What is an adult family home in Wisconsin?
According to the website of the Wisconsin Department of Health Services, an Adult Family Home is a place where adults who are not related to the operator reside and receive care, treatment or services that are above the level of room and board and that may include up to seven hours per week of nursing care per resident. The minimum age requirement for residing in an Adult Family Home is 18 years. This definition pertains only to three-bed and four-bed Adult Family Homes, which are regulated by the Department of Health Services Division of Quality Assurance. One-bed and two-bed Adult Family Homes are regulated by individual county Human Services departments.
The DHS website includes some interesting stats on adult family homes. As of September 2015, there were 1801 adult family homes licensed by DHS. The average start date for current licensees was March 6, 2009. Of all adult family homes, 1,395, or 77%, accept public funding.
Adult family homes often have programs for more than one resident classification, and the most common classifications include: 1,701 or 94% have a program for developmentally disabled residents, 1,039 or 58% have a program for emotionally disturbed residents or residents with mental illness, and 725 or 40% have program for residents of advanced age.
In this post, we used the term ‘Adult Family Home’ interchangeably with ‘assisted living home’. While some states, including Wisconsin, use the term ‘adult family home’, many use a more generic term such as ‘assisted living home’. But the same issues apply to the sale of any similar type of property.
Challenges of Selling an AFH
Keeping the sale confidential
A common challenge when selling an adult family home, another type of assisted living facility or just about any business is keeping the sale confidential. Most sellers don’t want their staff or residents to know they are selling until a sale is ready to close. There are many good ways to keep a sale confidential, whether or not you work through an agent.
Over at Senior Care Realty, we specialize in keeping sales quiet until closing. It’s sometimes impossible to prevent staff from whispering and wondering if “something’s up”. But targeted marketing, insisting on confidentiality agreements from buyers, and explaining expectations to buyers is part of the process that can help any seller.
Documenting the business value
Many owners of adult family homes live in the same home with their residents. This can provide many benefits, including certain tax benefits. Payments for ‘foster care’ are generally not taxable income, so some adult family home owners don’t report the income they receive – it’s not required. (Learn more by visiting another post on this subject.)
But that also presents a problem when the owner wants to determine how much the business is worth. If they don’t have good records of the income and expenses, it is difficult to determine the net income. Without a solid track record of the property’s historical net income, buyers and their lenders are reluctant to pay as much for the business value.
This problem can be corrected by keeping good records of all income and expenses, whether they need to be reported to the IRS or not.
Is the real estate alone worth more than it is with the business?
Adult family homes are almost always single family homes that have been converted to use for assisted living. The market for single family homes fluctuates – especially over recent years.
You would think that the home is always worth more because there is a business operating there. But that’s not always the case.
First, sometimes a buyer really likes the home because they want to live there with there family and nobody else. Maybe the home is in a great location. Maybe it has some beautiful feature or extra land. Any number of things may help increase the value of the home for a single family.
Second, the price that the buyer of an assisted living home can afford may be limited by the amount of income the property generates. The buyer may have an expectation for a return on their investment in the home and their lender will certainly need a certain amount of income to provide the financing. If the net income from an adult family home isn’t sufficient to support a price higher than the home is worth as a single family, then it may be better to close the assisted living and just sell the house.
Ways to Sell Your AFH
Sell the business and the real estate
The preferred choice for most sellers is to leave closing with cash in hand and no further ties to the property. This isn’t always possible.
Buyers of an assisted living home often face challenges with financing, particularly financing the portion of the price, if any, that is for the business value. But there are other options.
Sell the business, keep and lease the real estate
As I mentioned above, financing is often a problem for buyers of adult family homes. One solution is for the seller to provide the financing. And this can turn into a bonus for the seller, too.
When someone sells their adult family home, they are often left with the question about how to replace some or all of their income. Selling with seller financing, while it has it’s own issues to consider, can be a source of income to the seller for years to come. The business value can be paid to the seller with a down payment and monthly payments over time. The real estate can even stay with the seller but leased to the buyer of the business.
Close the business, sell the real estate for residential use
It take a special person to operate an adult family home. Every seller begins the process of selling with a hope of finding that special person to take over and continue what the seller started. But when nobody is able to take over the business – or the value of the house alone is just too high – then it may be time to consider closing the adult family home and turning the home back into use by a single family. It happens.
Selling an adult family home has some special challenges but those challenges can often be met with a good plan and some flexibility.