Housing Finance Commission - Tenant purchase options

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The federal Low-Income Housing Tax Credit (LIHTC) program encourages development of affordable rental housing. In Washington, the Housing Finance Commission manages the LIHTC program.

A few projects developed under LIHTC offer options for tenants to buy their homes, referred to as tenant purchase options. Such projects usually offer tenants the option to buy after the home has been available to rent for 15 years. Only 18 of the state’s nearly 1,300 LIHTC projects offer tenant purchase options; all but one are managed by tribal governments. Of the 18 projects, just six — with a combined total of 135 homes – had properties old enough to qualify for tenant purchase as of 2023.

Evictions at housing projects managed by the Nooksack Indian Tribe raised concerns about tenant purchase options and, more broadly, the LIHTC program managed by the commission. This audit examined the commission’s oversight of housing projects that offer tenant purchase options. It did not evaluate the Nooksack Housing Department’s decision to evict disenrolled tribal members living in LIHTC housing.

Read a two-page summary of the report.

Report Number 1035863 Report Credits

Key results

The audit found the tenant ownership option is little-known and largely misunderstood. It is not, as it has sometimes been called, a “rent-to-own” program. Though a property must be available to rent for 15 years to become eligible for the purchase option, tenants are not obliged to buy their homes. Nor are they automatically transferred from rental agreements to purchase contracts. Indeed, the legal path from renting to purchasing these homes appears quite complex.

The audit produced the following key findings:

  • In 2023, the tenant purchase option applied to 135 housing units
  • Nonetheless, the option for tenants to buy their homes has not yet been used
  • The state Housing Finance Commission followed federal and state laws concerning these projects
    • The audit did not find that the failure to deliver homeownership was the result of state management
    • However, the commission did not effectively monitor projects to ensure they were ready for tenant purchases

Background

Under the tenant purchase option, tenants are not obliged to buy the house they have been renting. Nor are homes automatically transferred from a rental agreement to a purchase contract. Tenant purchase options are thus different from lease-purchase (sometimes called “rent-to-own”) programs.

In addition, project owners are responsible for completing multiple steps before tenants can purchase their home, including:

  • Removing the financial partner from the project
  • Preparing tenants for homeownership
  • Resolving legal complexities for homes located on tribal lands, when applicable

For these reasons, it may take significantly longer than the initial 15 years before tenants actually take ownership of their homes if they are interested in doing so.

The audit report contains a primer that explains some of the additional complexities in tenant purchase option projects and how they differ from traditional homebuying or rent-to-own programs.

Commission met legal requirements

Federal and state laws place few requirements on the commission’s oversight of housing projects with tenant purchase options. The commission met those legal requirements related to tenant purchase options. It awarded points for tenant purchase in project applications for most of the audit period in accordance with its policies. Although the commission temporarily suspended application points for tenant purchase options during the 2023-24 application cycle, no projects expressed interest in using the option during that time.

Benefits of improved oversight

IRS oversight of the LIHTC program offers state agencies only minimal guidance for managing the program generally or tenant purchase options specifically. Although the commission met legal requirements, we found its monitoring activities were ineffective for ensuring project owners’ progress toward tenant purchases. For example, the commission did not follow its own plan for monitoring project owners’ progress in that area. For example, the commission did not ensure it received project updates throughout the required 15-year rental period of the projects.

Commission staff said they focused on compliance requirements that applied to all LIHTC projects and not specifically on tenant purchase outcomes, which affect relatively few projects. For example, managers said they prioritized making sure all homes were being rented and that all tenants met the program’s income requirements. Furthermore, they said they have few options to respond to project noncompliance beyond reporting it to the IRS.

The commission is also responsible for developing guidance to help project owners to implement tenant purchase options. Project owners we spoke with described a variety of challenges they faced in preparing for tenant home purchases. They felt program requirements were unclear about the actions they must take. They also said they would appreciate additional guidance that clarifies the commission’s expectations.

Views of tenants

The audit team met with focus groups of tenants at two housing developments to learn their views about the tenant purchase option program. We quote some of them in the audit report.

Tenants’ understanding of purchase options varied. A few thought they were simply renting a low-cost home. Most wanted more information about how the program worked to be confident about deciding to purchase. Their questions ranged from basic steps about purchasing under the option to concerns about title for the home and whether their children could inherit the house. Project owners are responsible for providing answers to these and many other questions: homeownership classes are common features of such projects.

Tenants were also aware they could face financial barriers to ownership. For example, tenants would need to source a downpayment and financing, just as any prospective home-buyer must do.

Despite these barriers to homeownership, LIHTC projects provide affordable rental housing to disadvantaged communities, even if tenants do not buy eligible homes. These income-restricted housing options directly benefit communities through increased housing supply and below-market rents.

Program intent lacks clarity

Auditors could find little information on the federal intent behind including a relatively small incentive for the ownership option in housing projects that otherwise focus on rental units. For that reason, we also concluded this tenant ownership option needs greater clarity – in communicating how it works, what tenants’ options are, and the goals of policy makers in offering it.

Recommendations

We made recommendations to the Housing Finance Commission to improve its monitoring of projects with tenant purchase options and to provide project owners clearer guidance. These recommendations seek to provide greater assurance that projects will fulfill the tenant purchase options they agreed to, and to improve communication about purchase options between the commission, project owners and tenants.