Does Restricting Rentals Make Sense for Your Association?

Does Restricting Rentals Make Sense for Your Association?

The issue of restricting residents’ ability to rent out their homes or condos is always a hotly contested one in HOAs and COAs because the interests of owner-occupants and investors are directly at odds. But as much as we’d all like to grant the maximum economic liberty to all association members, the development as a whole can be economically harmed if too many units are rented out.

Here are some considerations for homeowner and condo associations regarding rental restrictions:

Lending Considerations

There is a litany of reasons why rental restrictions make sense for some associationsIt’s a fact: Lenders commonly look at the number of units in a condominium or other development that are owner-occupied versus rented out. If the owner-occupied ratio (OOR) drifts too high, lenders could require more money down, or enact more stringent credit requirements on some prospective buyers.

For example, FHA requires that 50 percent of the units in a condominium development be owner-occupied to finance a new buyer. Fannie and Freddie also will not back loans on properties that are more than half rentals unless the buyer is going to be an owner-occupant. They don’t want to finance investors in these developments.

Quality of Life Considerations

There are quality of life issues for current residents to look at, too: Renters just aren’t prone to take care of the property as well as owners are. Renters also move more often, which means frequent moving vans, new neighbors, increased exposure to potential criminal activity, etc.

If you choose to enact a rent or lease restriction, you then have the challenge of enforcing it. To head trouble off ahead of time, take these steps:

Check Your State Laws

Some states have passed laws that limit the authority of HOAs to pass lease restrictions. Notably, California has passed a law that prohibits HOAs from imposing a rental restriction that was not already in place prior to 2012. It’s always a good idea to consult an experienced HOA or condo law attorney who’s licensed in your state before taking any action.

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Pay Attention to Process

Make sure your own processes in passing the lease restriction can stand up to legal challenges. That means the restriction was included on the public HOA meeting agenda, the meeting was publicized in accordance with your own HOA bylaws, a quorum of directors was present, the vote was recorded in the secretary’s minutes, etc.

Define Your Terms Carefully

If an owner is currently renting out a unit, or you otherwise grant a grandfather exemption to current owners when you pass a new rental restriction, under what circumstances does the grandfather clause no longer apply?

In the case of an outright sale to another party, that’s pretty clear-cut. But what about transfers of ownership to a trust? What if another owner buys a fractional interest in the unit? What about transfers to a family member? What about inherited properties? You’ll also have to consider transfers of ownership that occur as a result of divorce.

You have to be very specific about how you will administer the grandfathering status when you begin enforcing a new lease restriction in your development.

Get the Word Out

The best time to do this, of course, is when you have a new purchaser buying into the community. Have an addendum document warning owners that there are restrictions on their ability to rent out their units. Include this information, in writing, in your CC&Rs as well. You can use a cover sheet on your CC&R document.

It might be worthwhile to also send a copy of your updated CC&Rs to each owner by email (return receipt requested) or registered mail (again, return receipt requested).

Work With People

There are times when unforeseen circumstances will require an owner to rent out a unit for a time. It’s acceptable to have a process in place that allows the board of directors to request a waiver of the policy for reasons of extreme personal or financial hardship of an unforeseeable nature. For example, a member of the Reserves or National Guard could be ordered to active duty, or a member may have to relocate for a time to care for an ailing family member or seek medical treatment.

Don’t be a pushover, though. Your other residents are depending on you to protect their interests, and you don’t want to be granting waivers to anyone who pleads ignorance, claims they didn’t know about the policy, or who’s really an investor trying to pull a fast one.

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