oversight

P.K. Management Group, Inc., Doral, FL, Did Not Always Provide Property Preservation and Protection Services in Accordance With Its Contract With HUD and Its Own Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2016-09-29.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

           P.K. Management Group, Inc.
                   Doral, FL

     Single Family Real Estate-Owned Management and
                   Marketing III Program




Office of Audit, Region 5     Audit Report Number: 2016-CH-1008
Chicago, IL                                   September 29, 2016
To:            Robert Mulderig, Acting Deputy Assistant Secretary for Single Family Housing,
               HU
               //signed//
From:          Kelly Anderson, Regional Inspector General for Audit, Chicago Region, 5AGA

Subject:       P.K. Management Group, Inc., Doral, FL, Did Not Always Provide Property
               Preservation and Protection Services in Accordance With Its Contract With HUD
               and Its Own Requirements


Attached is the U.S. Department of Housing and Urban Development (HUD), Office of Inspector
General’s (OIG) final results of our review of P.K. Management Group, Inc., field service
manager, HUD’s real estate-owned Management and Marketing III program.
HUD Handbook 2000.06, REV-4, sets specific timeframes for management decisions on
recommended corrective actions. For each recommendation without a management decision,
please respond and provide status reports in accordance with the HUD Handbook. Please furnish
us copies of any correspondence or directives issued because of the audit.
The Inspector General Act, Title 5 United States Code, section 8M, requires that OIG post its
publicly available reports on the OIG Web site. Accordingly, this report will be posted at
http://www.hudoig.gov.
If you have any questions or comments about this report, please do not hesitate to call me at
(312) 353-7832.
                    Audit Report Number: 2016-CH-1008
                    Date: September 29, 2016

                    P.K. Management Group, Inc., Doral, FL, Did Not Always Provide Property
                    Preservation and Protection Services in Accordance With Its Contract With
                    HUD and Its Own Requirements


Highlights

What We Audited and Why
We audited P.K. Management Group, Inc. (PKMG), a contracted field service manager in
HUD’s real estate-owned Management and Marketing III program, as part of the activities
included in our 2016 annual audit plan and because it was the sole contractor performing
property preservation and protection services for U.S. Department of Housing and Urban
Development (HUD)-acquired properties located in Illinois in Region’s 5 jurisdiction. Our audit
objective was to determine whether PKMG provided property preservation and protection
services in accordance with its contract with HUD and its own requirements.

What We Found
PKMG did not always provide property preservation and protection services in accordance with
its contract and its own requirements. Specifically, it did not ensure that (1) 82 HUD-owned
vacant properties were in ready-to-show condition and (2) 23 custodial properties were free of
health and safety hazards and the exteriors were clean, safe, sanitary, and secured. In addition,
PKMG billed HUD for properties for which it had not provided property preservation and
protection services. As a result, PKMG inappropriately received more than $19,000 in property
management fees for properties that were not adequately maintained. In addition, it
inappropriately received more than $2,300 in property management fees for properties that it had
not serviced. If PKMG does not improve its process for performing property preservation and
protection services, we estimate that HUD could inappropriately pay more than $2.5 million in
management fees for properties that are not maintained in accordance with its contract
requirements over the next year.

What We Recommend
We recommend that HUD require PKMG to (1) certify that the applicable property and
preservation deficiencies have been corrected for the 105 properties cited, (2) reimburse HUD
more than $19,000 for the 105 properties that were not adequately maintained, (3) implement
adequate procedures and controls to ensure that all properties comply with its contract and its
own requirements to prevent more than $2.5 million in program funds from being spent for
monthly ongoing property management fees for properties that do not comply with HUD’s and
its own requirements over the next year, and (4) reimburse HUD more than $2,300 in property
management fees received for services it had not performed.
Table of Contents
Background and Objective......................................................................................3

Results of Audit ........................................................................................................5
         Finding: PKMG Did Not Always Provide Property Preservation and Protection
         Services in Accordance With Its Contract With HUD and Its Own Requirements ... 5

Scope and Methodology .........................................................................................15

Internal Controls ....................................................................................................17

Appendixes ..............................................................................................................18
         A. Schedule of Questioned Costs and Funds To Be Put to Better Use ...................... 18

         B. Schedule of OIG Property Observation Results .................................................... 19

         C. Auditee Comments and OIG's Evaluation ............................................................. 25

         D. Contract Requirements ............................................................................................ 40




                                                               2
Background and Objective
The Federal Housing Administration (FHA) is an organizational unit within the U.S. Department
of Housing and Urban Development (HUD) that administers the single-family mortgage
insurance program. FHA insures approved lenders against the risk of loss on mortgages. In the
event of a default on an FHA-insured loan, the lender acquires title to the property by
foreclosure, a deed in lieu of foreclosure,1 or other acquisition method; files a claim for insurance
benefits; and conveys the property to HUD. As a result of acquisitions through the mortgage
insurance program and other programs, HUD needs to manage and sell a sizable inventory of
single-family homes in a manner that promotes home ownership, preserves communities, and
maximizes the returns to the FHA insurance fund.

Since 1999, HUD has been outsourcing the disposition of its real estate-owned inventory to
management and marketing contractors. This acquisition is part of the third generation of
management and marketing services. On September 30, 2012, HUD entered into a management
and marketing contract with P.K. Management Group, Inc. (PKMG), for field service
management services2 to successfully manage HUD-owned single-family properties and provide
property preservation and protection services consisting of but not limited to inspecting,
securing, performing cosmetic enhancements, repairing, and providing ongoing maintenance to
the HUD-owned properties.

PKMG is a national real estate management company with experience in managing, preserving,
and providing environmental services for residential and commercial properties. It is the sole
prime contractor serving as the field service manager in six contract areas for HUD’s
management and marketing program, including Illinois. During the previous Management and
Marketing III program, PKMG served as a prime field service manager contractor in nine States
and territories and as a subcontractor providing quality control, property inspection, and
environmental services to an additional portfolio of HUD homes across 38 States. PKMG was
incorporated on May 7, 2005. Its corporate office is located in Doral, FL.

To implement its field service management contract with HUD, PKMG used subcontractors to
complete the property preservation and protection services. According to the contract with
HUD, PKMG should be liable for damages to all acquired properties due to failure to inspect or
secure property or other act, neglect, failure, or misconduct of the contractor, a subcontractor, or




1
  A deed in lieu of foreclosure is a transaction where the homeowner voluntarily transfers title to the property to the
lender in exchange for a release from the mortgage obligation.
2
  Field service managers are companies that provide property preservation and protection services consisting of but
not limited to inspecting and securing properties, performing cosmetic enhancements or repairs, and providing
ongoing property maintenance.




                                                           3
any management official of any of the foregoing. The contractor must indemnify HUD for
losses due to any act, neglect, failure, or misconduct of the contractor, a subcontractor, or any
management official of any of the foregoing. Therefore, PKMG is ultimately responsible to
ensure that the properties are maintained in accordance with the contract with HUD and its own
requirements. PKMG reviews the subcontractors inspection reports and completes quality
control inspections of the properties in its active inventory.

Region 5 includes the States of Illinois, Indiana, Michigan, Minnesota, Ohio, and Wisconsin.

Our audit objective was to determine whether PKMG provided property preservation and
protection services for HUD-owned single-family properties in accordance with its contract with
HUD’s and its own requirements.




                                                 4
Results of Audit

Finding: PKMG Did Not Always Provide Property Preservation
and Protection Services in Accordance With Its Contract With HUD
and Its Own Requirements
PKMG did not always provide property preservation and protection services in accordance with
its contract and its own requirements. Specifically, it did not ensure that (1) 82 HUD-owned
vacant properties were in ready-to-show condition and (2) 23 custodial properties were free of
health and safety hazards and the exteriors were clean, safe, sanitary, and secured. In addition,
PKMG billed HUD for properties for which it had not provided property preservation and
protection services. The deficiencies occurred because PKMG did not provide adequate
oversight of its subcontractors to ensure that properties were maintained in accordance with its
contract and its own requirements. As a result, PKMG inappropriately received more than
$19,000 in management fees for properties that were not adequately maintained. In addition, it
inappropriately received more than $2,300 in management fees for properties it had not serviced.
Based on our statistical sample, we estimate that over the next year, HUD will inappropriately
pay more than $2.5 million in management fees for properties that are not maintained in
accordance with its contract with PKMG.
Properties Were Not Adequately Maintained3
From PKMG’s active inventory, we statistically selected4 128 properties to observe5 and
determine whether PKMG ensured that the HUD-acquired properties were maintained in
accordance with its contract and its own requirements. Of the 128 properties, 105 (82 percent)
had 424 deficiencies. The 105 properties had interior, exterior, and health and safety hazard
deficiencies or a combination of deficiencies. Specifically,

            92 properties had 208 interior health and safety hazards,
            51 properties had 68 exterior health and safety hazards,
            60 properties had 77 other interior deficiencies,
            68 properties had 71 other exterior deficiencies.

As a result, HUD disbursed $19,425 in management fees for properties that were not properly
maintained. The table below represents the type of deficiency observed and the location, either
interior or exterior.




3
  See appendix D for criteria.
4
  Our methodology for the statistical sample is explained in the Scope and Methodology section of this audit report.
5
  We observed the 128 properties between March 15 and June 14, 2016.



                                                          5
                                    Interior health   Exterior health   Other interior   Other exterior
        Deficiency type               and safety        and safety       deficiencies     deficiencies

Tripping hazard                           43                22                -                -

Safety hazards (missing or
loose handrails, defective steps)         5                 9                 -                -

Property not secured (includes
sheds, garages, and
outbuildings)                             33                13                -                -

Active roof leak or water leak
(includes sheds, garages, and
outbuildings)                             11                2                 -                -

Cutting hazard                            38                16                -                -

Electrical hazard                         48                6                 -                -

Landscaping not maintained                 -                 -                -               66

Not broom swept (includes
sheds, garages, and
outbuildings)                              -                 -               55                4

Moisture damage                            -                 -                -                1

Feces in the property                     3                  -                -                -

Inoperable interior doors                 9                  -                -                -

Excessive mold or mildew                  2                  -                                 -

Gas line, water line, or dryer
vent not capped                           16                 -                -                -

Property deterioration                     -                 -               19                -

Missing emergency contact
notice                                     -                 -                3                -

Total deficiencies                       208                68               77               71




                                                      6
Ninety-Two Properties Had Two Hundred Eight Interior Health and Safety Hazards
Contrary to sections C.5.2.3 and C.5.2.3.16 of its contract, the interiors for 92 of the 128
properties observed were not free of health and safety hazards. The 92 properties had 208
interior health and safety hazards. The following items are examples of interior health and safety
hazards listed in the table: uncapped and exposed electrical wires, missing flooring, missing
thresholds, broken glass, protruding nails, broken windows, unsecured attached garage doors, gas
lines not capped, active water leaks, inoperable interior doors, mold or excessive mildew,
defective stairs, missing handrails, and feces.

Sixty Properties Had Seventy-Seven Other Interior Deficiencies
Contrary to section C.5.2.3.17 of its contract, 60 of the 128 properties observed were not in
ready-to-show condition.8 The 60 properties had 77 other interior deficiencies. The following
items are examples of other interior deficiencies listed in the table: debris on the floor, dead
insects on windowsills, cobwebs on vents, dirty carpets, and rotting basement wall. In addition,
24-hour emergency contact signs were missing for three properties at the time of our
observations.

Fifty-One Properties Had Sixty-Eight Exterior Health and Safety Hazards
Contrary to section C.5.19 of its contract, the exteriors for 51 of the 128 properties observed were
not free of health and safety hazards. The 51 properties had 68 exterior health and safety
hazards. The following items are examples of exterior health and safety hazards listed in the
table: rippling exterior carpets, broken glass, large hole in yard, unsecured detached garage side
door, exposed electrical wires, and missing midrails (balusters).

Sixty-Eight Properties Had Seventy-One Other Exterior Deficiencies
Contrary to sections C.5.1 and C.1.610 of its contract, the exteriors for 68 of the 128 properties
observed were not clean and sanitary and did not reflect a high standard of care. The 68
properties had 71 other exterior deficiencies. The following items are examples of the other
exterior deficiencies listed in the table: landscaping not maintained, debris in a detached garage,
abandoned vehicles in backyard, and detached garage wall damaged by water.

The following photographs illustrate examples of the deficiencies noted during the property
observations of the 105 properties that were not maintained in accordance with PKMG’s contract
with HUD or its own requirements.




6
  See appendix D for criteria.
7
  See appendix D for criteria.
8
  Ready-to-show condition is defined as a property free of debris, visible insect and rodent infestations, and health
and safety hazards. All cabinets, refrigerators, freezers, counter tops, and windows must have been wiped clean, and
the property must be free of bad smells. All floors and carpets must be clean. This requirement does not apply to
custodial properties.
9
  See appendix D for criteria.
10
   See appendix D for criteria.



                                                          7
Property #A34: Feces on
wall and floor




Property #A117:
Deteriorated basement
wall




                          8
Property #A119:
Broken window




Property #A125:
Property not secured;
missing door and
window




                        9
Property #A125:
Exterior debris




Property #A49: Interior
debris




                          10
Property #A122:
Missing flooring
covered up with carpet




Property #A114:
Unsecured vents




                         11
Property #A59: Hole in
backyard, creating
tripping hazard




Property #A123:
Missing midrails
(balusters) on second
floor




Inappropriate Property Management Fees Were Received for Services Not Provided
For three properties (FHA case numbers 131-990458, 137‐003836, and 137‐311574), HUD
asked PKMG to stop performing property preservation and protection services due to pending
demolition or removal from HUD’s inventory. For another property (FHA case number 137-
352298), HUD asked PKMG to stop providing property preservation and protection services
because the homeowner’s association dues owed on the property exceeded the appraised value.




                                              12
PKMG stated that if HUD asked that services not be provided for a particular property that was
in its active inventory, it would stop servicing the property and then manually remove the
property from its monthly field service manager batch billing transmittals to HUD. However,
based on our review of monthly batch billing transmittals and payment receipts, we determined
that PKMG did not always exclude these four properties from its monthly batch billing
transmittals. Because the four properties were not always removed from the monthly batch
billing transmittals, PKMG inappropriately received more than $2,300 in property management
fees.
PKMG Lacked Adequate Oversight of Its Subcontractors
PKMG lacked adequate oversight of its subcontractors to ensure that property preservation and
protection services were performed in accordance with its contract and its own requirements.
According to PKMG, it regularly performed quality control inspections of the properties in its
active inventory to ensure that its subcontractors properly maintained the properties.
Additionally, PKMG stated that the percentage of its inventory that it inspected on a recurring
basis had increased from 10 to 30 percent of its active inventory. However, based on our review
of PKMG’s quality control inspections, we determined that PKMG performed quality control
reviews for less than 9 percent of its active inventory. For one month, it reviewed only 59 (3.7
percent) of the 1,594 properties in its active inventory. For the quality control reviews we
reviewed, deficiencies were noted in every property PKMG reviewed. However, the quality
control findings report did not contain the names or other identifiers to determine the
subcontractors that had performed the preservation and protection services for the properties that
were not maintained in accordance with PKMG’s contract. PKMG acknowledged that its
subcontractors’ information was not in the report. However, it stated that it knew which
subcontractors were responsible for the deficiencies based on the location of the properties and
the work orders11 issued.

We reviewed PKMG’s compliance reports for the most recent 6 months and determined that the
reports did not identify the individuals or subcontractors responsible for the deficiencies in
accordance with PKMG’s quality control plan. In addition, PKMG did not provide
documentation (1) to show how its subcontractors had rated or (2) a list of its subcontractors that
had received additional training or were terminated. Further, although PKMG required
management to review the findings and implement the necessary steps to resolve exceptions to
prevent a recurrence, similar deficiencies continued to be identified in later reviews.
Conclusion
PKMG lacked adequate oversight of its subcontractors to ensure that properties were maintained
in accordance with its contract and its own requirements. As a result, it inappropriately received
more than $19,000 in management fees for properties that were not adequately maintained. In
addition, it inappropriately received more than $2,300 in management fees for properties it had
not serviced. Based on our statistical sample, we estimate that over the next year, HUD will pay



11
  Work orders are requests that PKMG used to send subcontractors back to a property to complete work they failed
to complete on a previous work order for no additional charge.



                                                        13
more than $2.5 million in management fees for properties that are not maintained in accordance
with its contract with PKMG.
Recommendations
We recommend that the HUD’s Acting Deputy Assistant Secretary for Single Family Housing
require PKMG to

     1A. Certify and provide supporting documentation showing that the applicable property
         preservation and protection deficiencies have been corrected for the 105 properties cited
         in this finding.

     1B. Reimburse HUD $19,425 in ineligible monthly ongoing property management fees for
         the 105 properties that contained property preservation and protection deficiencies.

     1C. Reimburse HUD $2,314 for the ineligible monthly ongoing property management fees
         received for services not performed.

     1D. Improve its quality control procedures to ensure that all properties in its active inventory
         comply with its contract with HUD and its own requirements to prevent $2,532,000 in
         monthly ongoing property management fees from being spent for properties that are not
         adequately maintained over the next year.

     1E. Implement the improved quality control procedures12 to ensure that property preservation
         and protection services are performed in accordance with its contract with HUD and its
         own requirements, including but not limited to ensuring that (1) it provides proper
         supervision and oversight of its subcontractors and (2) supervisory quality control
         inspections are completed and feedback is provided to the subcontractors to correct
         recurring deficiencies.

     1F. Implement procedures and controls to ensure that it manually removes properties from its
         monthly field service manager batch billing transmittals to HUD, when HUD asks that
         services not be provided for a particular property that is in PKMG’s active inventory.




12
     Improved quality control procedures from recommendation 1D.



                                                        14
Scope and Methodology
We performed our audit work between February and July 2016 at the Chicago regional office,
and we performed property observations in Illinois. The audit covered the period September 30,
2012, through February 2, 2016, and PKMG’s active inventory in HUD’s P26013 system, but our
scope was expanded as determined necessary.

To accomplish our review objective, we interviewed HUD’s staff at the Atlanta Homeownership
Center, the government technical representative for PKMG’s contract, and PKMG’s employees.
In addition, we obtained and reviewed the following:
        PKMG’s contract with HUD; internal policies and procedures; property management
         plan; quality control plan; HUD 3.6 property preservation contractor statement of work;
         the inspector and contractor training guides; quality control reviews; and monthly batch
         billing transmittals and receipts.

        Information contained in HUD’s P260 system, including the active properties assigned to
         PKMG’s inventory, routine inspection reports and photographs, property status, and
         other related communication records obtained from HUD’s system.

From the 1,584 active properties in PKMG’s inventory, we statistically selected 104 properties to
observe. We completed observations of 24 properties during our survey. In the audit phase, we
checked the status of the remaining 80 (104-24) properties in HUD’s P260 system to determine
whether the properties were still in PKMG’s active inventory. After reviewing the data in P260,
we determined that we did not have enough statistical replacement samples to replace the
properties that had been sold or reconveyed to the lenders. Therefore, we did not complete the
field observations of the remaining 80 properties statistically selected during the initial sample.
Our survey review determined that 19 properties were not maintained in accordance with
PKMG’s contract with HUD and its own requirements. We included the results of our survey
observations in the finding; however, the results from the survey were not included in our
projection.

Because we did not have enough statistical replacement samples, we created an additional
statistical sample. Therefore, from the 1,433 active properties in PKMG’s inventory, we
statistically selected a stratified, two-stage cluster sample of 104 properties to observe. We used
a statistical sample so the audit results could be projected to the universe. Of the 104 selected
properties, we found that 86 properties were not maintained in accordance with PKMG’s




13
  P260 is an Internet-based system that serves as the primary system of record for all HUD real estate-owned case
management transactions. The system will assign each HUD-owned property for contractors to track the disposition
activity from conveyance to sale.



                                                        15
contract with HUD or its own requirements. Projecting these results to the universe and
deducting a statistical margin of error, we can say, with a one-sided confidence interval of 95
percent that this amounts to at least 1,140 properties that were not maintained in accordance with
PKMG’s contract with HUD or its own requirements. Similarly, we found that of the fees paid,
an average of $147.70 per property was spent on properties that were not maintained in
accordance with PKMG’s contract with HUD or its own requirements. Projecting this amount to
the audit universe of 1,433 properties and deducting for a statistical margin of error, we can state,
with a one-sided confidence interval of 95 percent that at least $211,000 in ongoing monthly
property management fees was paid for properties that were not maintained in accordance with
PKMG’s contract or its own requirements for 1 month. Over the next year, this is equivalent to
an overpayment of $2,532,000 ($211,000 x 12 months) in property management fees paid for
properties that are not maintained in accordance with PKMG’s contract with HUD or its own
requirements.
Calculations below:
(83.62% - 1.8331 X 2.12%) x N = 79.7% x N ≈ 1,140 properties not adequately maintained
($155 - 1.8331 X $4.01) x N = $147.70 x N ≈ $211,000 spent monthly for properties not
adequately maintained
Data, Review Results, and Generally Accepted Government Auditing Standards
We relied in part on data maintained by PKMG and data entered into HUD’s P260 system by
PKMG and its subcontractors. Although we did not perform a detailed assessment of the
reliability of the data, we performed a minimal level of testing and found the data to be
adequately reliable for our purposes.
We provided our review results and supporting schedules to HUD’s Acting Deputy Assistant
Secretary for Single Family Housing; Chief of the Atlanta Home Ownership Center, Real Estate
Owned Division; and PKMG’s chief executive officer during the audit.
We conducted the audit in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain sufficient, appropriate
evidence to provide a reasonable basis for our findings and conclusions based on our audit
objective(s). We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objective.




                                                  16
Internal Controls
Internal control is a process adopted by those charged with governance and management,
designed to provide reasonable assurance about the achievement of the organization’s mission,
goals, and objectives with regard to

   Effectiveness and efficiency of operations,
   Reliability of financial reporting, and
   Compliance with applicable laws and regulations.
Internal controls comprise the plans, policies, methods, and procedures used to meet the
organization’s mission, goals, and objectives. Internal controls include the processes and
procedures for planning, organizing, directing, and controlling program operations as well as the
systems for measuring, reporting, and monitoring program performance.
Relevant Internal Controls
We determined that the following internal controls were relevant to our audit objective:

   Effectiveness and efficiency of operations – Policies and procedures that management has
    implemented to reasonably ensure that a program meets its objectives.
   Reliability of financial reporting – Policies and procedures that management has
    implemented to reasonably ensure that valid and reliable data are obtained, maintained, and
    fairly disclosed in reports.
   Compliance with applicable laws and regulations – Policies and procedures that management
    has implemented to reasonably ensure that resource use is consistent with laws and
    regulations.
We assessed the relevant controls identified above.
A deficiency in internal control exists when the design or operation of a control does not allow
management or employees, in the normal course of performing their assigned functions, the
reasonable opportunity to prevent, detect, or correct (1) impairments to effectiveness or
efficiency of operations, (2) misstatements in financial or performance information, or (3)
violations of laws and regulations on a timely basis.
Significant Deficiency
Based on our review, we believe that the following item is a significant deficiency:

       PKMG lacked adequate oversight of its subcontractors to ensure that properties were
        maintained in accordance with its contract and its own requirements (finding).




                                                  17
Appendixes

Appendix A


           Schedule of Questioned Costs and Funds To Be Put to Better Use
               Recommendation                             Funds to be put
                   number              Ineligible 1/      to better use 2/
                     1B                    $19,425
                       1C                     2,314
                       1D                                    $2,532,000
                      Total                 21,739            2,532,000


1/   Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity
     that the auditor believes are not allowable by law; contract; or Federal, State, or local
     policies or regulations.
2/   Recommendations that funds be put to better use are estimates of amounts that could be
     used more efficiently if an Office of Inspector General (OIG) recommendation is
     implemented. These amounts include reductions in outlays, deobligation of funds,
     withdrawal of interest, costs not incurred by implementing recommended improvements,
     avoidance of unnecessary expenditures noted in preaward reviews, and any other savings
     that are specifically identified. In this instance, if PKMG implements our
     recommendations, HUD will stop incurring program costs for properties that are not in
     ready-to-show condition or free of health and safety hazards and, instead, will spend
     those funds for properties maintained in accordance with its contract. Once PKMG
     improves oversight of its subcontractors, this will be a recurring benefit. Our estimate
     reflects only the initial year of this benefit.




                                             18
                  Appendix B
                                                               Schedule of OIG Property Observation Results
                       FHA case number




                                                                                                             Deficiency type




                                                                                                                                                                           Total deficiencies
                                                  Results
Identification




                                                                                Health and safety                                    Other deficiencies
   number




                                                                 Exterior




                                                                                                                       Exterior
                                                                            Number




                                                                                                  Number




                                                                                                                                  Number




                                                                                                                                                        Number
                                                                                       Interior




                                                                                                                                             Interior
                                                                            exterior




                                                                                                                                  exterior
                                                                                                  interior




                                                                                                                                                        interior
                                         Pass14


                                                      Fail15




                                                                                                              Total




                                                                                                                                                                   Total
S1               131-985663                             X           X           1         X           3          4         X          1         X           3         4    8
S2               137-686966                             X                                 X           4          4         X          1         X           2         3    7
S3               137-489893                             X           X           2                                2         X          1                               1    3

S4               137-213648                             X           X           1         X           3          4         X          1                               1    5
S5               137-325834                             X                                 X           1          1         X          1                               1    2
S6               137-331725                             X           X           2         X           3          5         X          1         X           2         3    8

S7               137-268143                             X                                 X           2          2         X          1         X           2         3    5
S8               137-597898                X
S9               137-510834                X

S10              137-641711                             X           X           1         X           4          5                              X           1         1    6
S11              137-505799                             X                                 X           3          3         X          1         X           2         3    6
S12              131-686559                             X                                 X           1          1         X          1                               1    2

S13              137-357996                             X                                                                  X          1                               1    1
S14              137-283417                             X           X           2         X           2          4         X          1                               1    5
S15              137-341857                             X                                 X           1          1                                                         1

S16              137-345341                             X                                 X           1          1         X          1                               1    2
S17              137-312086                             X           X           1         X           1          2         X          1         X           1         2    4
S18              137-372795                             X           X           1         X           1          2         X          1         X           1         2    4




                  14
                     Pass is defined as property preservation and protection services that were in accordance with PKMG’s contract
                  with HUD and its own requirements.
                  15
                     Fail is defined as property preservation and protection services that were not in accordance with PKMG’s contract
                  with HUD, its own requirements, or both.



                                                                                                  19
                                                                                                       Deficiency type
                   FHA case number




                                                                                                                                                                    Total deficiencies
                                              Results
                                                                          Health and safety                                    Other deficiencies
Identification
  Number




                                                                                                                Exterior
                                                                                            Number




                                                                                                                                                 Number
                                                           Exterior




                                                                                                                           Number
                                                                      Number




                                                                                                                           exterior
                                                                                            interior




                                                                                                                                                 interior
                                                                      exterior




                                                                                                                                      Interior
                                                                                 Interior
                                     Pass13




                                                                                                       Total




                                                                                                                                                            Total
                                                  Fail14


S19              137-516750                           X         X         1           X          1         2                               X         1          1             3
S20              137-352760                           X                               X          2         2          X        2           X         2          4             6
S21              137-003836              X
S22              137-310214              X
S23              137-422937              X
S24              137-473116                           X         X         1           X          3         4                               X         1          1             5
A25              132-183817                           X                               X          1         1          X        1                                1             2
A26              132-248687                           X         X         1           X          2         3          X        1           X         1          2             5

A27              132-183222                           X                                                               X        1                                1             1
A28              132-137243                           X         X         2           X          2         4          X        1           X         1          2             6
A29              132-210339                           X         X         2           X          2         4          X        1                                1             5
A30              132-208981                           X         X         1           X          2         3                               X         2          2             5

A31              132-239110                           X                               X          3         3          X        1           X         1          2             5
A32              132-208622                           X         X         1           X          4         5          X        1           X         1          2             7
A33              132-256078                           X         X         1                                1          X        1                                1             2

A34              132-201054                           X         X         1           X          6         7          X        1           X         2          3         10
A35              132-169804                           X         X         1           X          6         7          X        1           X         1          2             9
A36              132-240521                           X         X         1           X          4         5          X        1                                1             6
A37              132-204493                           X                               X          1         1                                                                  1
A38              132-150096                           X         X         1           X          1         2          X        1           X         1          2             4
A39              137-468303                           X                               X          2         2          X        1           X         1          2             4
A40              137-455521                           X         X         1                                1                                                                  1
A41              132-156775                           X                                                               X        1                                1             1
A42              132-161794                           X         X         1           X          4         5          X        1                                1             6

A43              132-280796                           X         X         1           X          2         3          X        1                                1             4
A44              132-286484                           X                               X          1         1          X        1           X         1          2             3




                                                                                            20
                                                                                                       Deficiency type
                   FHA case number




                                                                                                                                                                    Total deficiencies
                                              Results
                                                                          Health and safety                                    Other deficiencies
Identification
  Number




                                                                                                                Exterior
                                                                                            Number




                                                                                                                                                 Number
                                                           Exterior




                                                                                                                           Number
                                                                      Number




                                                                                                                           exterior
                                                                                            interior




                                                                                                                                                 interior
                                                                      exterior




                                                                                                                                      Interior
                                                                                 Interior
                                     Pass13




                                                                                                       Total




                                                                                                                                                            Total
                                                  Fail14


A45              132-223138                           X                               X          2         2          X        1           X         1          2             4
A46              132-160338                           X                               X          1         1          X        1           X         1          2             3
A47              132-221569                           X                               X          2         2                               X         1          1             3
A48              132-201201              X
A49              137-283662                           X                               X          3         3          X        1           X         1          2             5
A50              137-447131                           X         X         1           X          1         2          X        1                                1             3
A51              137-426336              X
A52              137-415828                           X         X         1                                1          X        1                                1             2

A53              131-803364                           X         X         1           X          1         2          X        1                                1             3
A54              137-210541                           X                               X          1         1          X        1                                1             2
A55              137-576768                           X         X         1                                1                                                                  1
A56              137-234852                           X                               X          2         2                                                                  2

A57              137-337969                           X                               X          4         4                               X         1          1             5
A58              137-430391                           X                               X          1         1                               X         1          1             2
A59              137-590717                           X         X         1           X          3         4                               X         2          2             6

A60              137-463175                           X                               X          1         1                               X         1          1             2
A61              137-334534              X
A62              137-651065              X
A63              137-709976                           X         X         1           X          1         2          X        1           X         1          2             4
A64              137-467809                           X                               X          3         3          X        1                                1             4
A65              137-332972                           X                               X          3         3                               X         2          2             5
A66              137-376662                           X                               X          2         2          X        1           X         1          2             4
A67              137-351702                           X         X         2           X          4         6          X        1           X         2          3             9
A68              137-391816                           X         X         1                                1          X        2                                2             3

A69              137-376499                           X         X         1           X          5         6          X        1           X         1          2             8
A70              137-351397                           X         X         1           X          1         2          X        1           X         1          2             4




                                                                                            21
                                                                                                       Deficiency type
                   FHA case number




                                                                                                                                                                    Total deficiencies
                                              Results
                                                                          Health and safety                                    Other deficiencies
Identification
  Number




                                                                                                                Exterior
                                                                                            Number




                                                                                                                                                 Number
                                                           Exterior




                                                                                                                           Number
                                                                      Number




                                                                                                                           exterior
                                                                                            interior




                                                                                                                                                 interior
                                                                      exterior




                                                                                                                                      Interior
                                                                                 Interior
                                     Pass13




                                                                                                       Total




                                                                                                                                                            Total
                                                  Fail14


A71              137-691393                           X                               X          2         2          X        1           X         2          3             5
A72              137-546029                           X         X         1                                1                               X         2          2             3
A73              132-251209              X
A74              132-179529                           X         X         3           X          1         4          X        1           X         1          2             6
A75              132-274617                           X                               X          1         1          X        1           X         1          2             3
A76              132-252141                           X                               X          1         1          X        1           X         1          2             3
A77              132-202870                           X         X         2           X          3         5          X        1           X         1          2             7
A78              132-269848                           X                               X          1         1                                                                  1

A79              132-265446                           X         X         2           X          2         4          X        1           X         1          2             6
A80              132-183178                           X                               X          1         1          X        1                                1             2
A81              137-517783                           X                               X          2         2                               X         1          1             3
A82              137-540757                           X                               X          1         1          X        1                                1             2

A83              137-532521                           X                                                               X        1           X         1          2             2
A84              137-209879                           X                               X          1         1                               X         1          1             2
A85              137-492843              X

A86              137-510637                           X                                                                                    X         1          1             1
A87              137-743340              X
A88              137-572438                           X                               X          2         2                               X         1          1             3
A89              131-724704                           X                               X          2         2                                                                  2
A90              137-384507                           X                               X          1         1          X        1                                1             2
A91              137-531695              X
A92              137-487290                           X         X         2           X          1         3          X        1           X         1          2             5
A93              137-224604                           X                               X          1         1                                                                  1
A94              137-369902                           X         X         2           X          2         4          X        1                                1             5

A95              131-815376              X
A96              137-439021                           X                               X          2         2                                                                  2




                                                                                            22
                                                                                                       Deficiency type
                   FHA case number




                                                                                                                                                                    Total deficiencies
                                              Results
                                                                          Health and safety                                    Other deficiencies
Identification
  Number




                                                                                                                Exterior
                                                                                            Number




                                                                                                                                                 Number
                                                           Exterior




                                                                                                                           Number
                                                                      Number




                                                                                                                           exterior
                                                                                            interior




                                                                                                                                                 interior
                                                                      exterior




                                                                                                                                      Interior
                                                                                 Interior
                                     Pass13




                                                                                                       Total




                                                                                                                                                            Total
                                                  Fail14


A97              137-254648              X
A98              131-870142                         XX                                X          2         2                                                                  2
A99              137-297870                           X                               X          3         3                               X         1          1             4
A100             137-342145              X
A101             137-336623                           X                               X          1         1          X        1                                1             2
A102             137-312086                           X                               X          3         3          X        1                                1             4
A103             137-550862              X
A104             137-325075                           X                               X          1         1          X        1                                1             2

A105             137-462456              X
A106             137-428291                           X         X         2           X          1         3          X        2                                2             5
A107             137-352940                           X                               X          1         1          X        1           X         1          2             3
A108             137-549783                           X         X         1           X          4         5                               X         1          1             6

A109             137-260669                           X                               X          2         2                                                                  2
A110             137-484054                           X         X         1           X          3         4          X        1                                1             5
A111             137-484490              X

A112             131-751253                           X         X         1                                1                                                                  1
A113             137-582063                           X                               X          4         4          X        1                                1             5
A114             137-548120                           X                               X          3         3                               X         1          1             4

A115             137-343264                           X         X         1           X          4         5                               X         2          2             7

A116             137-539247                           X                               X          5         5                               X         1          1             6

A117             137-429301                           X         X         2           X          4         6                               X         1          1             7

A118             137-590823              X

A119             137-282288                           X         X         1           X          3         4                                                                  4

A120             137-443002              X




                                                                                            23
                                                                                                         Deficiency type
                     FHA case number




                                                                                                                                                                      Total deficiencies
                                                Results
                                                                            Health and safety                                    Other deficiencies
Identification
  Number




                                                                                                                  Exterior
                                                                                              Number




                                                                                                                                                   Number
                                                             Exterior




                                                                                                                             Number
                                                                        Number




                                                                                                                             exterior
                                                                                              interior




                                                                                                                                                   interior
                                                                        exterior




                                                                                                                                        Interior
                                                                                   Interior
                                       Pass13




                                                                                                         Total




                                                                                                                                                              Total
                                                    Fail14


A121             137-614827                             X         X         1           X          4         5                               X         2          2             7

A122             137-415866                             X         X         1           X          3         4                               X         1          1             5

A123             131-896274                             X         X         3           X          1         4          X        1                                1             5

A124             137-430834                X

A125             137-483342                             X         X         1           X          3         4          X        1           X         1         2              6

A126             137-353296                X

A127             137-463027                             X         X         2           X          3         5          X        1           X         1         2              7

A128             137-516228                             X                               X          3         3                               X         2         2              5

            Totals                        23          105        51        68           92      208       276         68       71            60       77       148      424




                                                                                              24
Appendix C
             Auditee Comments and OIG’s Evaluation



Ref to OIG
Evaluation    Auditee Comments




Comment 1




Comment 2




Comment 3




                               25
Ref to OIG   Auditee Comments
Evaluation




Comment 3


Comment 4
Comment 5




Comment 6




Comment 7
Comment 8


Comment 9




                            26
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 10




Comment 11




                               27
Ref to OIG   Auditee Comments
Evaluation




Comment 5
Comment 11




Comment 11
Comment 11




Comment 11




                            28
Ref to OIG   Auditee Comments
Evaluation




Comment 11




Comment 12




Comment 11


Comment 13




                            29
Ref to OIG   Auditee Comments
Evaluation




Comment 14


Comment 15




Comment 16




Comment 17




Comment 18




                            30
Ref to OIG   Auditee Comments
Evaluation




Comment 18




Comment 18




Comment 18




Comment 19




                            31
Ref to OIG    Auditee Comments
Evaluation




Comment 19




Comment 19




Comments 8,
11, 15, and
17
Comment 20
Comments 8,
11, 15, and
17
Comment 21
Comment 5
Comments 8,
11, 15, and
17




                             32
Ref to OIG    Auditee Comments
Evaluation




Comment 22


Comments 8,
11, 15, and
17
Comment 16


Comment 19




Comment 19


Comment 19




                             33
                         OIG Evaluation of Auditee Comments


Comment 1   PKMG states that it had reviewed the information and supporting photos that we
            provided for each property that contained deficiencies. It contends that it re-
            reviewed the inspections that were previously conducted at each property and
            determined that there were no previous reports that matched 68 percent of the
            findings that we reported. Therefore, many of the issues we identified were first-
            time reported cases. It also contends that our findings were not dissimilar to the
            findings it was accustomed to seeing during its own reviews of routine inspections
            and quality control inspections.
            PKMG did not provide documentation of the various inspections referred to in its
            comments. We obtained the routine inspection reports for each property from
            HUD’s P260 system and reviewed the inspections that occurred before and after
            our observations. We determined that the location of the deficiencies, such as
            kitchen, front lawn, etc., were not always captured in the inspection reports.
            Therefore, because the location of the deficiencies we cited were not always
            captured in PKMG’s inspection reports, it is difficult to accurately compare the
            reports for corrections or recurring issues.
Comment 2   PKMG contends that (1) it was not required to make improvements to the
            properties because the properties were sold in as-is condition and (2) the
            deficiencies we reported were minor defects. We agree that PKMG was not
            required to make improvements to the properties. However, we disagree that the
            reported deficiencies were minor. As stated in the report, 100 properties had 276
            interior or exterior health and safety hazards, and 92 properties had 148 other
            interior and exterior deficiencies. According to PKMG’s contract and its own
            internal policies, the identified deficiencies required corrective actions. Further,
            in a meeting with PKMG on April 29, 2016, it agreed that the deficiencies
            identified during the review related to its contract or its own internal policies and
            procedures.
Comment 3   PKMG contends that it reviewed HUD’s P260 system and determined that HUD’s
            asset managers reported that one property observed during the survey was not in
            ready to show condition, and that two properties observed during the audit were
            not in ready to show condition. However, PKMG did not provide documentation
            to support its assertions. Additionally, this audit was not a review of HUD’s asset
            managers.
Comment 4   PKMG states that HUD’s asset manager was obligated to conduct routine
            inspections and monitor and assess whether properties were being properly
            maintained by the field service manager. As mentioned in comment 3, this audit
            was not a review of HUD’s asset manager; therefore, we did not review its role
            and responsibilities in the management and marketing process.




                                               34
Comment 5   PKMG states that it was required to complete routine inspections every 14 days
            and that many issues (deficiencies) can arise from weather, neighbors, and
            vendors. PKMG also states that our observations were reported 2 months after
            the inspections were completed. We acknowledge that issues may occur between
            inspections. According to section C.5.2.3.2 of PKMG’s contract, it was required
            perform routine inspections at a minimum of once every 2 weeks. However,
            based on geography, climate, age, and community needs, some properties may
            require more frequent inspections and a higher level of maintenance than others.
            Further, in reviewing PKMG’s routine inspection reports, we determined that 52
            inspections were completed within 3 days before or after our property
            observations. However, we could not determine whether the deficiencies that we
            identified during our observations were also identified and corrected by PKMG.
            Specifically, the routine inspection reports and accompanying photographs
            generally did not include the areas or locations we cited as being deficient. For
            example, we observed the property associated with FHA case number 137-
            516228 on May 12, 2016. During the observation, we identified the following
            deficiencies: (1) water leaking in the kitchen, (2) debris, (3) exposed wiring, (4)
            missing basement flooring, and (5) water overflowing from the sump pump in the
            basement. When we reviewed the routine inspection report, we determined that
            PKMG’s subcontractor had inspected the property after we left the property that
            same day. However, the subcontractor addressed only the overflowing water
            from the sump pump in the basement. The routine inspection report did not
            contain notes or supporting photographs showing that the subcontractor reported
            or addressed the (1) water leak in the kitchen, (2) debris, (3) exposed wiring, or
            (4) missing basement flooring. According to PKMG, all inspection reports should
            have been clear and legible and included date-stamped photographs of all
            deficiencies identified on all visits to the property. Further, if corrections were
            made, the reports should have been included before and after photographs.
Comment 6   PKMG contends that if the majority of the deficiencies we cited met the intent of
            imminent health and safety concerns, we would have notified PKMG of the
            deficiency within 24 hours. We acknowledge that not all of the deficiencies that
            we observed presented imminent health and safety concerns. However, as
            mentioned in the report, 100 properties contained 276 health and safety
            deficiencies. We reported our results to PKMG and HUD throughout the audit.
            See comment 5.
Comment 7   PKMG states that it was using the findings we cited to conduct additional training
            for its employees and subcontractors. We commend PKMG for taking necessary
            actions to improve its inspection process. PKMG should work with HUD to
            resolve the recommendations cited in this report.
Comment 8   PKMG contends that all of the deficiencies have been resolved and that HUD
            received its full expected value for the contract with PKMG. PKMG also states
            that its contract does not contain provisions that require properties in its active



                                              35
              inventory to be free of deficiencies at all times. We disagree. PKMG did not
              provide documentation to support its assertion that all of the deficiencies cited in
              the audit report had been resolved. In addition, section C.5.1 of PKMG’s contract
              states that PKMG must maintain all properties in a manner that results in
              properties that are clean, safe, secure, and sanitary and preserve property value.
              Further, section C.5.2.3.1 of PKMG’s contract states that the contractor must
              ensure that the properties remain in ready-to-show condition until sold.
Comment 9     PKMG states that there was no demonstrable impact on HUD holding times,
              marketability, or sales pricing and value based on our findings. PKMG did not
              provide documentation to support its assertions. Our review was not of HUD
              holding times, marketability, or sales pricing and value. Our review was of the
              property preservation and protection services provided by PKMG as part of its
              contract.
Comment 10 PKMG contends that we did not request information on all of its quality control
           inspections. We disagree. Our review was of the property preservation and
           protection services provided by PKMG as part of its contract. Section B.1 of
           PKMG’s contract with HUD states that PKMG must provide Field Service
           Management services to successfully manage HUD-owned Single Family
           Properties and provide property maintenance and preservation services consisting
           of but not limited to inspecting the property, securing the property, performing
           cosmetic enhancements or repairs, and providing on-going maintenance. During
           the audit, we requested information and documentation regarding PKMG’s
           quality control inspections. PKMG states that it does two types of quality control
           inspections, one for initial inspections, and one for recurring inspections. PKMG
           defined its initial quality control inspections as a review of 100 percent of the
           newly acquired HUD-vacant properties after the HUD Property Inspection Report
           and initial clean out were completed.
               Section C.5.1 of PKMG’s contract with HUD states that PKMG must maintain
              all properties in a manner that results in properties that are clean, safe, secure, and
              sanitary and preserve property value. Further, section C.5.2.3.1 of PKMG’s
              contract with HUD states that the contractor must ensure that the property remains
              in ready to show condition until sold. Because (1) the initial quality control
              inspections are completed before the property moves to step 1C Ready to Show
              Condition, (2) PKMG reviews 100 percent of the initial inspections, and (3)
              PKMG uses subcontractors to complete the property preservation and protection
              services, we determined that the recurring quality control inspections of the
              subcontractors were more relevant to our review. PKMG did not mention or
              provide documentation to support that it performed more than one type of quality
              control inspection for its recurring inspection reviews. Further, its quality control
              plan did not include information regarding the various types of quality control
              inspections mentioned in its comments. PKMG also did not provide
              documentation to support its assertions that it completed the inspections in the




                                                 36
              chart or that it increased its quality control reviews of recurring inspections from
              10 to 30 percent.
Comment 11 PKMG states that it disagrees with the accounting used to determine that the loss
           to HUD was more than $19,000 and that the fee was for all recurring services to
           the properties cited in the audit report. PKMG also states that (1) we arbitrarily
           and without logical rationale labeled the findings as contractor deficiencies and
           (2) our conclusion that HUD’s payments to PKMG were inappropriate was not
           justified. While we agree that the monthly ongoing property management fee was
           for more than biweekly inspections, we disagree that we arbitrarily concluded that
           the fee was inappropriately paid to PKMG.
              PKMG did not provide a cost allocation plan to demonstrate the amount or
              percentage of the monthly property management fee that was attributable for
              preservation and protection services for HUD’s vacant or custodial properties.
              Therefore, we questioned the entire fee it earned for the properties that were not
              appropriately maintained for the month in which our observation occurred. In
              addition, PKMG provided a chart showing work orders it had completed for
              deficiencies that were identified during the audit. However, it did not provide
              documentation of the work orders or property inspection reports that included
              before and after pictures in accordance with its policies. See comments 1 and 5.
Comment 12 PKMG contends that HUD and the HUD asset manager determined that 96
           percent of the properties we observed were in ready-to-show condition.
           Therefore, the properties were promoted to step 1C. It also contends that the asset
           manager’s initial inspections determined that 77 percent of the properties we
           observed were free of health and safety hazards initially or throughout HUD’s
           holding time. PKMG also states that 100 percent of all not-ready-to-show
           conditions and health and safety hazards we reported have been corrected.
              Although the properties had been promoted to step 1C, according to section
              C.5.2.3.1 of PKMG’s contract, the properties must remain in ready-to-show
              condition until sold. As mentioned in comment 3, the audit did not include a
              review of HUD’s asset manager. In addition, PKMG did not provide
              documentation to support that all of the issues cited in the audit report had been
              corrected.
Comment 13 PKMG states that vacant properties were an ongoing source of vandalism and
           blight for many cities across the country, especially Illinois, which was number
           one in all of the States that it manages for HUD. Further, included with its written
           comments was a list of incidents reported by the asset manager for the properties
           that we observed during the audit. However, the incident reports did not
           necessarily involve any of the findings we reported. PKMG also contends that it
           had corrected all of the deficiencies we reported.
              Section C.5.2.3.2 of PKMG’s contract states that based on geography, climate,
              age, and community needs, some properties may require more frequent


                                                37
              inspections and a higher level of maintenance than others. Further, PKMG did
              not provide documentation to support that all deficiencies cited in the report had
              been corrected.
Comment 14 PKMG states that health and safety issues directly related to the volume of its
           cases were beyond its control until the issues were discovered or it was notified of
           such deficiencies. PKMG also states that we do not present any cases in which
           PKMG failed or refused to correct a deficiency in a timely manner. We partially
           agree. We acknowledge that PKMG generally corrected the deficiencies that we
           identified during the survey phase. However, it did not provide documentation to
           support that it had corrected the deficiencies observed during the audit phase. In
           addition, we commend PKMG for its willingness to correct the deficiencies cited
           during the audit. However, it needs to improve its oversight of its subcontractors
           to ensure that properties are maintained in accordance with its contract and its
           own requirements.
Comment 15 PKMG contends that our review and findings were not supported contractually or
           by regulation and that we failed to cite any basis to recommend a reduction or
           recapture of PKMG’s monthly ongoing property management fee. We disagree.
           Our property observations determined that 105 (82 percent) of the 128 properties
           observed were not maintained in accordance with PKMG’s contract with HUD or
           its own requirements. We believe that this noncompliance is material enough to
           support the recapture of payments for services not performed or for subpar
           performance.
Comment 16 PKMG agrees that it owed HUD the monthly ongoing property management fee
           for the properties for which HUD asked it to stop providing services. However, it
           contends that it had reimbursed HUD for the fees cited in this audit report.
           PKMG further states that it will continue to subtract fees related to these cases.
              PKMG did not provide documentation to support the reimbursement. However,
              we commend PKMG’s commitment to ensure that it properly removes the fees
              from its monthly batch billing transmittals to HUD. It should work with HUD to
              ensure that it continues to remove the fees for these and other properties for which
              HUD requests the discontinuation of services.
Comment 17 PKMG contends that we are not permitted to report information that identifies its
           pricing structure for services under its contract. We removed the information that
           we believe was proprietary from the audit report.
Comment 18 PKMG agrees with our references to the contents of its property management plan
           submitted to HUD as a contract requirement. However, it does not agree that we
           should cite the requirements of its property management plan, in the audit report
           as it believes the information to be proprietary and confidential. PKMG also
           contends that if the excerpts of its property management plan were to be released,
           it would give potential bidders insight into PKMG’s processes and procedures
           when the contract is released on a competitive basis less than 30 days after the


                                                38
               date of its response to us. We removed all references to PKMG’s property
               management plan from the audit report.
Comment 19 PKMG states that it agrees with our findings but emphasizes that issues noted in
           the audit report were not previously reported to PKMG. In addition, PKMG
           states that it has used the information we provided to improve its services to HUD
           by implementing key personnel changes for all three management positions; more
           intense and frequent one-on-one and group training; review of deficiencies
           directly in the field by walking with the subcontractors and discussing the
           deficiencies and acceptable corrections of deficiencies and recommendations for
           improvement; further training; increased internal training for PKMG staff;
           improved oversight of staff and subcontractors; and increased evaluations,
           training, and realignment of quality control inspection companies performing
           work for PKMG.
               We commend PKMG on the steps it has taken to ensure that it has proper
               supervision and oversight of its subcontractors. PKMG should work with HUD to
               ensure that it has adequately improved its quality control procedures and that the
               improved quality control procedures have been fully implemented.
Comment 20 PKMG contends that there was no logic to our extrapolation of its audit results to
           the universe and our estimation of future savings to HUD has no validity. We
           disagree. Our methodology for projecting the audit results to the universe, as
           detailed in the scope and methodology of this report, is a valid statistical estimate
           of future savings. Funds to be put to better use, as defined by the Inspector
           General Act of 1978, as amended, are estimates of amounts that could be used
           more efficiently if an OIG recommendation is implemented and authorized.
Comment 21 PKMG contends that the deficiencies could have been the result of the weather,
           inspectors, asset managers, appraisers, buyers, brokers, or vandalism. Therefore,
           it was not possible to quantify which deficiencies HUD should be reimbursed for.
           We disagree. Section C.5.1 of PKMG’s contract states that PKMG must maintain
           all properties in a manner that results in properties that are clean, safe, secure, and
           sanitary and preserves property value. In addition, section C.5.2.3.1 of PKMG’s
           contract states that the contractor must ensure that the property remains in ready-
           to-show condition until sold. See also comments 5 and 6.
Comment 22 PKMG states that it agrees with our recommendation 1A and that it will supply
           the certification and supporting documentation to its government technical
           representative. We commend PKMG for undertaking necessary actions to
           remediate the deficiencies identified in recommendation 1A. PKMG should work
           with HUD to resolve the recommendation.




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Appendix D
                                     Contract Requirements


Section C.1.6 of PKMG’s contract with HUD states that the purpose of this contract is to obtain
property management services as detailed in section 5.2 field service managers are companies
that provide property maintenance and preservation services consisting of but not limited to
inspecting the property, securing the property, performing cosmetic enhancements/repairs, and
providing on-going maintenance.
HUD has identified six primary objectives for its field services managers. They are to ensure
that: (1) FHA insured properties are maintained in a manner that preserves communities, (2)
HUD has real time access to all property related information, (3) properties are secured and safe
from hazardous conditions, (4) property values are preserved, (5) properties are maintained in a
manner that reflects a high standard of care, and (6) there is a high level of customer satisfaction
with HUD’s property disposition program.
Section C.2.2 of the contract defines HUD-owned properties as those properties that HUD owns
by reason of payment of an insurance claim or another acquisition method. Unless otherwise
indicated the term includes vacant land and occupied conveyed properties. HUD-owned
properties are also referred to as HUD REO or HUD-homes.

Section C.2.2 of the contract states that secured properties was defined as a property where all
windows, doors and openings are locked, boarded (where authorized), or otherwise secured to
prevent unauthorized entrance by person or animal into any portion of the dwelling, including
exterior entrances to crawl spaces, and any other structures on the property, e.g. garages and
sheds. Broken window - A pane of glass that has a visible opening that permits entry or
exposure to the elements or which is so badly cracked as to constitute a hazard, e.g. a window
with a crack that divides a single pane into two or more pieces.
Section C.2.2 of the contract defines health and safety hazards as conditions or situations at the
property that exposes the government to abnormal risk, which presents a source of danger, which
could cause an accident, or poses the threat of injury, harm to the public or property, that must be
corrected within 1 day of discovery or notification.

Section C.5.1 of the contract states that the purpose of this performance based contract is to
obtain property management and preservation services to achieve the outcomes described in
Section 1.6 (purpose and objectives). In general, the contractor must perform inspections,
preservation, maintenance, and property management services for HUD-owned properties.
Property management responsibilities under this performance work statement include:

      Initial inspections to confirm whether property meets conveyance conditions;
      Preservation of property from conveyance to sale;
      Maintenance and preparation of properties intended for sale;
      Management of rental properties;



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      Management and maintenance of properties in the custody of, but not owned by HUD.

Regardless of the type of acquisition or the property management services required, the
contractor must maintain all properties in a manner that results in properties that are clean, safe,
secure and sanitary and preserves property value.
Section C.5.1.7.1 of contract states that the contractor should update, maintain, and implement a
comprehensive quality control plan. The contractor’s quality control plan will ensure that all
aspects of this performance work statement, in accordance with the performance standards listed
herein, are performed completely and appropriately, and will contain a plan for corrective action
when deficiencies or insufficient performance are identified by either HUD or the contractor.
The quality control plan will be designed and implemented to result in quality and timely
contract performance. The quality control plan will, at a minimum, include: a detailed inspection
oversight program covering all general and specific tasks; specify tasks or areas to be inspected
on either a scheduled or unscheduled basis including the manner in which inspection is to be
conducted; a description of the techniques to be employed for producing and validating services
and deliverables that conform to the acceptable quality standards in the contract; a description of
the “checks and balances” that will be used to ensure an acceptable level of quality; provisions
for responding to technical directions and comments; and provisions that will be used to prevent
and eliminate the potential for fraud, waste and abuse of HUD funds or other funds and resources
received in the performance of this contract.
Section C.5.1.8 of the contract states that PKMG should develop and implement a
comprehensive property management plan that fully describes how PKMG intends to meet or
exceed its contract requirements. PKMG’s contract with HUD, section C.5.2.3 states that the
contractor must maintain properties in a manner that is clean, safe, sanitary, and secure.

Section C.5.2.2.1.2.1 of the contract states that if the inspection identifies any health and safety
conditions, or there is a need for any emergency repairs, the contractor must remedy those
conditions within 1 day of the inspection and update P260 with work orders and before and after
photographs within (2) days of completion of the remedial action.
Section C.5.2.2.3.6 of the contract states that the contractor must stop active leaks that may cause
deterioration of the property or pose an imminent health or safety hazard.
Section C.5.2.3 of the contract states that the contractor must maintain properties in a manner
that is clean, safe, sanitary and secure. The contractor should be liable for damages to all
acquired properties due to failure to inspect or secure property or other act, neglect, failure, or
misconduct of the contractor, a subcontractor, or any management official of any of the
foregoing. The contractor must indemnify HUD for losses due to any act, neglect, failure, or
misconduct of the contractor, a subcontractor, or any management official of any of the
foregoing. The contractor must not be held liable for casualty damage as long as, before and
after such casualty, the contractor takes immediate and reasonable action to protect the property.
Section C.5.2.3.1 of the contract states that before the asset manager lists any HUD-owned
property for sale, the contractor must ensure that it is in ready to show condition which means



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the property is free of debris, visible insect/rodent infestations and health and safety hazards. All
cabinets, refrigerators, freezers, counter tops, and windows must have been wiped clean and the
house must be free of bad smells. All floors and carpets must be clean. All repairs required to
correct safety hazards and any approved repairs to be done prior to listing the property must be
completed in order for the house to be in ready to show condition. The yard must be free of trash
and debris. The grass must be cut, bushes trimmed and holes patched, and or properly secured to
protect the public. The contractor must also ensure that the property remains in ready to show
condition until sold.
Section C.5.2.3.2 of the contract states that the contractor must routinely inspect and take all
actions necessary to ensure that properties are free from health and safety hazards, free of debris,
refuse, and personal property that corrective actions are taken on broken windows and doors, that
properties are properly secured, that winterization is maintained, and active leaks are promptly
addressed. At a minimum, the contractor should inspect the property once every 2 weeks and
report data on field service manager property inspection form. Based on geography, climate,
age, and community needs; some properties may require more frequent inspections and a higher
level of maintenance than others. Upon HUD’s request, the contractor must provide within 2
business days the routine inspection forms used by the contractor to perform the inspections.
Section C.5.2.8 of the contract states that vandalism may occur before or after the acceptance of
a sales contract. In the event a property is vandalized prior to or after acceptance of a sales
contract, the contractor should, once vandalism is discovered: (1) remove all graffiti from private
and public surfaces on the property even if the graffiti was present at acquisition; (2) repair to its
prior condition any damaged locks, doors or windows; and (3) immediately repair any health or
safety hazard. These repairs will be completed at the contractor’s expense.

Section C.5.2.10 of the contract states that custodial properties are vacant properties secured by a
secretary-held mortgage, including a home equity conversion mortgage. By virtue of its security
interest, HUD has certain rights and responsibilities to ensure that the property is preserved and
protected. HUD does not hold title to custodial properties and therefore they are not offered for
sale. Custodial properties will be assigned to the contractor through the government technical
representative. Within two (2) calendar days of notification of assignment the contractor should
complete the HUD Property Inspection Report, secure the property, and perform initial services
in accordance with Section 5.2.2.2 to the extent that such requirements can be met without
constituting an illegal trespass, and upload the HUD Property Inspection Report in P260. If the
property is occupied, the contractor should immediately notify the government technical
representative and await instructions prior to taking further action.

The contractor must maintain vacant custodial properties in accordance with the contractor’s
property management plan and at the direction of the government technical representative,
subject to the following conditions:

      C.5.2.10.2 Ready to Show Condition – The contractor should not be required to keep the
       interior of the property clean and ready to show as described in Section C-5.2.3.1 (ready
       to show condition), unless the unclean condition constitutes a health or safety hazard.




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      C.5.2.10.3 Personal Property – The contractor should not remove any personal property
       unless it constitutes an imminent health or safety hazard.

Section C.5.2.16 of the contract states that the financial control manual for HUD's Real Estate
Owned Division provides instructions and guidance for processing and monitoring all financial
transactions associated with the disposition of HUD-owned single family properties. This
ensures that during HUD's ownership or custody, all Real Estate Owned Division disbursements
are valid, reasonable, sufficiently documented, appropriately authorized, and comply with
contracting and program guidelines, regulations, and or statutes as appropriate.

Section C.5.1.8 of the contract states that the contractor must develop and implement a
comprehensive property management plan that fully describes how the contractor intends to meet
or exceed the performance objectives of this performance work statement. The property
management plan should address, at a minimum, the methodology and/or standards for:

      Maintenance and level of care;
      Conducting and uploading inspection data into P260;
      Validating work performed at a satisfactory level;
      Subcontracting control and oversight;
      Emergency response;
      Utilizing construction/improvement cost estimating application;
      Ensuring compliance with local and state laws and regulations regarding evictions;
       vacancies and any other property related compliance issues;
      Servicing properties across geographic areas and in varying ranges of property value.




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