Rough Transcript of the Video
How are you today? Welcome to my channel inside real estate. Today we're going to talk about affordable housing. When I talk about affordable housing in this video, I'm not talking about housing that is merely affordable. I'm actually talking about the legal definition of affordable housing. In the simplest way, affordable housing is housing that isn't sold according to market rates.
Normally, when you have a house and you put it on the market, your goal is to get whatever price the market will bear, the highest price possible. Affordable housing isn't set up that way at all. With affordable housing, when it is built, a spreadsheet is created. They figure out what they should charge for it, and it's usually a rate that's much lower than what the market rate would be. That's what makes it affordable. There can be a lot of variances in this. Something that's affordable in a wealthy town is going to be quite a bit more expensive than something that's affordable in a town that is less wealthy or where the real estate is less expensive. Affordable is really relative to the community that the property is built in. You can have very expensive, affordable properties. They're just affordable relative to everything else that's selling in that town.
How affordable is this stuff? It's not unusual to see this trade somewhere between 20 to as much as 40 percent less than what the unit or house might get relative to its price at market, like other property. While initially, that sounds like a good deal, and it is. Your entry cost is very low. You do need to remember that when you sell it, you're going to be selling it at the same discount. That doesn't mean you're going to be selling at the same price. As the town goes up in value, your unit, your affordable unit, is going to go up in value, but you're not going to get an opportunity to capture market value, except in rare instances where the property no longer qualifies as affordable housing. That's a rare case, though, so I'm not going to talk about it too much in this video. I don't have a ton of time to do it.
The key things that you want to remember here are that affordable housing is very cheap relative to the town that it's in. It is not set at market price. The price is calculated on a spreadsheet and has a lot to do with where the house sold last, and how much the town has moved up since. The other things you need to know about this is that because it's not sold at market rates, there are lots and lots of people that want it. Let's initially talk about where this affordable housing came from, why it exists. At the end of this video, I'm going to talk a little bit about how you can buy one of these affordable units, and maybe you can't. If you can, I'm going to explain to you what's involved as a typical process for buying them.
Where do these affordables come from? Builders have known for a long time that if they buy a piece of land and put one house on it, they can make a certain amount of profit. If they put two houses or four houses on the same property, their margin, the amount of money that they can make, goes up quite a bit. Developers, as a general rule, are incentivized to put in what's called high-density housing. Basically, they're incentivized to put in as many units as they can on a small piece of land as possible because that increases their margin, that makes them make more money. Towns have zoning in place that specifically restricts how many units you can put on certain pieces of land. On top of that, it was very common for developers to go in there and buy land and say we want to do this with it, and for the towns to say no.
I'm sure that there were some other kinds of affordable housing, but affordable housing has a significant part of the market. It really started to take shape when Massachusetts passed its 40b laws. The 40b laws typically were an override to local zoning that allows developers to put in high-density housing in towns where there is not enough affordable housing or enough high-density housing, depending on how they're calculating it, regardless of what the town zoning actually says. It turns out that if you're going to apply for building permits this way, it's very expensive and time-consuming, but the developers use it as leverage against the town to get higher-density units put in place. The towns usually let them do that because they're going to lose if they go to the state. This way, they can sort of control a little bit more what actually gets built. You can't really stop the developer from doing high-density housing, unfortunately. Or, I shouldn't say unfortunately. But from the town's perspective, this is usually an unfortunate thing. For everyone else who needs housing and recognizes that there's not enough of it to go around, this is a good thing. The purpose of the law was to help create more housing, more housing options for people that live in Massachusetts, and for the most part, it works.
There is a condition, though. Usually, with the town's demand, is that the developer dedicate a certain number of units based on the project. If they put in 100 units, it's not uncommon for them to do 10 units that are affordable. If they want to take advantage of the 40b law, that's a condition of the 40b law. They have to set up these units that are going to be sold far below market rates. On the surface, this makes a lot of sense. By putting extra units on the property, the developer can make more money, but as part of making more money, he has to lose money on a few units, not too many, but a few, or make no money, in order for the affordable housing to be created. That's where it comes from. At the end of the day, most of the affordable housing that you'll see in Massachusetts is part of a larger community where it's off to the side or sometimes scattered throughout. Basically, it's part of a larger development, and it was decided between the developer and the town or the developer and the state how many units needed to be there and at what price they were going to be sold. That's how the affordables get created. Even though it sounds like a good idea, it's very important to remember that you're not getting in at a market price, and when you sell it, you're not going to get out at a market price. You're going to get out when you sell it at a price that is determined by the same spreadsheet that they used in order to determine the price when you bought it. This housing functions a little bit differently than market-rate housing. With market-rate housing, you can buy something that's beat up, put in some elbow equity, clean it up, fix it up, do some renovations, and you can make a profit on those renovations and build equity for when you sell the home later. Affordable housing doesn't really work that way because no matter what you do to the property, as a general rule, you can't sell it at market. You can't capture the benefit from doing that work.
In that way, it's just very important to remember that you're kind of stuck with riding the town. As the town goes up in value, your unit will too, so you do get to develop equity. At the end of the day, you can't really improve the house in any meaningful way in order to change the price. Generally, expansions and the other kinds of things that you could do with unregulated housing, market-rate housing, you just can't do it. That's an overview of affordables. Now, we're going to dive into how do I find them, and how do I buy them, and the difficulty with doing that. Finding them is relatively straightforward. There just aren't very many. If you take a look, you're not likely to find very many, especially if you're looking in a narrow area. Generally, I recommend to folks who are looking for this kind of product that they cast a pretty wide net, you know, six, seven, eight, nine towns to go look at the affordables. The reason is, even if you find an affordable, it may not be the right affordable for you. By that, I don't mean that you don't like it. By that, I mean, you won't qualify. In order to qualify for an affordable, typically the way it's done is the person who's buying it needs to be at a certain income level relative to the town. It's not uncommon for me to see that the person's income level needs to be between 80 percent and 85 percent of the town median. I'm not exactly sure where they get the town medium income. I'm pretty sure that they get it from the IRS, but I don't know for sure. There's a limit as to the amount of income that you can have, and they make adjustments based on your household size, based on the number of kids that you have, and the number of people in your household. From there, they have income limits for the number of people that can buy these houses. I would say 90 percent of the time. The people who call me about affordables simply don't qualify because they make too much money. These really are for people who are. Uh, not making sort of an average amount of money. I have to be making below average amount of money, but here's the tricky part. The tricky part is, you have to be making enough money to qualify for a mortgage on the place. So, in practice, your income needs to fall in this very small band between not making too much and not making too little. It's not just about income. There are other disqualifiers. If you have significant assets, like investments, or own other properties, you may not qualify for affordable housing. These programs are designed for people with limited financial resources. There are exceptions and variations in the process from town to town, and even from unit to unit, depending on the parameters set when the affordable housing was built. However, the key thing to understand is that your income must fall within a narrow band to qualify.
Despite the limited number of people who qualify, these units are so inexpensive relative to the market that they typically receive dozens of applications. When you file an application, it is similar to a rental application but with more paperwork. The town reviews all applications and often disqualifies many applicants due to excessive income or assets. The remaining qualified applicants form a small subset. Then, the town randomly selects a winner from this group. The price of an affordable unit is fixed by the town, not the market. You will know the exact price, but these units are typically very difficult to obtain.
If you've watched this far, you've likely learned about the origins of affordable housing, why it's not sold at market rate, and the general parameters for applying. Keep in mind that this is not a quick process. The town often markets these properties for an extended period to gather numerous applications. Even if you qualify, there's no guarantee you'll be selected. These units can be hard to find and hard to win, but if you succeed, it can be a great opportunity. If owning a house is your goal and you want to escape the rental market, this might be a viable option. If you want to know more, leave a comment, and we'll see if you might be a candidate."
It's gonna be hard to win, but if you do get in there, it could be a great deal.
