HOA Rental Exceptions – Grandfathering and Hardships

What can homeowners do when they are caught between the need to rent their condo or townhouse and a policy that restricts rentals in the HOA community?

There are two main policy exceptions to explore – grandfather clauses and hardship exceptions.  First, review the HOA Governing Documents.  Was the rental restriction an original provision or was it added later?  If the rule came later, get a copy of the HOA Board meeting minutes, the amendment Resolution and any materials explaining the rationale for the leasing limitations.

Does the rental policy have a “grandfather clause” which provides temporary or permanent permission to ignore the rental restrictions?  HOA Boards often create grandfathering provisions for current owners when the association’s policies change, but this is not required.  The most common grandfather clause allows owners with existing tenants to continue those arrangements under certain circumstances.   Grandfathering options include allowing leasing until:

1.  the existing lease term ends;

2.  a specified date, such as a year after the rule change;

3.  the existing tenant no longer wants to rent that unit;

4.  the existing owner sells the unit.

 

Some HOAs let everyone keep all leasing rights if they owned before the new policy was implemented.  Upon sale, the revised rules would then apply to the new owner. This solution feels the most “fair” to existing owners because it preserves the privileges that applied when they purchased the condo or townhouse.  

(A few states have adopted laws restricting the power of homeowner associations to prevent leasing.  Contact a real estate attorney to determine whether there is an applicable law in your jurisdiction.)

Whether or not a grandfather clause exists, most rental policies provide ways for the HOA board to grant a hardship exception.  Boards have discretion in setting the definition of a “hardship”, so review the leasing policy carefully.  Typical examples of qualified hardships include extended absences from home due to military service or medical conditions.

Financial problems cause the most requests for hardship exemptions in tough real estate markets. And HOA’s are split on whether job relocations, family changes or financial difficulties will meet their hardship test.  Even Solomon would find it hard to balance the requests for hardship exceptions against the HOA’s need to retain a high percentage of owner-occupancy.

And like grandfather clauses, hardship exemptions can expire even when the hardship itself still exists.  Most associations allow owners to re-apply although the HOA Board is not obligated to approve extensions.

 

Related Posts in this Series: 

HOA Rental Restrictions – Owner Perspectives

Rental Restrictions – The Third Rail of HOA Policies

How to Challenge an HOA’s Rental Policy

HOA Rental Policies -Procedural Flaws That Matter 

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Comments

  1. sbanicki says:

    What is must often seen conflicts between HOA rules and regulations and the rules enforced by HUD under a fha 223(f) loan. In today’s market place nothing competes with an FHA loan, therefore HOA’s may be forced to conform with HUD requirements.

    • Rebecca Law says:

      Hi Steve,
      You are correct that FHA is the 600 lb gorilla that dictates many of the rules and regulations around mortgages these days. However, the FHA 223(f) loan program you mentioned applies only to multi-family rental properties, not condos or townhouses.

  2. Sheila says:

    Response requested: We are in this situation right now with a condo we inherited and the HOA allowed us to rent for 1 year due to death of the owner. Now that the year is over, they are sending us certified letters to revert the property to owner occupied. The condo sales in the area are poor and we do have it on the market with the tenant still in place. They insist the tenant must move out ASAP and we have requested the tenant stay in place until the sale. We can’t make the payment with no tenant and the house will go into default. What will the HOA do to us if we keep our tenant a few more months while the home is for sale? Thank you for any help.

    • Rebecca Law says:

      Hi Sheila,
      I’m sorry to hear that you are in this difficult situation.

      In most cases, the HOA Board will begin imposing a fine for each month that the tenant is in the condo without their approval. I don’t know what state you are in, but in Minnesota HOA fines can be collected through a lien on the condo or as a personal judgment againt the owner. It’s serious stuff.

      Have you applied for a second year of hardship exception and been turned down? If yes, what reason did the Board give for their decision? If the reason was the FNMA 20% rental cap, make sure the Board knows that it is still possible to get FNMA-approved financing if the condominium rental rate is over 20%. The key is to find a loan officer willing to apply for a waiver through the FNMA Project Eligibility Review Service (PERS). You can find more info here. Most HOA Boards do not know this is an option and it can be a lifesaver in this tough economy.

  3. Rachael says:

    Our condo building has a rental cap of 3 units, which we have reached. One person is on the waiting list.

    One of the unit owners who is currently renting wants to put the unit on the market as a potential rental property. The board is divided about whether the rental status of the condo is attached to the unit (in which case it would stay as one of our three rentals and the wait listed owner would stay on the list) or with the owner (allowing the person currently on the waiting list to rent while the new buyer gets added to the waiting list.)

    What is the usual procedure?

    • Rebecca Law says:

      Hi Rachel,
      You have touched on the main thing that makes the issue of rentals in an HOA community so challenging. The “usual procedure” is simply that the HOA Board makes judgments about how to balance the best interests of the community with individual owners’ need or desire to rent out their units. HOA Board decisions vary because there is no one RIGHT answer about which solution is the most fair to everyone.

      Common solutions include: Owners who bought when there was no leasing restriction retain the right to lease for as long as they own the unit OR for as long as their current tenant remains in place OR for a maximum lease period of 2 years OR only owners who meet the Board-specified definitions of “hardship” are allowed to lease.

      Ultimately, the rental status of the condo “belongs” neither to the unit nor to the individual owner. It belongs to the majority because that’s where the power resides to determine the condo’s status. That may be a majority of the HOA Board or a majority of the homeowners or both, depending on how the Governing Documents are worded. ( Note: A few states have passed legislation curtailing the HOA’s power to impose new rental restrictions on existing owners.)

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