HB-3-3560 

CHAPTER 14: MANAGEMENT AND 

DISPOSAL OF REAL ESTATE OWNED PROPERTY 

14.1 INTRODUCTION 

When the Agency takes ownership of a project, adding the property to its inventory 

through liquidation proceedings, the project becomes real estate owned (REO). When the title 

transfers to the Agency, the property becomes an Agency asset. The Agency’s objectives in 

managing and selling its inventory of REO properties include: 

 Preserving affordable, decent, safe, and sanitary housing for tenants or potential 

tenants; 

 Maintaining the value of the housing project; 

 Protecting the Agency’s financial interests; 

 Ensuring that the properties comply with state and local code requirements and 

applicable environmental regulations; and 

14.2 OVERVIEW OF THE CHAPTER 

This chapter is divided into five sections. 

 Section 1 describes the management of custodial and REO property. It describes 

acceptable management methods; discusses issues related to taking possession of 

custodial and REO properties, such as disposing of nonsecurity property and paying 

taxes and insurance premiums; and explains requirements related to maintenance, 

environmental concerns, and other management issues. 

 Section 2 covers the disposition of REO property. It describes the methods for 

pricing and selling the properties and outlines procedures for accepting bids from 

potential purchasers. It also describes the standards the property must meet before 

being sold. 

 Section 3 describes the environmental requirements that must be fulfilled before 

selling an REO property. These include requirements related to flood and mudslide 

hazard areas, wetlands, coastal barrier resources systems, historic places, protective 

covenants and easements, underground storage tanks, and hazardous substances. 

 Section 4 outlines the procedures for processing and closing the sale of an REO 

property. These procedures are similar to the procedures for closing other Agency 

loans. This section also highlights some of the special considerations for REO 

properties. 

 Section 5 provides instructions on processing credit sales for non-program terms. 

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SECTION 1: MANAGEMENT OF CUSTODIAL AND REO PROPERTY 

14.3 OVERVIEW 

The Agency assumes management responsibility for two types of properties: custodial 

and REO. Custodial property is borrower-owned property that has been abandoned. REO is 

Agency-owned property to which the Agency has acquired title, either as a result of foreclosure 

or conveyance by deed in lieu of foreclosure. This section outlines the requirements for 

management of each type of property. 

Loan Servicers are responsible for ensuring that custodial and REO properties are 

appropriately managed and maintained. The goal of property management is to protect the 

tenants and the interests of the Government. Consequently, Agency efforts to secure and manage 

these properties are to begin immediately once the following occurs: 

 The property title is conveyed to the Agency; or 

 The Agency determines property is abandoned. 

14.4 MANAGEMENT METHODS AND CONTRACTS 

The Agency has the authority to contract with qualified management entities to perform 

the management activities discussed in this section. The extent of management is dependent on 

factors such as: 

 The nature of the project; 

 The project’s location; 

 The condition of the project; 

 Necessary maintenance; and 

 Availability of acceptable management entities. 

In some cases, the existing management agent can be maintained; in others, the Agency 

must hire a new management agent to provide all property management services on behalf of the 

Agency. 

A. Selecting a Management Contractor 

Management contractors are selected in accordance with Agency procurement 

procedures outlined in RD Instruction 2024-A. Alternative methods for selecting a 

management contractor may be established by the Agency if it is in the best interest of 

the Government. Alternative selection methods require advice from the Office of 

General Counsel (OGC). Prior to obtaining a management agent for custodial property, 

the Agency should determine if court approval is required. 

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B. Management Contract Requirements 

At a minimum, management contracts must: 

 Allow for properties to be added or removed from the contractor’s assignment, 

whenever necessary, such as when a property is taken into custody, acquired, or sold 

during the period of a contract; 

 Prohibit the contractor or associates of the contractor from performing repairs if the 

executed agreement calls for the contractor to provide detailed repair specifications; 

 Require the management agent to hold security deposits in trust and handle them in 

accordance with the tenant’s lease or occupancy agreement; and 

 Require compliance with environmental laws. 

The management agent must develop an Affirmative Fair Housing Marketing Plan 

(AFHMP), in accordance with RD Instruction 1901-E. The AFHMP must be submitted to 

the loan office. The AFHMP must receive written approval from the Civil Rights 

Coordinator in the Rural Development State Office. Form RD 1955-62, Request for 

Contract Services for Custodial/Inventory Property or Program Services is a sample 

statement of work for a project management contract. 

C. Management Costs 

The costs of management services related to REO property will be paid out of income 

generated by the housing project being managed. If income from the housing project is 

inadequate to pay for management services, Agency resources may be used to pay for 

management services. 

D. Project Funds 

When a property becomes REO, the Agency transmits operating and maintenance, 

reserve accounts, and escrow funds to the St. Louis Office. The former borrower’s 

account is credited for these amounts. If there is a surplus of funds, the St. Louis Office 

will forward a refund check payable to the former borrower. 

14.5 TAKING POSSESSION 

A. Taking Custodial Possession 

The Agency is authorized to take custody of security property when a borrower 

becomes incapacitated, dies, or has abandoned a security property. When the Field 

Office has attempted for more than 30 days and is unable to contact a borrower, the Loan 

Servicer must inspect the property to determine its status and attempt to locate and

contact the borrower. The Field Office should seek the advice of OGC in making its 

determination and recommendation.

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1. Determining Whether a Property Has Been Abandoned 

The determination that a property has been abandoned requires significant 

investigation and documentation. In addition to the actions described in this paragraph, 

Field Office Staff must follow any procedures required by state or local law in order to 

confirm the determination of abandonment and to take custodial possession. The Agency 

cannot act to obtain possession of a property as long as a lien holder has legal possession 

of the property, or the borrower or the lien holder has a right to lease proceeds. Field 

Office Staff cannot classify a property as “abandoned” prior to documenting attempts to: 

 Determine that there is no clear evidence of management presence at the project. For 

example, a site visit indicates that tenants are unable to contact borrower or property 

manager regarding repairs or rent collection, the project has fallen into disrepair due 

to a total lack of maintenance activities, or the Loan Servicer cannot locate the 

borrower or property manager; 

 Locate the borrower through sources including, but not limited to, tenants, the postal 

service, utility companies, business associates, relatives, insurance agents, and tax 

authorities; and 

 Determine whether there are other liens on the property. If liens exist, whether the

lien holder(s) are willing to work with the Agency to secure the property. 

2. Recommendation for Taking Custody 

The Field Office will report its findings to the State Director. The report will 

recommend that a property be taken into custodial possession if it appears that the 

property has been completely abandoned and the Agency needs to assume responsibility 

for it to protect the security. Alternatively, if the Field Office reports that the property is 

occupied, the report will give details as to whether the occupants are under a lease or are 

unauthorized. The Field Office will provide any other relevant details and recommend 

future action. When appropriate, the State Director will authorize the Field Office to take 

custodial possession. When the Field Office believes that a property is abandoned, it 

must prepare a report that provides evidence of a property’s abandonment. The report is 

placed in the borrower’s case file, and a copy of the report is forwarded to the State 

Office. 

3. Liquidation 

The need to take custodial possession of a property may occur before or after a loan 

has been accelerated. If liquidation is not already in progress, taking custodial possession 

should initiate the process. Field Office Staff are responsible for conducting liquidation 

activities. 

B. Acquiring an REO Property 

When a Field Office acquires a property, Field Office Staff must notify the State 

Director. An additional REO case file should be created from the original case. The 

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REO case file should include the property title, recent inspection reports, appraisals, 

environmental reviews, and any other documentation related to the physical condition or 

value of the property. No information related to the borrower is needed in the REO file. 

14.6 INSPECTING AND SECURING CUSTODIAL AND REO PROPERTY 

Once REO property is acquired, Field Office Staff must inspect the property to determine 

what steps need to be taken to further ensure its security and maintain its value. The inspection 

will allow Field Office Staff to designate the property as program or non-program and evaluate 

the need for repairs. 

A. Inspecting and Classifying the Property 

Field Office Staff must perform an on-site field inspection of REO property to: 

 Determine repair needs; 

 Gather information to assist in completing the environmental review; 

 Assist in updating the due diligence report and appraisal, as necessary; and 

 Take necessary actions to secure and maintain the housing project. 

Based on the results of the inspection, Field Office Staff designate REO property as 

program or non-program property after considering factors such as size; design; possible 

health and/or safety hazards; and obsolescence due to functional, economic, or locational 

conditions. REO property may be sold as non-program property it any of the following 

conditions exist: 

 The housing project does not meet Agency requirements and the cost of bringing 

the housing into compliance is determined, by the Agency, to be economically 

unfeasible based on the amount of funds available to the Agency and the housing 

needs in the market area where the housing is located; 

 Attempting to sell the property on program terms is not in the best interest of the 

Federal Government; or 

 Hazardous substances or petroleum products have been released on the property 

and the cost of cleanup is estimated to exceed the dollar value the Agency will 

recover through sale of the property. 

REO property in an area no longer designated rural is treated as if it were still in a 

rural area. 

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B. Securing Custodial and REO Property 

When the Field Office assumes management responsibility and takes possession of 

REO or custodial property, immediate steps must be taken to inspect and secure the 

property whether by Field Office Staff or management contractor. 

1. Physical Security of Vacant Properties 

If the property is vacant, it should be locked or otherwise secured and a no trespassing 

notice should be posted. For REO only, after an inspection determines utility systems are 

in safe operable condition, utility companies should be contacted to maintain or reinstate 

utility service. An inventory should be made of any nonsecurity personal property left on 

the premises and efforts made to identify any owners or lien holders. 

2. REO Properties Occupied by Tenants 

REO property may be occupied by tenants with leases executed by the former 

borrower. The Agency may require tenants to sign a new lease, but if it is in the best 

interest of the Government, the Agency may honor existing leases. The Agency may 

evict unauthorized tenants. 

When units in an REO property are under an existing lease and the Agency decides to 

continue the lease, the tenant must be notified, in writing, that the Agency has acquired 

the former owner’s rights under the lease and that all payments should be remitted to the 

Agency’s management agent. If a lease is to be terminated, the tenant must be notified, 

in writing, that their lease is being terminated in 30 days, and they must vacate. The OGC 

should be contacted for advice and assistance prior to evicting a tenant in order to obtain 

possession of an REO property. 

Rent payments due and payable before the date the Agency acquired the property are 

applied to the borrower’s account. Any surplus funds will remain with the project. 

14.7 DISPOSITION OF NONSECURITY PROPERTY 

The Agency has no legal claim to any nonsecurity, owner, or tenant property left on the 

premises. State or local law may affect procedures for disposing of personal property left on the 

premises of an REO or custodial property. Field Office Staff must comply with any state or local 

requirements, as well as the procedures discussed in this paragraph. If the owners or lien holders 

of any personal property that remains custodial or REO property can be identified and located, 

Field Office Staff must offer them a reasonable opportunity to remove the property. Any 

conversations with the owner of the property should be documented and placed in the case file. 

A. Custodial Property 

The Agency may remove any nonsecurity personal property from custodial properties 

as long as such property can be safely stored. Personal property cannot be removed and 

stored if: 

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 The storage facility presents a hazard to the security of the property, such as a 

leaking roof or unsecured area, which allows access to the property by 

unauthorized persons; and 

 The personal property itself presents a hazard, such as flammables or explosives. 

Hazardous materials must be managed in compliance with Paragraph 14.10. 

B. REO Property 

1. Notice to Owners or Lien Holders of Personal Property 

If the property is not retrieved after the initial notification, a certified letter should be 

sent, return receipt requested, notifying the owner or lien holder of the date on which the 

Agency will dispose of the property, and that the property may be retrieved before the 

disposition upon payment of any expenses incurred by the Agency related to the personal 

property, such as advertisement or storage. 

2. Disposal of Unclaimed Property 

The Field Office will dispose of unclaimed property in accordance with its value and 

conforming with local practices. For example, if there are items of significant value, an 

advertisement may be placed in the local newspaper. Unclaimed tenant property will be 

disposed of in accordance with the terms of the lease. 

3. Income from Disposition 

Proceeds from the sale of items under lien should be paid to any owner or lien holder 

after deducting Agency selling expenses. If there is no known owner or lien holder, 

proceeds are applied to the REO account. 

14.8 TAXES AND INSURANCE 

A. Taxes 

REO property is subject to taxation by state and local political jurisdictions in the 

same manner and to the same extent as other properties, unless state law specifically 

exempts property owned by the Federal Government. If a jurisdiction changes the law to 

begin taxing Government-owned property, only taxes accrued after the effective date of 

the change will be paid. Field Office Staff must notify the taxing authority, in writing, 

when title to real estate is acquired and provide the Field Office address to which tax bills 

should be sent during Agency ownership. 

If the value of the property is significantly less than the value at which it is being 

taxed, as soon as it is acquired the Agency may request a new assessment by the local 

taxing authority. Management contracts between the Agency and property managers

may include provisions allowing the management agent to request a new tax assessment. 

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If property is acquired subject to a prior lien, before the Agency pays taxes, Field 

Office Staff must contact the prior lien holder to determine if that lien holder will pay the 

taxes. 

Taxes on program property are paid when due. Taxes on non-program property may 

be deferred until the property is sold if the taxes that accrue before disposition exceed the 

value of the property. If the taxing authority schedules a tax sale before the Agency can 

sell the property, Field Office Staff will determine what is in best interest of the 

Government. To make this determination the Field Office Staff will calculate the net 

recovery value that would result from paying the taxes and continuing sales efforts. This 

calculation will be compared with the net recovery value if the Agency allowed the 

property to be sold for delinquent taxes. (See Chapter 12 for a more detailed discussion of 

net recovery value.) 

B. Insurance 

1. Custodial Property 

Insurance on custodial property will be maintained per program instructions. 

2. REO Property 

Insurance will not be canceled when property is acquired. However, the Agency will 

pay additional premiums to continue coverage only when it is in the best interest of the 

Federal Government. If it is necessary to file a claim, Field Office Staff should submit 

the claim and direct that insurance proceeds be forwarded to the St. Louis Office. 

14.9 PHYSICAL MAINTENANCE AND REPAIR 

Custodial property will be maintained and repaired only as needed to protect the security 

of the property and to prevent deterioration. In the case of historic buildings, such repair and 

maintenance will be done in a manner that preserves the design integrity. Consult with the SEC 

and/or SHPO to resolve any issues in this regard. In the event of damage or theft, the procedures 

described under subparagraph A of this section should be followed. 

All contracts for management or lease of REO property will contain provisions that 

protect environmental resources determined to be present in keeping with Section 3, 

Environmental Requirements 

REO property designated to be sold as program property must be repaired, as necessary 

to meet the Agency’s requirements for decent, safe, and sanitary housing. 

REO property designated to be sold as non-program property will be managed in a 

manner that: 

 Removes health and safety hazards; 

 Prevents deterioration; and 

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 Complies with state and local requirements for the sale of the property. 

Additional repairs or renovations will only be made if they will enhance the sale value of 

the property and are determined, by the Agency, to be in the best interest of the Government. 

A. Vandalism and Theft 

Field Office Staff will report any willful damage or theft to the local law enforcement 

authorities and in whatever manner necessary, to attempt to resolve the incident, 

including signing complaints and testifying at hearings or trials. 

Field Office Staff should send a written report of the incident to the State Director 

and a copy to the Regional Office of the Inspector General (OIG). The State Director, in 

consultation with the OGC as necessary, will advise and assist the Field Office Staff. 

Damage to REO program property as a result of vandalism and theft may be repaired 

as necessary to continue marketing. Repairs may include cost-effective improvements to 

minimize the likelihood of future damage, such as increased lighting, security fencing, 

and removal of shrubs that limit visibility. Non-program property should be broom 

swept, but generally will not be repaired unless necessary to prevent deterioration. 

Custodial property should be repaired only to protect the security and prevent 

deterioration. 

B. Off-Site Repairs or Improvements 

The Agency may require off-site repairs or improvements to protect property from 

damage, to protect the Government’s interest or enhance the marketability of property. 

Off-site improvements must be approved by the State Office. To obtain approval, Field 

Office Staff must prepare a justification that demonstrates failure to make the 

improvements would likely result in a loss in property net recovery value greater than the 

expenditure, and that there are no other feasible means with state or local entities to 

accomplish the same result. 

To obtain off-site improvements, the Agency may enter into a contract with a private 

company or enter into a cooperative agreement with a state or local government, or other 

entity to obtain repairs or improvements. Under a cooperative agreement, the entity will 

provide money, property, services, or other items of value to the entity to accomplish a 

public purpose. While cooperative agreements are not a contract action, the authority, 

responsibility, and administration of a cooperative agreement must be consistent with 

contract action. OGC should be consulted when a cooperative agreement is considered. 

14.10 SPECIAL USES OF REO 

A. Transitional Housing for the Homeless 

By a Memorandum of Understanding (MOU) between the Agency and the 

Department of Health and Human Services, REO property that is not under lease or sales 

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agreement may be leased to public bodies and nonprofit organizations to provide 

transitional housing for the homeless. 

B. Mineral Leases 

When it is in the best interest of the Government, the Agency may lease mineral 

rights associated with REO property. OGC should be contacted for assistance in 

preparing the lease agreement. The appropriate level of environmental review must be 

completed prior to any agreement to lease mineral rights. Since such actions may be 

controversial and may have the potential for significant impact on the environment, prior 

consultation with the State Environmental Coordinator is required. 

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SECTION 2: DISPOSITION OF REO PROPERTY [7 CFR 3560.503]

14.11 OVERVIEW 

The Agency will make every effort to sell REO properties quickly and at the best 

possible price. Whenever possible, preference will be given to selling REO program property to 

a program borrower. Preference will be given to offers from bidders who are determined eligible 

by the Agency to purchase REO property designated to be sold as program property. 

A. Sale Methods and Pricing 

Most REO properties are sold through public drawing. However, the Agency may 

sell properties through auction, sealed bid, negotiation, or agreements with other Federal 

Agencies, such as the Department of Housing and Urban Development (HUD). 

REO properties are initially priced for sale at their present market value, as 

determined by appraisal. Administrative price reductions may be taken over time to 

facilitate sale of the property (see Paragraph 14.14 for a discussion of price reduction). A 

schedule is published that restricts sales of program property to program-eligible buyers 

for a period of time before any offering to the general public, and whenever there is a 

reduction in price. 

An Affirmative Fair Housing Marketing Plan, as described in Paragraph 14.15, must 

be prepared for REO multi-family housing properties of four or more units. 

B. Financing 

When funds are available, the Agency may offer financing to buyers of REO 

property. When program credit is offered, the loan is processed following the procedures 

described in HB-1-3560. 

Non-program credit terms are offered when the buyer is not eligible for a Section 514 

or 515 loan, or the property does not qualify as a program property. Section 5 provides 

instructions for credit sales on non-program terms. Buyers who receive financing on 

non-program terms must be advised that they are not eligible for interest credit or rental 

assistance. 

C. Warranty 

The Agency does not provide a warranty of either the title or the physical condition of 

any REO property. 

14.12 PRICING AND SALES SCHEDULES 

REO housing is priced and initially offered for sale at its present market value, based on a 

current appraisal. Administrative price reductions may reduce the offering price to facilitate the 

sale. Mineral, water, and similar rights are generally sold with the property and are not sold 

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separately except when the Government’s security interest will not be jeopardized. Lease or 

royalty interests that do not pass by deed are assigned to the buyer. 

A. Appraisals 

To determine the property’s present market value, the Field Office must arrange for 

an appraisal in accordance with the procedures described in Chapter 4, Notice of Funding 

Availability (NOFA) and Initial Application Process. If repair or improvement is 

planned, the appraisal must provide both as-is and as-improved values. Each asimproved appraisal must include a list of the planned repairs. Any special flood or 

mudslide hazard areas or wetlands and related use restrictions must be reflected in the 

appraisal. All REO property considered for disposal or lease must be evaluated for 

possible contamination from hazardous substances or petroleum products through the 

process of due diligence and completion of the Transaction Screen Questionnaire (TSQ) 

as described in Paragraph 14.26. This will normally be completed at the same time as, or 

prior to, the appraisal. 

A property must be reappraised whenever its condition has deteriorated, it has been 

significantly damaged or vandalized, additional repairs and improvements have been 

made, cleanup of hazardous material or lead-based paint, or there has been a change in 

market conditions. Refer to Section 3 for detailed environmental requirements. 

B. Sales Schedules and Administrative Price Reductions 

The sale of REO program property is restricted to program-eligible buyers when a 

property is offered for sale and any time an administrative price reduction is taken. 

Exhibit 14-1 provides the sales schedule for program property. The sales price is fixed 

when a sales contract is executed and does not decrease further based upon scheduled 

price reductions. 

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Exhibit 14-1 

Sales Schedule for Multi-family Housing REO Property Program Property

Days from Initial Offer Action

Day 1 Initial offer (appraised as-is value with subsidy). 

Day 45 If no acceptable offer, reduce price by 10 percent and offer 

again. 

Day 91 

If no acceptable offer, reduce price by another 10 percent or use 

other methods (additional 10 percent price reductions allowable 

after 45 days) 

Day 180 

If no acceptable offer, submit REO case file with 

documentation of marketing efforts to State Office for further 

advice on sales incentives or to authorize sealed bid/auction. 

Loan Servicer may reevaluate whether the project should be 

classified as a program property. 

Exhibit 14-2 provides the sales schedule for non-program properties. If a program 

property has not sold following active marketing efforts and two price reductions, Field 

Office Staff will reevaluate the property to determination if it should continue to be 

marketed as a program property. The reevaluation process may include an updated 

appraisal. 

Exhibit 14-2 

Sales Schedule for Non-Program REO Property

Days from Initial Offer Action

Day 1 Initial offer (appraised as-is value without subsidy). 

Day 45 

If no offer, reduce price by 10 percent and offer again. 

Additional 10 percent price reductions are allowable after 45 

days. 

Day 91 If no acceptable offer, reduce the price by another 10 percent or 

use other sale methods. 

Day 180 

Submit REO case file with documentation of marketing efforts 

to State Office for further advice on sales initiatives to 

authorize sealed bid/auction. 

14.13 MARKETING AND ADVERTISEMENT 

A good marketing plan is the key to reaching the maximum number of potential buyers 

and to ensuring that eligible program applicants have an opportunity to purchase REO properties. 

The Agency may advertise directly or contract for advertising services. Broker contracts may 

include advertising services. All advertisements must state occupancy or environmental 

restrictions. 

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A. Fair Housing and Affirmative Fair Housing Marketing Plan 

All advertising must meet equal housing opportunity requirements and contain the 

equal housing opportunity statement and logo. 

B. Truth in Lending Act (TILA) and Real Estate Settlement Procedures Act 

(RESPA) Integrated Mortgage Disclosures rule (TRID) 

If the availability of Agency financing will be advertised, marketing efforts must 

conform to the requirements of the TRID. Exhibit 14-3 highlights these requirements. 

Exhibit 14-3 

TRID Highlights 

 Advertisements that state specific credit terms must state only terms that 

will actually be offered. 

 Any finance charge listed must be stated as an annual percentage rate. 

 Key terms related to financing used in the advertisement must be defined 

C. Advertising and Marketing Methods 

Advertising efforts should be designed to reach a broad audience. Each Field Office 

should identify appropriate marketing efforts and tailor them for each market area. At a 

minimum, advertisements must be placed in newspapers of general circulation and posted 

on the Field Office bulletin board. Other marketing efforts that may be appropriate 

include: 

 Posting an advertisement on the Agency’s multi-family housing REO Web site at 

https://mfhreo.sc.egov.usda.gov. This site allows staff to upload, modify, and delete 

properties. The general public will view multi-family housing REO properties for 

sale at: http://www.resales.usda.gov; 

 Posting advertisements in public locations accessible to prospective purchasers, 

including community bulletin boards and major employment sites; 

 Broadcasting announcements on radio or television; or 

 Informing potential program applicants or investors of the availability of REO 

properties. 

Advertisements must include the following:

 Appropriate language, stressing the need for potential buyers to complete and submit 

an application and other required documentation; 

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 Any restrictive-use requirements that will be attached to the project and added to the 

property’s title; 

 Sale price; and 

 Date, time, and location of drawing. The date and time must allow adequate time for 

advertising and review of application packages. 

D. Review of Marketing for Unsold Properties 

At least quarterly, the State Director must review the status of unsold REO property 

to ensure that acquired properties are being placed on the market promptly, properties on 

the market are selling within a reasonable time frame, and that properties under contract 

are closed in a timely manner. Of particular concern are: 

 Properties acquired more than 90 days ago that have not yet been made available for 

sale; 

 Program properties that have been available for sale for 6 months or more and are not 

under contract; 

 Non-program properties that have been available for sale for 4 months or more and 

are not under contract; and 

 Properties that have been under contract for more than 60 days and have not closed. 

14.14 SPECIAL MARKETING TECHNIQUES 

A. Buyer Incentives 

The State Director may authorize buyer incentives when Field Office Staff provide 

evidence that a specific market area is depressed and the incentives are required to 

stimulate buyer interest. To request approval for buyer incentives, the Field Office must 

describe past efforts to sell the property and explain why the proposed incentives are 

expected to produce improved results. Incentives, such as the payment of closing costs, 

may be appropriate for any property. Amortization schedules longer than the standard 

term may be offered for non-program properties. 

B. Broker Incentives 

When an additional broker incentive is needed, such as when a very low-value 

property offers an inadequate commission; the State Director may authorize a minimum 

commission or fixed-amount sale bonus. To request the incentive, the Field Office must 

describe the past efforts to sell the property and justify the amount and the purpose of the 

incentive. Upon the approval of the State Director, a written offer of the incentive that 

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specifies the requirements and circumstances in which the incentive will be given must 

be provided to the broker. 

C. Acquisition of Land, Easements, or Rights-of-Way to Effect Sale 

When it will help the sale of REO property and it is in the best interest of the 

Government, the State Director may authorize the acquisition of adjacent land, 

easements, or rights-of-way in order to cure title defects or encroachments. Additional 

land may not be acquired at a cost in excess of its appraised market value. 

14.15 REO PROPERTY NOT MEETING PHYSICAL STANDARDS 

When REO property does not meet the Agency’s dwelling standards, and making repairs 

that will allow the property to meet these standards is not economically feasible for the 

Government, the property is listed, advertised, and sold with specific occupancy restrictions. 

Housing that does not meet the Agency’s dwelling standards may still be considered 

decent, safe, and sanitary if it: 

 Is structurally sound and habitable; 

 Has a potable water supply; 

 Has functionally adequate, safe, and operable heating, plumbing, electrical, and 

sewage disposal systems; 

 Meets the Agency’s thermal performance standards; and 

 Is safe—that is, a hazard does not exist that would endanger the health or safety of 

occupants. 

The deed by which such a property is conveyed will contain a covenant restricting the 

new owner from allowing occupancy of affected residential units until it those units meet the 

Agency’s dwelling standards, as discussed in Chapter 3 of HB-1-3560. Property that is not 

decent, safe, and sanitary must still meet the Agency’s environmental requirements, including 

the management of hazardous substance requirements discussed in Paragraph 14.10. 

In the event that the Agency has acquired property that is unsafe and cannot feasibly be 

made safe, for reasons that are environmental in nature or relate to contamination from 

hazardous substances or petroleum products, Field Office Staff will provide appropriate 

information to the State Director, including the observations and recommendations of the State 

Environmental Coordinator. The State Director will submit the case file, along with complete 

documentation of the problem and a recommended course of action, to the Deputy 

Administrator, Multi-Family Housing, with a copy to the Director, Program Support Staff, for 

their joint review and guidance. 

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A. Notice of Occupancy Restriction 

The notice of sale and sale contract must describe the specific conditions that prohibit 

occupancy and the items necessary for the property to meet decent, safe, and sanitary 

standards, using language similar to the following: 

“Pursuant to Section 510(e) of the Housing Act of 1949, as 

amended, 42 U.S.C. 1480, RHS has determined dwelling unit or 

units on this property inadequate for residential occupancy. The 

quitclaim deed by which this property will be conveyed will 

contain a covenant excluding the inadequate residential unit(s) 

from residential use until the dwelling unit(s) is repaired or 

renovated as follows:” (insert the items necessary for the property 

to meet decent, safe, and sanitary standards, clearly indicating the 

inadequate unit(s) and necessary repairs for each unit). 

For purposes of advertising, the list of specifications may be replaced with a 

statement to contact the Agency, or the real estate broker under an exclusive listing 

contract or “any real estate broker” for open listing agreements, whichever is relevant, for 

a list of specific items necessary for the property to meet decent, safe, and sanitary 

standards. 

B. Quitclaim Deed Restrictive Covenant 

The quitclaim deed must contain a covenant restricting residential occupancy if units 

within the project fail to meet the Agency’s dwelling standards. The covenant must 

describe the conditions that prohibit occupancy of specific units and specify the 

improvements that are necessary for the property to fully comply with Agency standards 

for housing that is decent, safe, and sanitary. The covenant may use language in a State 

Supplement, similar to the following:

“Pursuant to Section 510(e) of the Housing Act of 1949, as 

amended, 42 U.S.C. 1480, the purchaser (‘Grantee’ herein) of the 

above described property (‘subject property’ herein) covenants and 

agrees with the United States acting by and through the U.S. 

Department of Agriculture (‘Grantor’ herein) that the inadequate 

dwelling unit(s) located on the subject property as of the date of 

this quitclaim deed will not be occupied or used for residential 

purposes until the item(s) listed at the end of this paragraph have 

been accomplished. This covenant shall be binding on Grantee 

and Grantee’s heirs, assigns, and successors and will be construed 

as both a covenant running with the subject property and as 

equitable servitude. This covenant will be enforceable by the 

United States in any court of competent jurisdiction. When the 

existing dwelling unit(s) on the subject property complies with the 

aforementioned standards of the U.S. Department of Agriculture in 

accordance with its regulations, the subject property may be 

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(02-24-05) SPECIAL PN 
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released from the effect of this covenant and the covenant will 

thereafter be of no further force or effect. The property must be 

repaired as follows: .” (insert the items referenced in the 

notice of sale and sale contract, necessary for the property to meet 

decent, safe, and sanitary standards) 

C. Release of Restrictive Covenant 

When the owner requests a release of the restrictive covenant, the Agency inspects 

the property. The Agency will release the covenant if the conditions that prohibited 

occupancy have been corrected; the specific items necessary for the property to meet 

decent, safe, and sanitary standards have been provided; or the structure necessitating the 

restrictive covenant has been removed from the site. Restrictive covenants, established as 

environmental mitigation measures, will not be released without the concurrence of the 

State Director. 

14.16 DISPOSITION BY PUBLIC DRAWING 

Public drawing is the preferred and most common method of sale for REO properties. 

Exhibit 14-4 outlines the public drawing process. Use of any other sale method requires 

approval from the State Office. 

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HB-3-3560 

Exhibit 14-4 

The Disposition by Public Drawing Process

Step 1 The property is offered for sale at market value. Loan Servicer 

completes Form RD 1955-40, Notice of Real Property for Sale. 

Step 2 The Loan Servicer advertises the property. Contacting known 

interested parties is part of advertising efforts. Program properties are 

offered exclusively to program applicants for the first 45 days, after 

which the property is available to anyone. The Agency may accept 

offers from program applicants prior to the advertised drawing date. 

Non-program purchase offers cannot be accepted prior to the drawing 

date. 

Step 3 Offers are accepted and stamped with the date and time of receipt. 

Step 4 Agency reviews offers. If only one offer is received and the offer 

meets Agency requirements, that single offer may be accepted. If 

more than one offer is received, the Agency will accept the offer that 

is in the best interest of the Government. If acceptable offers are 

comparable, these will be sealed, placed in a receptacle, and drawn 

sequentially. 

Step 5 If no acceptable offer is received, reduce price by 10 percent or use 

other incentives. Repeat steps 1 through 4. 

Step 6 If no acceptable offer is received, submit REO case file with 

documentation of marketing efforts to the State Office for further 

advice on sales incentives or to authorize sealed bid/auction. Loan 

Servicer may reevaluate whether the project should be classified as a 

program property. 

A. Listing the Property 

REO property is offered for sale 

using Form RD 1955-40. The date 

indicated on Form RD 1955-40 is the 

effective date of the offer to sell. An 

offer to purchase may be submitted at 

any time after the effective date listed in 

the notice. 

When an offer is accepted, the notice 

of sale is revised to indicate that only 

back-up offers will be taken. The notice 

is not withdrawn until the sale is closed, 

except when the offer is from a nonprofit 

organization or a public body for 

transitional housing for the homeless. 

REO Property Subject to Redemption Rights 

REO property subject to redemption rights 

may still be sold if Field Office Staff determine 

that there is no probability of its redemption and 

state law permits its sale. In states where such 

sales are permitted, a State Supplement will be 

issued with the specific state law requirements. 

The buyer must sign a statement acknowledging 

sale conditions under state law. The original 

signed statement will be filed in the REO case 

file and transferred to the borrower’s case file if 

it is Agency financed. 

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B. Submission Requirements 

An offer to buy must be submitted on Form RD 1955-45, Standard Sales Contract, 

Sale of Real Property of the United States. Offers received in any other form must be 

returned to the offeror. Any offer to buy that is contingent upon Agency credit must be 

accompanied by a completed Form SF 424, Application for Federal Assistance. 

Applications are considered completed and acceptable only if they include the required 

attachments. To establish borrower eligibility, the following attachments must be 

included when the application is submitted: 

 Financial statements for the past two years; 

 Credit report for each general partner (if limited partnership) or each officer (if 

corporation); 

 Proposed limited partnership agreement and certificates of limited partners, if 

applicable; 

 Tax-exempt ruling from the IRS designating the borrower organization as a 501(c)(3) 

or 501(c)(4) if applicant is nonprofit (if designation is pending, a copy of the 

designation request); 

 Mission statement; 

 Evidence of organization under state and local law or copies of pending applications; 

and 

 List of board members 

Those requesting Agency credit must meet the applicant eligibility requirements as 

outlined in Paragraph 4.16 of HB-1-3560. 

C. Receiving and Considering Offers 

Each offer must be date stamped when it is received. Offers received on the same 

day will be selected for consideration by lot. Names will be placed in a receptacle, 

drawn, and numbered sequentially. Offers drawn after the first are held as backup and 

the offeror so notified. 

The Agency selects the first minimum acceptable offer received and executes Form 

RD 1955-45. The form is then sent to the bidder along with a letter to indicate 

acceptance of the offer. A letter is also sent to notify all unsuccessful bidders of the 

status of their offers. 

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HB-3-3560 

D. Cancellation of Sales Contracts 

If an offer contingent upon obtaining Agency financing on program terms is selected 

and the credit request is subsequently rejected, the next offer is considered. Property is 

not held off the market pending the outcome of an appeal. If there are no backup offers, 

the notice of sale is revised to indicate the new status of the property. 

When a sales contract is canceled due to offeror default, any earnest money collected 

is forwarded to the Field Office where it will in turn be forwarded to the St. Louis Office 

for application to the General Fund. 

14.17 DISPOSITION BY SEALED BID OR AUCTION 

Any use of the sealed bid or auction methods must be authorized by the State Director. 

Program properties may be sold using these methods only after regular sales efforts have been 

unsuccessful for six months. Either method may be used as the initial sale effort for nonprogram properties when regular sale efforts are not likely to result in prompt sale (such as when 

structures have been substantially destroyed by fire). 

A. Establishing the Minimum Acceptable Offer 

Field Office Staff must develop and document the recommendation for the minimum 

acceptable bid or sales price using the net recovery value worksheet provided in Chapter 

12, Attachment 12-A. 

B. Publicizing the Sale 

The Agency solicits sealed bids or publicizes an auction by public notice. The notice 

must include the date, time, and place of the bid opening or auction and describe how 

bids are to be made, the required percentage of bid deposit, the maximum credit terms, 

the cash preference percentage described in subparagraph C.3 of this section, and other 

pertinent information, such as a notice of special flood or mudslide hazard area or 

wetland and any related use restrictions. 

C. Sealed Bid Procedures 

1. Submission Requirements 

Sealed bids must be made on Form RD 1955-46, Invitation, Bid, and Acceptance, 

Sale of Real Property of the United States, and be accompanied by a deposit provided in 

the form specified in the bidding instructions. No deposit is required from bidders who 

are eligible program purchasers. A minimum deposit of 10 percent is required for nonprogram loans. 

Bidders must submit their bids in a sealed envelope marked: “SEALED BID OFFER 

 * ” (*insert Property Identification Number). 

Bids may be submitted for individual properties or a group of properties. 

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2. Receiving and Opening Bids 

All bids will be date and time stamped when they are received. Sealed bids will be 

held in a secured file before bid opening. If the bidder wants to withdraw their bid, this 

must be done prior to the drawing date. The bid opening will be held publicly at the 

place and time specified in the notice with at least two Agency employees present. Each 

bid received will be recorded showing the name and address of the bidder, the amount of 

the bid, the amount and form of deposit, and any conditions of the bid. The record of 

bids will be signed by the staff person conducting the bid opening and retained in the 

REO file. 

3. Reviewing and Accepting Bids 

Only responsive bids will be considered. To be considered responsive, bids must be 

signed and dated by the offeror, include any required deposit, and be for an amount at 

least equal to the established minimum bid. Minor deviations or defects in the bid 

submission may be waived by the Approval Official so long as the bid meets these 

minimum requirements. 

Generally, the highest bid will be selected. However, cash bids will be given 

preference over bids that are contingent upon the offeror obtaining financing if the cash 

offer is at least equal to a specified percentage of the highest offer. Exhibit B of RD 

Instruction 440.1 specifies the applicable percentage. 

In the case of two identical bids for a program property, program-eligible purchasers 

will be selected before bidders who are not program-eligible. 

4. No Acceptable Bid 

If no acceptable bids are received, the Agency may negotiate a sale at the best price 

possible in accordance with Paragraph 14.18. All bidders must be informed, in writing, 

of any anticipated negotiations. Deposits must be returned to all bidders by certified 

mail, return receipt requested. 

5. Notification to Bidders 

Field Office Staff also must notify unsuccessful bidders in writing that their bids were 

not accepted and who the successful bidder was. Deposits must be returned to all 

unsuccessful bidders by certified mail, return receipt requested. 

When a bid is accepted, Field Office Staff must execute Form RD 1955-46 and send a 

written acceptance of the bid. 

6. Failure to Close 

If a successful bidder fails to perform under the terms of the offer, for any reason 

other than denial of credit by the Agency, the bid deposit will be forfeited and forwarded 

to the St. Louis Office for application to the General Fund. 

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HB-3-3560 

Upon determination that the successful bidder will not close, the State Director may 

authorize direct negotiations with the next highest bidder, authorize another sealed bid 

sale, or authorize negotiations with other interested parties, as described in Paragraph 

14.18. 

D. Auction Procedures 

The State Director will determine whether an Agency employee will conduct the 

auction or whether the complexity of the sale requires the services of a professional 

auctioneer. Form RD 1955-46 is used for auction sales. 

1. Selecting a Professional Auctioneer 

Auctioneers are selected through a competitive process using the procedures 

described in RD Instruction 2024-A. The commission will be set as part of the auctioneer 

solicitation. If an auctioneer submits a bid with a commission rate that is significantly 

lower than other bids, detailed documentation will be provided attesting that they have 

successfully sold properties at the lower rate with no compromise in service. 

2. Bid Deposits 

Successful bidders will be required to make a bid deposit of 10 percent of the 

purchase offer. This fee will be waived for program-eligible bidders, pending final 

determination of eligibility. Deposits should be in the form of cashier’s check, certified 

check, postal or bank money order, or bank draft payable to the Agency. Cash and/or 

personal check may be accepted only if deemed necessary for a successful auction to 

occur by the person conducting the auction. 

Where program financing is authorized, all notices and publicity should provide for a 

method of prior approval of credit and the credit limit for potential program-eligible 

purchasers. This may include submission of letters of credit or financial statements prior 

to the auction. The auctioneer should not accept bids that request program financing in 

excess of the market value. 

3. Accepting Bids 

When the highest bid is lower than the minimum amount acceptable to the Agency, 

negotiations should be conducted with the highest bidder or, in turn, the next highest 

bidder(s) or other persons known to be interested in obtaining an executed bid at the 

predetermined minimum. 

4. Purchaser’s Default 

Upon purchaser’s default, the Field Office Staff will remit the bid deposit to the St. 

Louis Office as a miscellaneous collection. The property may than be disposed of 

through a negotiated sale. 

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HB-3-3560 

14.18 NEGOTIATED SALE 

If no acceptable bid is received either from a sealed bid sale or at a public auction, the 

State Director may negotiate a sale at the best price possible without further public notice by 

negotiating with interested parties, including previous bidders. 

A sale made through negotiation will be documented and accepted by the Approval 

Official on Form RD 1955-46 and must be accompanied by a bid deposit of 10 percent of the 

negotiated sales price, except that the deposit will be waived for program-eligible buyers. 

14.19 DISPOSAL OF PROPERTY FOR SPECIAL PURPOSES 

REO properties may benefit people in need of housing who can be reached in cooperation 

with other programs or Federal agencies. Cooperative agreements with other Federal or stateassisted housing programs will be announced and updated with administrative notices. 

14.20 DISPOSAL AS CHATTEL OR SALVAGE 

If the Agency is unable to sell non-program property by regular sale, sealed bid, or public 

auction, the structure may be sold as chattel or salvage to be removed from the site. Form 

RD 1955-47 is used to transfer title of real property converted to chattel to the purchaser. 

If no offer is received to remove the structure, the State Director may contract or arrange 

to have it demolished, in exchange for the salvaged materials or otherwise as determined 

appropriate. For example, the local fire-fighting unit may be permitted to use a structure slated 

for demolition as a burn for fire fighting practice. Once the structure is disposed of, the lot is 

offered for sale as non-program REO property. 

If REO property is a vacant lot, the lot is offered for sale as non-program property. 

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HB-3-3560 

SECTION 3: ENVIRONMENTAL REQUIREMENTS 

14.21 OVERVIEW 

The Agency must complete the appropriate level of environmental review under the 

National Environmental Policy Act for disposal of REO property in accordance with RD 

Instruction 1940-G prior to determining the disposition of the property. The proposed disposal 

of REO property will normally qualify as a categorical exclusion. However, an environmental 

assessment and an environmental impact statement (EIS), when deemed necessary, is required 

for any proposed disposal of REO property that meets one of the following criteria: 

 The Agency has evidence that the transaction would result in a change in use of the 

REO property (for example, residential to commercial); 

 The transaction is controversial for environmental reasons; 

 The original environmental assessment for the project contains mitigation measures 

requiring an on-going managerial action (such as preservation of an historic building 

or setbacks from wetlands); 

 The transaction affects environmental resources identified in 1940-G, or 

 The property is contaminated with hazardous substances or petroleum products. 

This section summarizes the basic environmental information that pertains to disposal of 

REO properties. For more detailed information and assistance, refer to RD Instruction 1940-G 

and the State Natural Resource Management Guide. 

14.22 PROPERTY LOCATED WITHIN A SPECIAL FLOOD OR MUDSLIDE 

HAZARD AREA OR CONTAINS WETLANDS 

Prospective buyers will be provided written notice that the REO property is in a special 

flood or mudslide hazard area. 

Form RD 1955-46 , “Invitation, Bid, and Acceptance, Sale of Real Property of the United 

States” must include notice of special flood or mudslide hazard areas, wetlands and other 

environmental use restrictions. Prospective purchasers, auctioneers, and brokers must be 

provided a copy of this information. 

The conveyance instrument for disposal of REO property containing wetlands or located 

in a special flood or mudslide hazard area must specify those uses of the property that are 

restricted under any Federal, state or local floodplain and wetland regulations, as well as other 

relevant restrictions. Use restrictions will relate to the use of the property by the purchaser and 

any successors as determined by the Agency. See 14.28. 

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(02-24-05) SPECIAL PN 
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14.23 COASTAL BARRIER RESOURCES SYSTEMS 

REO property located within a Coastal Barrier Resource System (CBRS) will not be sold 

until the Agency completes consultation with the USFWS Regional Director, and agreement is 

reached that the proposed sale does not violate the provisions of the CBRS. 

No continued Federal financing is permitted for REO property located within a CBRS. 

14.24 NATIONAL REGISTER OF HISTORIC PLACES 

When REO property has been determined to be listed on (or eligible to be listed on) the 

National Historic Register, the Loan Approval Official must consult with the SHPO. This 

consultation will establish any necessary restrictions on future use of the property to maintain 

compatibility with preservation objectives per 14.28. 

A property that is listed or eligible for listing on the National Register of Historic Places 

may be leased or operated by management contract, the lease or management contract will 

contain provisions that the use will preserve property’s condition and historic character. 

14.25 UNDERGROUND STORAGE TANKS (UST) 

USTs found on the property will be investigated to determine the contents of the tank and 

whether the tank has leaked or is leaking. Investigations will include the extent of contamination 

and methods of remediation. Such investigations will be undertaken by persons authorized by 

state law and provided to the appropriate state regulatory agency for consultation on appropriate 

steps to take. The report will be made a part of public information provided to prospective 

buyers and lenders. Notice of cleanup will be made a part of covenants to the deed to assure 

notice to future buyers as further discussed at 14.28. When a UST is leaking, the tank will be 

removed and the areas of contamination cleaned up in accordance with state regulations. If the 

UST is replaced, the work will be in accordance with state and local requirements 

14.26 MANAGEMENT OF HAZARDOUS SUBSTANCES AND PETROLEUM 

PRODUCTS 

All property considered for disposal or lease must be evaluated for possible hazardous 

substance contamination as part of the Agency’s environmental due diligence. The minimum 

level of documentation of due diligence is the Transaction Screen Questionnaire (TSQ), which 

will be prepared by the Agency or an environmental professional under contract to the Agency. 

If the TSQ indicates the possibility of contamination a Phase I Environmental Site Assessment 

(ESA) will be prepared to determine the types of contamination present. If determined necessary 

by the ESA, a Phase II ESA will be prepared to determine the extent and potential costs for 

remediation. An environmental professional will prepare the ESA. The SEC should be 

consulted during this process for guidance and assistance in review and acceptability of the 

reports. 

Environmental due diligence is normally conducted prior to the Agency taking action to 

foreclose and the reports previously prepared should be reviewed and supplemented as necessary 

prior to sale or lease. 

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HB-3-3560 

14.27 LEAD-BASED PAINT 

All projects constructed prior to 1978 will be assessed for the presence of lead-based 

paint in accordance with the Rural Development adopted portions of the HUD “Lead Safe 

Housing Rule.” To assist staff in determining the requirements for compliance the “Lead-Based 

Paint Compliance Key” is available at the RHS Intranet site. This automated tool should be run 

and a copy saved for records and any requirements for investigation and remediation included in 

the scope of work for repair prior to sale. The costs of the lead-based paint work should also be 

included in the appraisal of property value. 

Prospective purchasers must be notified of the results of the inspection inspection and 

any remediation efforts. Attachment 14-A is a sample disclosure format to provide purchasers 

with information about known lead-based paint hazards in the property. 

14.28 PROTECTIVE COVENANTS RESTRICTIONS AND EASEMENTS 

The Agency has a responsibility to take actions to protect environmental resources on 

REO property. Protective actions or mitigation measures on future use of the property may take 

the form of covenants, restrictions or conservation easements and will be filed with the deed. 

Such protection may be used to limit use of and to protect: 

 Floodplains; 

 Wetlands; 

 Coastal barrier systems; 

 Historic and cultural resources; 

 Endangered or threatened species; 

 Critical habitat; 

 Wilderness areas; 

 Wild or scenic rivers; 

 Natural landmarks listed in the National Register of Natural Landmarks; Sole source 

aquifer recharge areas designated by EPA; 

 Designated national trails; 

 Important farmland; or 

 Other resources identified in 1940-G or protected under state law. 

The appropriate state and Federal agencies should be consulted for determinations of 

effect. The advise of the State Environmental Coordinator should be sought if it appears that 

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(02-24-05) SPECIAL PN 
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disposal of the REO property may affect any of these resources and the environmental review 

raised as indicated in 1940-G. 

Examples of use restrictions include prohibition of draining, filling or building in a 

floodplain or wetland area, maintaining the property in keeping with results of consultation with 

the SHPO or notifications on hazardous material remediation on the site. 

In any case in which a property has been contaminated with hazardous materials or 

petroleum products, notice shall be provided to prospective buyers and a covenant attached to the 

deed providing notice to future buyers. The notice shall include all findings and actions to 

cleanup taken by the Agency. Any information from Agency site reconnaissance, investigations 

and clearances provided by independent environmental professionals will be made a part of 

presale notices and covenants or restrictions in the deed. In addition, the Agency is obligated to 

cleanup any materials found on site in the future provided that the materials were in place prior 

to the date of conveyance. Covenants and restrictions to address the specific conditions will be 

developed with the assistance of OGC, the SEC and National Office environmental staff. 

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HB-3-3560 

SECTION 4: PROCESSING AND CLOSING 

14.29 OVERVIEW 

If the Agency is closing the sale with program financing, the sale is closed in accordance 

with program closing instructions provided in Chapter 8 of HB-1-3560. If other financing is 

being used, the financing agent’s closing procedures should be followed. Cash sales are closed 

by the Agency collecting the sale price and delivering the quitclaim deed to the buyer. 

Title clearance and property insurance requirements for a program-financed sale are the 

same as for a program loan. 

14.30 SPECIAL NOTICES AT SALE 

In accordance with the Residential Lead-Based Paint Hazard Reduction Act of 1992, 

sellers of housing built before 1978 receiving Federal assistance must provide the purchasers of 

such housing with specific information about the housing’s lead history and general information 

on lead exposure prevention. As seller the Agency must: 

 Provide the buyer with the lead hazard information pamphlet, Protect Your Family 

from Lead in Your Home, available from the National Lead Information 

Clearinghouse at 1-800-424-LEAD, or a similar EPA-approved pamphlet developed 

by the State; 

 Permit the buyer a 10-day opportunity to conduct a risk assessment or inspection for 

the presence of lead-based paint hazard; and 

 Include in the sales contract: (1) disclosure of any lead-based paint hazard or a 

statement that the Agency has no knowledge of such hazard; (2) a list of any 

information about the hazard available to the seller and passed on to the buyer; and 

(3) a Lead Warning Statement and acknowledgment, signed by the buyer. A sample 

disclosure format, including the required Lead Warning Statement, is provided in 

Attachment 14-A. 

 Notice shall be provided to prospective buyers of all hazardous material activities and 

findings. This shall include access to records of Agency site reconnaissance and 

investigations by environmental professionals. If hazardous materials have been 

found in performance of due diligence, notification of remediation results will be 

provided. Covenants or restrictions to the deed will be developed with the assistance 

of OGC to address the specific conditions. The National Office environmental staff 

and the SEC should be consulted in the preparation of all environmental covenants or 

restrictions. 

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14.31 INSPECTION 

An inspection of the property by the buyer should be scheduled immediately before 

closing to ensure satisfactory condition of the property and the resolution of any problems or 

discrepancies. 

14.32 PRORATING REAL ESTATE TAXES AND/OR ASSESSMENTS 

When REO property is subject to taxation and/or assessment, they are prorated between 

the Agency and the buyer, as of the date the title is conveyed. The Agency is responsible for all 

taxes and assessments accrued as of the settlement date, and the buyer is responsible for all taxes 

and assessment that accrue after the closing date. The Agency’s pro rata share is deducted from 

the proceeds of the sale at closing, if sufficient funds are available, or is paid under 

RD Instruction 2024-A.

14.33 COMMISSIONS 

Commissions are paid at closing if there is sufficient cash from sale proceeds to cover the 

commission. If not, the Agency will pay the commission and charge it to the REO account as a 

recoverable cost. 

14.34 TRANSFERRING TITLE 

The Agency conveys the property to the buyer by Form RD 1955-49, Quitclaim Deed, or 

other form of non-warranty deed approved by OGC. The State Director signs the conveyance 

instrument, a copy of which is retained in the REO case file. The buyer is responsible for 

recording the instrument. 

14.35 REPORTING SALE 

When the transaction is closed and the conveying instrument has been delivered, the 

disposition is recorded in the REO system. Real property that has been disposed of by means 

other than sale, including total loss or destruction, will also be reported in the REO system. Sale 

proceeds are forwarded to the St. Louis Office to be credited to the General Fund. 

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(02-24-05) SPECIAL PN 
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SECTION 5: PROCESSING CREDIT SALES ON 

NON-PROGRAM TERMS 

14.36 OVERVIEW 

The sale of non-program properties is conducted in a manner similar to other sales; 

however, there are some differences in the terms of the sale, the processing of the offers, loan 

closing, and the treatment of the property after the sale is complete. This section highlights these 

differences. See HB-1-3560 for processing credit sales for program properties. 

14.37 TERMS OF A NON-PROGRAM CREDIT SALE 

The following provisions apply to credit sales on non-program terms. 

 Interest rate. The Section 515 interest rate plus 0.5 percent will be charged on all 

types of housing credit sales. Refer to Exhibit B of RD Instruction 440.1 (available in 

any Field Office) for interest rates. Loans made on non-program terms will be equal 

to the lesser of the prevailing interest rate at the time of loan approval or loan closing; 

and 

 Term of note. The note amount will be amortized over a period not to exceed 10 

years. If the State Director determines more favorable terms are necessary to 

facilitate the sale, the note amount may be amortized using a 30-year factor with 

payment in full (balloon payment) due not later than 10 years from the date of 

closing. In no case will the term be longer than the period for which the property will 

serve as adequate security. 

Agency loans to finance the purchase of non-program REO property are subject to the 

availability of funds. 

Each tenant in an REO property designated to be sold as a non-program property will 

be notified by the Agency, in writing, of the housing project’s non-program designation 

and will be given an opportunity to obtain a Letter of Priority Entitlement (LOPE). 

14.38 ACCEPTING OFFERS 

The sale of a non-program property is similar to other sales. Field Office Staff publicize 

the sale, accept bids, and choose a bid from the first acceptable bids received. 

 Documenting offers and acceptance. Field Office Staff must use Forms RD 

1955-45 and 1955-46, as appropriate, to document the offer and acceptance. Field 

Office Staff must accept the contract prior to processing a request for credit on nonprogram terms. 

 Cash sales. If the offeror can purchase the property without Agency assistance, Field 

Office Staff will simply collect the purchase price (less any deposits) and deliver the 

deed to the purchaser. 

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(02-24-05) SPECIAL PN 
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 Purchase with non-program credit. Purchasers requesting credit on non-program 

terms will be required to submit documentation to establish financial stability, 

repayment ability, and creditworthiness: 

 The borrower may submit the standard forms used to process program 

applications or comparable documentation. Field Office Staff may request 

additional information as needed to support loan approval. 

 Field Office Staff will order individual credit reports for each individual applicant 

and each principal within an applicant entity. Commercial credit reports will be 

ordered for profit corporations and partnerships, and organizations with a 

substantial interest in the applicant entity. 

14.39 APPROVAL 

Field Office Staff must use Form RD 3560-51 to approve a credit sale even though no 

obligation of funds is involved. For guidance on how to complete the form, see the special 

instructions on the FMI pertaining to non-program credit sales. 

The Loan Servicer must review Form RD 1910-11 with the applicant, and the form must 

be signed by the applicant. 

14.40 CLOSING SALE 

The Loan Servicer will provide the closing agent with necessary information for closing 

the sale. Title clearance, loan closing, and property insurance requirements for a credit sale are 

similar to those for program loans. As for program sales, OGC assistance will be requested to 

provide closing instructions. 

The following are the highlights of the closing process for non-program sales: 

 Closing costs. The purchaser will pay their own closing costs. Earnest money, if 

any, will be used to pay purchaser's closing costs with any balance of closing costs 

being paid by the purchaser. Any closing costs which are legally or customarily paid 

by the seller will be paid by the Agency from the down payment; 

 Down payment. A down payment of not less than 10 percent of the purchase price is 

required at closing and will be remitted by the Field Office Staff; 

 Modification of security instruments. Field Office Staff must modify security 

instruments as necessary: 

 On the Form RD 3560-52, Promissory Note and/or security instrument (mortgage 

or deed of trust) any covenants relating to graduation to other credit, restrictiveuse provisions, personal occupancy, inability to secure other financing, and 

restrictions on leasing may be deleted; and 

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HB-3-3560 

 Deletions are made by drawing a line through the specific inapplicable language. 

The borrower and an Agency representative must initial the changes. 

 Purchase of more than one property. When more than one property is bought by 

the same buyer and the transactions are closed at the same time, a separate Form RD 

3560-52 will be prepared for each property, but one mortgage will cover all the 

properties; and 

 Reporting sale. When the transaction is closed and the conveying instrument has 

been delivered, Field Office Staff will report the sale like all other sales. They will 

process Form RD 3560-19, Status of REO Property, in accordance with the respective 

FMI. 

14.41 SERVICING THE NON-PROGRAM LOAN 

Credit sales on non-program terms will be classified as non-program loans and serviced 

accordingly. The project is not subject to any rent, occupancy, or other program requirements. 

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(02-24-05) SPECIAL PN 
HB-3-3560 

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HB-3-3560 

Attachment 14-A 

Page 1 of 2 

ATTACHMENT 14-A 

LEAD-BASED PAINT DISCLOSURE FORM 

SAMPLE Disclosure Form for Target Housing Sales 

Disclosure of Information on Lead-Based Paint and/or Lead-Based Paint Hazards 

This form is also available at HUD’s Lead Safe Housing website. 

LEAD WARNING STATEMENT 

Every purchaser of any interest in residential real property on which a residential dwelling was 

built prior to 1978 is notified that such property may present exposure to lead from lead-based 

paint that may place young children at risk of developing lead poisoning. Lead poisoning in 

young children may produce permanent neurological damage, including learning disabilities, 

reduced intelligence quotient, behavioral problems, and impaired memory. Lead poisoning also 

poses a particular risk to pregnant women. The seller of any interest in residential real property is 

required to provide the buyer with any information on lead-based paint hazards from risk 

assessments or inspections in the seller's possession and notify the buyer of any known leadbased paint hazards. A risk assessment or inspection for possible lead-based paint hazards is 

recommended prior to purchase. 

SELLER'S DISCLOSURE (INITIAL) 

__________(a) Presence of lead-based paint and/or lead-based paint hazards (check one below): 

 Known lead-based paint and/or lead-based paint hazards are present in the housing 

(explain). 

________________________________________________________________________

________________________________________________________________________

____________________ 

 Seller has no knowledge of lead-based paint and/or lead-based paint hazards in the 

housing 

 __________(b) Records and reports available to the seller (check one below): 

 Seller has provided the purchaser with all available records and reports pertaining to leadbased paint and/or lead-based paint hazards in the housing (list documents below). 

________________________________________________________________________

________________________________________________________________________

____________________ 

 Seller has no reports or records pertaining to lead-based paint and/or lead-based paint 

hazards in the housing. 

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HB-3-3560 

Attachment 14-C 

Page 2 of 2 

 Purchaser's Acknowledgment (initial) 

__________ (c) Purchaser has received copies of all information listed above. 

__________ (d) Purchaser has received the pamphlet Protect Your Family From Lead in Your 

Home. 

__________ (e) Purchaser has (check one below): 

 Received a 10-day opportunity (or mutually agreed upon period) to conduct a risk 

assessment or inspection for the presence of lead-based paint and/or lead-based paint 

hazards; or 

 Waived the opportunity to conduct a risk assessment or inspection for the presence of 

lead-based paint and/or lead-based paint hazards. 

AGENT'S ACKNOWLEDGMENT (INITIAL) 

____ (f) Agent has informed the seller of the seller's obligations under 42 U.S.C. 4852d and is 

aware of his/her responsibility to ensure compliance. 

CERTIFICATION OF ACCURACY 

The following parties have reviewed the information above and certify, to the best of their 

knowledge, that the information provided by the signatory is true and accurate. 

___________________ __________ _____________________ ________ 

Seller Date Seller Date 

___________________ __________ _____________________ ________ 

Purchaser Date Purchaser Date 

___________________ __________ _____________________ ________ 

Agent Date Agent Date 

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