Over the past 10 years, many Home Owner Associations have sought to amend their Governing Documents to restrict leasing. This topic is so volatile, it could be called the “third rail” of HOA decisions. In fact, one law firm’s PowerPoint presentation on this topic starts with the slide: Rental Restrictions: How to Best Create Dissension and Animosity in Your Homeowners Association.
Given that, why not just keep the peace by letting each owner do what they want? While that’s one option, many HOA Boards limit leasing to protect property values and to keep the association in good standing.
Owners preferred, please
Most homeowners prefer other owners as neighbors because renters don’t have the same stake in preserving the community. (That may be less true today when many foreclosed owners have carried their habits of “ownership pride” over to their newly-rented place.) Nevertheless, high leasing ratios cause a drop in buyer demand which, in turn, lowers market prices.
And there’s no denying that leasing reduces the on-site owners available for the HOA Board and other association tasks. Since most HOA’s already have a chronic shortage of volunteers, this is an important consideration.
Impact on mortgages and insurance
One of the biggest reasons homeowner associations limit leasing is to comply with mortgage financing rules so that the pool of qualified buyers is as large as possible. Mortgage insurers, such as Fannie Mae and Freddie Mac, reject loans if the development’s owner-occupied ratio is too low. For new condos, the GSE’s owner-occupied requirement ranges from 51% to 70%. Established condos must have at least 51% if the buyer is an investor. But when the buyer will live in the unit, there is no limit.
In contrast, FHA loans currently require 50% owner-occupancy minimum for existing projects, whether or not the buyer is an investor. In new developments, FHA will reduce their minimum to 30% owner-occupied in certain circumstances beginning August 2011. The lending rules for condos are complex and ever-changing. Whether you are a buyer or an HOA board member considering a leasing policy, consulting an experienced attorney or loan officer is crucial.
Leasing levels of 51% or more will also cause insurance companies to classify the entire development as investment property. That designation significantly increases the cost of the HOA’s master insurance policy, which in turn raises the HOA assessments. High assessments may cause owners to flee and prospective buyers to stay away.
A smorgasbord of solutions
The main response of HOA Boards has been to cap the number of units with leases. Once the rental ratio is determined, the next decision is how to make the transition to the new rule. Some HOAs start by grandfathering in current owners on the premise that it is unfair to impose this rule change on that group. Others grandfather in existing leases for a specified time – for a year after the adoption of the new rule, or until the lease term ends or until the current occupant is no longer a tenant. And some boards implement the new rule quickly by notifying owners that all leases must terminate in the near future.
Finally, some HOA’s prohibit leasing entirely. Bans like this are most often found in small associations of 20 units or less. But just as too much leasing can hurt property values, so can a rigid rule that allows no leasing at all.
Related Posts in this Series:
Photo courtesy of FreeFoto.com