthly one-on-one homebuyer training component for our residents. And we do partner actually with third parties that are HUD approved housing counseling agents purchasing from other sort of system nonprofits in our area. Do you have any suggestions on how to enforce or encourage participation with our residents? Donna Major: Are they already in the home? Or are these people that you're putting into your pipeline for a possible lease purchase client? Q: These are people that are already in the home. And they started off just -- Donna Major: I've had that same issue with a couple of people, and really it's -- you feel like a babysitter on some level. Instead of having them come in all the time because on a monthly schedule I found that having people come in every month may have been a little bit demanding for them. So I have gone down to doing phone calls and checking in on them over the phone. So that's one way that I have -- I found that makes -- has made the participation better and I can keep up with them. Instead of requiring them to come in, just do a monthly phone call to check in because sometimes a lot of things don't change within that month. Now, I don't know what you're doing under your -- with the one-on-one counseling each month, but I found that a lot of things weren't changing for me every month. Q: Yeah. Correct. 11

12 Donna Major: Yeah. So the follow-up phone calls made it easier for me and I could ask them has anything changed, what's going on in the household. If they say that something has happened, something's different, then we'll set for them to come in and we can meet and figure out what's going on and redo our action plan. But it took a whole lot for me. Q: Okay. Thank you. David Cramer: If I could just add, Kent, a couple of comments. One is in the CVC model, the counseling is in-house. And I think because it's in-house, there is more incentive to make the program work as a lease purchase program. When one has to partner with a counseling agency, I find that to be because it's one step removed, a little bit more difficult although it can work. The issue is how the counseling agency is set up and understands the lease purchase program and how different it is from their normal homeownership program. So there might be some tweaking there in terms of how the counseling agency is working with ANDP. Q: Okay. Thank you. Donna Major: Dave, I think you're exactly right because we have one client that really doesn't want to talk to Keysha, but we have an employee on staff that he'll always talk to. When we need to check with him, we have a different employee call him. And you can do that in-house because you have the flexibility to do those types of things, whereas you don't if you're outsourcing it. Kent Buhl: So Ann Cheney did raise her hand. So let me unmute here. Hi, Ann. Q: Hello. How are you today? I guess I just wanted to clarify a couple of things. CVC I doing a great job with its lease purchase program. It does require a lot of willingness by the participating jurisdiction or whomever. A program that actually is workable on both ends; one form the funding agency perspective to make sure that the program adheres to all the applicable regulations, but that you work within those to the maximum extent that's feasible to provide that housing partner with the greatest flexibility to get a good tenant in that house the first time around because the ultimate goal is to convert that unit to homeownership. And if it's done improperly, it's a nightmare, fraught with landmines for everyone concerned. And one of the things that I did want to note -- and we work very close with Community Ventures to do this -- was to make sure that when you have a prospective lease purchase client, you have to get that moving notice to them. Because if you evict that client for anything other than cause, you're apt to trigger relocation requirements, because it's a programmatic noncompliance as opposed to eviction for cause. That's a pretty important step in the process. And just sort of to wrap up, I guess, I'm going to join Donna little bit here. For better or for worse, I actually had the opportunity to comment on the state's action plan for the NSP program and that was the point at which the state asked if I were interested in this program. And I'm still debating whether or not that yes was a good answer or a bad answer. Donna Cramer: So are we, Ann. Yeah, it's working really well. It works better under NSP than it worked before. 12

13 Q: It does. And I understand that and I think maybe I even said this on a webinar last week that I expect a number of the state units to convert to homeownership because of the challenges in first mortgage financing. That's not an automatic default so much as it is a recognition of some standard changes in marketplace. Folks that are credit worthy and mortgage ready, at this point, many of them are gun-shy about purchasing homes. And folks that -- exactly in the case that Donna gave who were otherwise credit worthy or would've been at a 575 jumping up to a 620. We had a lot of folks in the pipeline that when the secondary market underwriting criteria changed were no longer mortgage ready. And providing folks that have worked very hard and very diligent an opportunity to cheap homeownership through lease purchase is certainly a good way to accomplish the purposes of NSP, which are to get houses back into occupancy, regardless whether that be lease purchase, rental, or home ownership. Donna Major: Thank you, Ann. Kent Buhl: Thank you, Ann. Appreciate that. Donna Major: And she is the expert. If anybody wants to know what our program looks like, I'll send you Ann's original design. And Ann, if you had not understood the program when we applied for it, I mean, no telling what kind of heartache we would've gone through to try and do some lease purchase units. I think the PJ understanding it and being committed to it is critical. Kent Buhl: We do have a couple more questions here that we can take and then we'll move on to Bill Brett of Columbus Housing Partnership. But let's first go to Dianne Hart [ph]. Hi, Dianne. Where are you from? Q: I'm calling from Tampa, Florida, East Tampa Business and Civic Association. And hi to all my classmates. We just finished training with Dave Cramer. My question is how do you deal with clients who are continuously late? I only have one that's late every single month on his lease purchase. Donna Major: Well, we ACH all of our payments. We set all our lease purchase up on ACH. Now, sometimes we have had a couple that the money wasn't there. But it's really -- I'm fortunate to say that we haven't run into that problem. We ran into account number changing and things like that, but setting it up on an ACH seems to do the best to counteract those late payments, if you are able to. Q: Okay. Well, I can ask my housing -- city of Tampa and see what they say; see if they'll allow us to do it. Thank you very much. Donna Major: You're welcome. Kent Buhl: Thanks, Dianne. And one final question here from Bob Jones and then we'll move on. Hi, Bob. 13

14 Q: This is Bob Jones, city of Springfield, Missouri. We're an NSP1 recipient. We have about 20 houses that are partly rehabbed and we're looking at instead of selling them doing the lease purchase. How do you handle -- I know some of the earlier discussion talked about the $500 application fee and $1,000 application fee. Is that also a security or cleaning deposit? And have they had problems? They said something about 15 percent of them don't roll over in purchase. When they leave, the house is trashed. And do they allow pets? Donna Major: Okay. Let me start with the pets. We don't prohibit pets. Remember, we have to buy the property. The client actually picks out the property. So before we -- when we're getting ready to do the purchase contract on that, they have to put their skin in the game that point, in what we call pre-purchase agreement. They put in their $500 or their $1,000. Now, that would go towards a deposit. For example, we have had one young lady that decided lease purchase wasn't for her and she did move out. The first thing our property management people do is they go in, they check the house completely, and any repairs that has to be made beyond some normal wear and tear, simple wear and tear is taken first out of that deposit they made. If we should get one that trashes it and that $500 or $1,000 doesn't cover it, then we go into the funds that we have been setting aside for them. Now, our program does not -- we do not keep those funds if they don't go on to homeownership. We will return that, but only after that house is in perfect condition again. Bob Jones: Thank you. Kent Buhl: Thank you, Bob. And at this point -- good questions, everyone. Thanks. Keep those coming. We'll break again for questions after we hear from Bill Brett of Columbus Housing Partnership. Hi, Bill. David Cramer: And again, if I could just give a brief introduction. Bill comes to us as a veteran of asset management, primarily with Columbus Housing Partnership which has a huge portfolio. But also I should note that Bill does training at the Neighbor Works Training Institute in asset management and actually does a course in scattered site property management. So he comes at it from a practitioner's perspective as well as someone who trains on this. So very grateful to have Bill join us. So take it from there, Bill. Bill Brett: Thank you very much, David. Thank you, Kent. Hello, fellow attendees. Yeah, Columbus Housing Partnership is based in Columbus, Ohio. I'll get my little state political announcement done. We have about 2,000 rental units of which about 400 of them are scattered site, primarily single family homes. We've been in that arena -- most of them have been financed through the low income housing tax credit program. And we've been in that arena beginning over 15 years ago. We have some that are just coming to their expiration or their 15 year compliance period. So those that were lease option, tax credit 14

15 deals now we're working through preparing the buyers for ownership financially and credit counseling, etc. So we're just in the process of going through all that. But at CHP, we have really four lines of credit. We have home sales, which touches on a lot of the similarities of what you folks are experiencing. We also have a rental living department which gets into a designed rental living. We have a housing advisor center that gets into foreclosure prevention and homebuyer education and credit counseling and that sort of thing. And we have a community life or resident services line of business as well. And it's interesting as time goes on to see how all those different lines of businesses come together to interact. For example, in our rental living side, we have our development folks go out and put the planned rental property together. And at asset management, we've begun to work in the last few years closer and closer together with that rental living group to help them from a design standpoint of a product and what we want as a rental product. So as our homes for sale division has emerged through with the NSP funds and some of those things, we chat with us that okay, if this house doesn t sale, what should we be looking at from a rental standpoint. You know, typically, in a house, you would put carpet in the living area and carpet up the stairs and in the bedrooms perhaps. And in a rental portfolio, we put a wood lookalike-type product called Velour from Home Depot that looks like wooden plank material in the living area. They have one that looks like slate tile that we put in the kitchens and the bathrooms. And what we find is it's probably about twice the cost to buy it and install, but in terms of maintaining, we don't have to replace it every three to five years like you would in a typical rental product. So in some of those homes that are initially intended for sale but are in perhaps a neighborhood or an area that the sale is certainly not guaranteed or something that might happen in the future, we've been putting that product in so that if it does become a rental, it'll help us to maintain the -- keep our maintenance cost down. And it's an attractive product, too. So we're actually getting some folks that are interested in going with that versus carpet in the homes that they're purchasing. You know, the tough part with scattered site is that it's not like your traditional apartment communities where you have an office building that's surrounded by 50 or 100 or 200 apartment units. As a manager in that type of a community, you can pull in and drive around the site and in about 15, 20 minutes kind of get a good feel for what went on the night before and is there any damage or did they have a party again over in the corner building. When you get into scattered sites and you're managing it with 400 rental units, if we wanted to drive by every one of those units, it'd probably take us a week to do that. So when you're looking at how to keep your eye on that product and maintain it, it's a lot more labor intensive and therefore more costly. I'll talk a little bit more about that in a little bit. New market tax credits in single family scattered sites, we've been fortunate in that anything that we build using the new market tax credits and cupping with other forms of financing that we've been able to attract a buyer because the incentives are there. 15

16 Kent Buhl: Bill, this is Kent. Can I interrupt for a second? Bill Brett: Sure. Kent Buhl: Are you able to advance your slides? Bill Brett: Yes. Kent Buhl: Okay. Bill Brett: Thank you. Kent Buhl: There you go. Bill Brett: Sometimes I engage the mouse and the brain doesn't follow. So thank you, Kent. Kent Buhl: No worries. Bill Brett: Okay. So the new market tax credit single family scattered. We haven't had to get into that a whole lot as I mentioned, but from a product design standpoint and looking ahead, there's been definitely interaction between the various groups. Near market rate downtown condos right before the housing market took a tank, we made the decision to get into some -- convert a building near our headquarters into condos. And after trying to sell those, construction completed right about the peak of the housing market and so sales weren't going. They're talking about 18 units that weren't going where -- the way we anticipated. So we've actually converted some of those to lease options and have those in our portfolio, the rental side of it. As I mentioned earlier, majority of our 400 units are 15-year low income tax credit units that are coming into their 15-year compliance period, and then the end of this year and every year of the next couple of years. So I mentioned some of the -- working with construction and design on some of the different features. You know, the operational side of it, as we're talking to the different groups and particularly in the courses I teach, there's a number of folks that are in the course that it's a planned program. We plan to get into rental housing. I would say they're probably outnumbered by three or four to one for the folks that are, like, well, it wasn't our intention; we just ended up in the rental game. And that short term of time and weighing what happens if this doesn't sell? Because getting into the management side of it, it's tough; it's tricky. There's a lot of folks that can do that well internally if there's a handful of units and they're close to their central offices. If they're not close or if they really don't have anybody that understands that game, then that can be the downfall on some of the organizations. The short-term balance of managing it and encouraging ownership, it takes a lot of coaching. We've looked into -- and just brought aboard a housing coach that we really don't want to call it a salesperson, but you mentioned how do you keep the residents coming to the classes. Because 16

17 we have -- even with our 15-year tax credit, we have an internal maintenance and external maintenance and a landscape class that they're required to attend in the first three years of their 15-year period. Then they're required to attend them again through the course of their 10-year in the house as well. So this housing coach has helped us to make sure that they're taking the classes. They're staying on top of things; talks to them about rentals. They work closely with our housing counseling folks on the counseling -- one-on-one counseling sessions, coordinating them. They work with them on the high -- homebuyer education, making sure that they've attended the classes and are thinking about those sorts of things. So that encouraging doesn't just happen on its own. You have to have somebody that can take the time and the effort to follow through with that. Even with short-term, it's still an asset that has to be maintained. It's still a matter of keeping your eye on it and making sure that the property is being maintained and encourage the residents to take those steps that they're required in order to move into that homeownership mode. Special challenges of scattered site. You know, there is no on-site manager. There's, again, that challenge of we ask our -- we have a third party management company that manages our 400 units and we ask them to at least drive by the property once a week. And not just drive by it, but the front, the back, make sure that things are being maintained the way they should be. It is a different type of property management. It's totally different, again, than the manager that can just drive to the property and in 10 minutes understand what's going on. It's training the maintenance staff that if they're on a work order at this unit and they see that we own a house across the street or they pass one along the way that if they see something, point it out, phone it in, get a work order, get it taken care of it. With scattered site, reducing windshield time is critical where you don't want a resident calling in saying my blind is broken. And the maintenance guy gets in his vehicle, drives over, measures the blind, goes to Home Depot, stops for a cup of coffee on the way, gets to Home Depot, doesn't quite have the blind they need; goes back to the house to make sure that the one that he can get will fit it. So the windshield time is critical. Our management companies have a database on each house so that when a work order is phoned in, they can pull up the database, they have the measurements of every window. They have the manufacturer and the model number of every refrigerator and stove. They have the measurement of every room for carpet or tile so that when a work order is phoned in, they don't have to send somebody there to measure. They've got it all on their database so that they can put the parts in a vehicle the night before and send somebody out the next day to do the work order because that windshield time will actually kill you. The no uniform equipment, faucets and that sort of thing, it creates a challenge if you're trying to cut down that windshield time. It's how do you inventory those parts so that if it's a Delta or Moan faucet that you've got the replacement parts so the guy's not taking this trip back and forth to Home Depot. We've gone in some cases and actually changed out faucets so that they're all 17

18 alike so that -- and again, that's something for the design standpoint when you're looking at homes for sale that might turn to rentals. In our rental market, we've tried to set a spec so that the faucets are the same. So if the home sells, it's got a nice faucet in it. If it doesn't sell and becomes a rental, it's the same faucet that we have in our rental homes so when we go to maintain it, we know what's in there and we can inventory the parts. So there's some cost benefit analysis that's done for that to make sure that we're being efficient. You know, creating the eyes and ears of the unit are some of the things we've already discussed. An interesting byproduct of scattered housing is that you have a house that you've decided not to sell but to put it up for rent. You put a sign out front. Does that sign really say for rent? Or does it say "free copper, free appliances, come break into me because there's nobody at home?" So it gets into a whole different ballgame on how do you market that product. And how do you keep that product from getting vandalized sometimes in some less wonderful neighborhoods? How do you rent that product? Do you have somebody call into a central office? Do you have the prospective renter meet you at the office and then follow you over? Or do you put them in your car, which I hope people aren't doing? Do you meet them at the house? How long do you have to sit there and wait? Is it okay for one person to go by themselves? Or do you need to have a team go over to the house for safety purposes? So there's a lot of things you have to consider when you're thinking about the different aspects of managing the scattered sites. You know, the handling lease purchasers differently in regards to maintenance. We have the classes, we teach the folks how to maintain it. Some of them do a very good job of it and some of them don't do as well and for various reasons. Either they just don't get it or there may not be handy. There's other folks that -- and maybe a single mom with kids. They don't have the time to get out and do some of the maintenance that they would like to do. So how do you deal with that? Do you do it for them and charge them for it? Can they afford to do it or not do it? So those are some of the different aspects that you have to think about when you're thinking about jumping into the program. And I believe that's all for now. Any questions? Kent Buhl: Thank you, Bill. Yeah, we do have -- Q: Hello? Hi. I had a question regarding the rehab aspect of your program. If you just have any tips or suggestions on managing a large scale single family scattered site rehab program. We've had to sort of grapple with some of those issues over the last two years as we've gotten a large number of units all in a very short period of time by virtue of NSP contracts. Also related to that, I was curious as to whether your organization as an original contractor yourself. And then thirdly related if there's any special software or other tools that you use to track the status of acquisition rehab. And you did mention -- I heard the database that the property management company uses to help check specs of products in each of your houses. 18