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. 39 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; 40 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 41 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. 42 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. 43
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)