7 Indicators Your Property Requires Market Alignment

Quick Guide: Market Alignment

• Identify indicators that your property requires market alignment
• Understand how a phased RCS approach can help capture missed revenue
• Begin with a preliminary rent assessment before your next Section 8 contract renewal
• Explore SAFMR analysis and non-shelter services valuation opportunities

The difference between optimal and suboptimal rents in Section 8 properties can amount to hundreds of thousands of dollars over a contract period. Yet many owners and managers don't realize they're leaving significant revenue on the table during each Section 8 contract renewal cycle. These indicators help you identify when your property requires market alignment to achieve its full revenue potential. Based on our analysis of thousands of properties nationwide, here are the seven most reliable warning signs that your Section 8 property may require market alignment.

1. Your Property Has Consistently Applied Only Baseline OCAF

The Operating Cost Adjustment Factor (OCAF) is designed to adjust rents based on changes in operating expenses, such as utilities, insurance and property taxes. It does not account for shifts in market rental rates. If your property has only received OCAF increases for multiple renewal cycles, especially in areas experiencing significant market rent growth, there's a high probability you've fallen behind market rates. A comprehensive HUD rent analysis can reveal this gap.

2. Your Contract Rents Are at Least 10% Below Fair Market Rent (FMR)

HUD’s Fair Market Rents (FMRs) serve as a benchmark for determining maximum allowable rents in the Section 8 program. If your property’s contract rents are at or below 90% of the applicable FMRs, it’s a strong indicator that your units may be under-rented. A below FMR assessment can quantify the potential adjustment opportunity.

In metropolitan areas, HUD provides Small Area Fair Market Rents (SAFMRs), which offer rent estimates at the ZIP code level. This granularity allows for a more accurate reflection of local market conditions. Comparing your property’s rents to the relevant SAFMRs can reveal discrepancies that may warrant a rent adjustment. A thorough SAFMR analysis can identify opportunities for market alignment.

Action Step: Utilize HUD’s FMR & SAFMR Lookup Tool to find the current FMR/SAFMRs for your property’s zip code. Compare these figures to your existing contract rents for each unit type. A discrepancy of more than 10% suggests a need for a comprehensive review to explore potential adjustments.

3. Your Pricing Model Overlooks Non-Shelter Services

HUD's updated Section 8 Renewal Policy Guidebook, effective May 1, 2023, allows for the valuation of certain non-shelter services in Rent Comparability Studies (RCS). These services, when consistently provided and included in the rent, can justify rent increases. Non-shelter services valuation is a critical component of a complete Rent Comparability Study. Examples include:

• Security services and monitoring
• Internet or broadband services (internet service valuation HUD has specific guidelines)
• Community activities and programming
• Shuttle or transportation services
• Health and wellness programs
• Utilities or energy-efficiency enhancements

To qualify for valuation, services must be regularly and reliably available to tenants. Failing to document and value these services in your Section 8 RCS may result in missed opportunities for HUD-approved rent increases.

4. Your Last RCS Was Completed by a Non-Specialist

Conducting a HUD Rent Comparability Study (RCS) requires specialized expertise, not only in local rental markets but also in the intricate compliance requirements outlined in HUD’s Section 8 Renewal Policy Guidebook, particularly Chapter 9. Appraisers lacking specific experience with HUD Chapter 9 compliance may inadvertently overlook critical factors, leading to undervalued rent assessments and missed revenue opportunities.

HUD mandates that RCS appraisers adhere to stringent guidelines, including the selection of appropriate comparables, accurate adjustments for differences, and comprehensive documentation. Non-specialists may fail to fully capture the value of amenities, services, or recent property enhancements, resulting in rent conclusions that do not reflect the property’s true market potential.

5. Your Area's Market Dynamics Haven't Been Captured in Your Current RCS

Significant changes in your property's surrounding neighborhood can substantially impact its market rent potential. If your last Rent Comparability Study (RCS) was conducted before such developments, your contract rents may no longer reflect the current market conditions. HUD's guidelines emphasize the importance of considering neighborhood characteristics when determining market rents.

Key neighborhood changes that may warrant a reassessment include:

• Introduction of new retail, dining, or commercial developments within close proximity
• Improved school ratings or the establishment of new educational institutions
• Enhanced public transportation access
• Development of new parks, trails, or recreational amenities
• Arrival or expansion of major employers in the area

Regularly monitoring neighborhood developments and conducting timely RCS updates can help ensure your property's rents remain aligned with its true market potential and maximize HUD rent increase opportunities.

6. Comparable Section 8 Properties Have Higher Approved Rents

If similar Section 8 properties in your area – those with comparable unit sizes, amenities and property conditions – have recently secured higher approved rents, it’s a strong indication that your property may be a candidate for market alignment. This disparity often arises when other property owners have conducted recent Rent Comparability Studies (RCS) to align their rents with current market conditions, while yours may be based on outdated assessments.

7. You've Recently Added Amenities Without Updating Your RCS

Investments in property amenities enhance resident experience and can significantly increase your property's market rent potential. However, unless these improvements are documented in a current Rent Comparability Study (RCS), they won't be reflected in your contract rents.

HUD's updated Section 8 Renewal Policy Guidebook emphasizes the importance of accurately valuing amenities and services in the RCS. According to the guidebook, appraisers must consider the presence of amenities and services when determining market rents.

Common enhancements that may warrant a rent adjustment include:

• Renovated community rooms or shared spaces
• Upgraded security systems
• Improved internet infrastructure
• Enhanced common areas or exteriors

To ensure these improvements are recognized in your contract rents, it’s essential to update your RCS accordingly. This involves documenting the enhancements and demonstrating their value relative to comparable properties.

Action Step: Review any capital improvements made since your last RCS. If significant enhancements have been implemented, consult with a qualified appraiser to update your HUD Rent Comparability Study, ensuring your contract rents accurately reflect your property's current value.

The Cost of Waiting

Consider This Case: A national non-profit organization owned a 75-unit elderly Section 8 property on the West Coast. Despite operating in a high-growth ZIP code with substantial new multifamily development, the owner relied on routine OCAF increases and assumed rents were close to market levels.

For years, they postponed conducting a Rent Comparability Study (RCS), unaware that their contract rents were falling significantly behind. When they finally commissioned a full RCS, they discovered their rents were 31% below market and well below the applicable Small Area Fair Market Rents (SAFMRs).

The RCS identified over $190,000 in additional annual rent potential, but by then, the property had already missed out on multiple years of unrealized revenue. The delay in proactively assessing their rent alignment resulted in a substantial financial opportunity that could never be recaptured.

Key Takeaway: Delaying an RCS—especially in high-demand markets—can lead to significant and permanent revenue loss. A preliminary rent assessment could have flagged the issue earlier, allowing the owner to act sooner and maximize returns over a longer period. This is particularly important during acquisition due diligence to ensure proper valuation.

Taking Action: Your Section 8 Rent Reality Check

If any of these warning signs sound familiar, the good news is that action doesn't always require a full RCS right away. We recommend starting with a preliminary Section 8 rent assessment to estimate whether significant market alignment potential exists.

With just a few data points – your current rents, ZIP code, and service offerings, we can help you determine whether a phased RCS approach could unlock substantial additional revenue.

Request a Preliminary Rent Assessment Today