HUD’s Asset Control Area (ACA) program is a partnership with communities to use FHA foreclosed inventory to strengthen neighborhoods. Units are acquired at a 50 percent discount and sold to low and moderate income homeowners.

Communities struggling with high levels of FHA foreclosures may want to enroll in HUD’s Asset Control Area (ACA) program. ACA allows approved nonprofit organizations and local governments to buy foreclosed properties at a 50 percent discount. Once renovated, the properties must be sold to homeowners earning up to 115 percent of area median income. The nonprofit recoups its overhead and developer fee from the difference between the sale price and its costs, though it is limited to a maximum of 15% of development costs. The program can be a powerful tool to build homeownership, upgrade the housing stock, and prevent foreclosed properties from being sold to investors. Managed correctly, it can easily cover expenses and provide a steady revenue stream. Operating within HUD’s program guidelines is tricky, however, and requires detailed knowledge of neighborhoods, local real estate markets, and scattered site single-family housing rehabilitation.

David Sann, Director of Housing Development at Baltimore’s St. Ambrose Housing Aid Center, has the ACA program down to a science. “When you sign up for the ACA program HUD essentially draws a box around your target neighborhood” he explains. “You have to take every REO property within that box, no matter what its condition.” While the 50% discount may seem generous at the outset, properties needing substantial renovations can easily eat up that subsidy. The sale price is limited to the lower of 115 percent of total development costs or the after-rehab appraised value. Within that limit nonprofits must include all of their costs; rehab, insurance, fees, marketing, and their margin. The limit on buyers’ incomes restricts the market for the properties, and it can be challenging to find families who can meet the income requirements, have low debt loads, and whose credit is good. Properties that sit for months without a buyer eat into the profit margin. Mr. Sann sums it up this way; “HUD limits what you can earn, but not what you can lose.”

The key to success in ACA, Mr. Sann believes, is to choose the right neighborhood in the first place. HUD only offers ACA as an option in designated revitalization areas that are characterized by low homeownership, low income, and high FHA foreclosure rates. Within those areas, nonprofits can negotiate to serve census block groups that fit their profile. Mr. Sann’s recipe for ACA success has three key ingredients: the market for housing in the neighborhood, the price range, and consistency of housing type. Belair-Edison, in northeast Baltimore, is one of Mr. Sann’s favorite ACA neighborhoods, because it has all three of these in abundance. A neighborhood of modest brick 1920 -1950s era rowhouses, with Herring Run Park and other amenities nearby, Belair-Edison is attractive to buyers. Renovated homes there are likely to sell quickly, keeping carrying costs to a minimum.

The homes’ modest size make them affordable to low and moderate income buyers. Since buyers’ incomes are capped, it is critical that prices be low enough for them to qualify without additional subsidies. In addition, HUD’s ACA 50 percent discount is less valuable when the market is depressed. For example, if the fair market value after rehab is $60,000, and St. Ambrose acquires it for $30,000, that leaves only about $30,000 to do all of the necessary renovations, cover soft costs, and extract a developer fee. Absent significant subsidies, there is no way to make the numbers work in depressed neighborhoods.

ACA works best in “mid-range” neighborhoods with a solid housing demand, moderate (but not too depressed) prices, and a modest, uniform housing stock.

Finally, the uniformity of the housing stock makes it easier to project and manage renovation costs. When all the units have a similar footprint and floor plan there are few surprises in what they will need in order to bring them up to standards. This also allows St. Ambrose to work at a larger scale. Under ordinary circumstances Mr. Sann says he and his two staff could acquire, renovate and sell 50 houses annually through the ACA program. While picking the right neighborhood is essential, having the right staff may be just as critical. Mr. Sann, in addition to serving as the Director of Housing, is a licensed real estate broker with 13 years of development experience. Through their in-house Charm City Realty brokerage St. Ambrose has access to the multiple listing service, which allows Mr. Sann to do extensive market research. Mr. Sann’s construction manager is also an architect, which lowers costs and improves project quality. The third staffperson, the Marketing Coordinator, is also a licensed realtor with 17 years of experience working with homeowners in Baltimore housing markets.

Mr. Sann admits that the ACA program has been a little more challenging in the current market. Baltimore did not see a huge run-up in housing prices, and its prices have adjusted downwards by only 10-15%. However, in recent years subprime borrowers did bypass FHA in favor of “exotic” mortgage instruments with fewer restrictions. Since use of FHA insurance was down generally, there have been fewer foreclosures. This year, Mr. Sann estimates that his staff of three will do only 35 units, which is below their capacity. Now that the exotic mortgages are no longer available Mr. Sann believes there will be renewed interest in FHA and this problem will go away.

A bigger challenge is understanding where the market is going, and pricing units accordingly. Nonprofits always struggle with the vagaries of appraisals, which may use the wrong comparables, not properly account for the cost of needed repairs, or give insufficient value to improvements. In a declining market, however, St. Ambrose’s risk is that it will acquire properties at a cost that is higher than what it can afford to renovate and sell them for eight months later. This eats into profit margins which were not robust to begin with. Again, Mr. Sann expects this will be sorted out as the market stabilizes.

Managed carefully, Mr. Sann believes that the ACA program is a great tool for strengthening neighborhoods. Homes St. Ambrose renovates have new or updated kitchens, baths, heating systems, electric, plumbing, roofs, refinished hardwood floors or new wall-to-wall carpet, ceiling fans throughout the house and/or central air conditioning (sometimes both). Energy efficiency is improved through new storm doors, new replacement windows, and new Energy Star appliances: refrigerator, stove, built-in microwave, washer and dryer. Reasonably priced and tastefully finished, the homes are sold to low and moderate income buyers (averaging about 89% of area median.) Solid homes, sold to buyers who have completed homebuyer education workshops, means that the homeowners will be more successful over the long term. That’s good for the families, and good for neighborhoods as well.

Best Practices

• HUD’s ACA program is not a “one size fits all” fix for any troubled neighborhoods. Rather, it works best in neighborhoods with a modest housing stock, where prices are not too depressed and there are homeowners who want to live there. Mr. Sann and his team have figured out the formula that works best in Baltimore, and apply that very carefully.
• Each member of St. Ambrose’s Housing Development team is able to play more than one role, which reduces cost, improves efficiencies, and strengthens their ability to analyze and respond to changing market conditions.