To many homeowners’ associations and cites the word “rent” is truly a four-letter word.
The 2008 Indiana Supreme Court case of Villas West II v. McGlothin began as a community association’s legal action against a homeowner who was renting out her property to tenants. It ended as a landmark decision supporting homeowners’ associations of all stripes.
There were two reasons that the case was watched closely nationwide: first, because many, if not most, associations already have some type of rental restriction; and second, because it was the first case of its kind to reach a state high court. It was far from conclusive.
Today the debate continues as to whether property investors should have the right to rent out their homes to tenants, and from all appearances the fight isn’t over by a long shot.
City fathers play “mother hen”
Investors are monitoring the case of Winona, Minn., a small college town, which in 2006 implemented the first comprehensive rental cap ordinance by a city in the U.S. Three homeowners opposed to the ban on renting their property in the college community took their case before the Minnesota Court of Appeals in 2013. The case has now gone to the Minnesota Supreme Court.
“To me it’s getting beyond what elected officials are supposed to do — starting to dictate who can rent, who can’t rent, who can do this, who can do that,” Ted Dzierzbicki, a plaintiff whose house is across the street from Winona State University, is quoted by watchdog.org. “They’re not the kind of laws that benefit and protect people.”
The website reported: “The 2006 law restricts rentals to 30 percent of properties per block to curb ‘excessive on-street parking, anti-social behavior and deteriorating housing conditions’ in the college community.” But those who already were renting out their properties were grandfathered in, so the percentage of properties per rent per block could dramatically exceed 30 percent.
At least three more Minnesota cities have passed rental caps on homeowners — Mankato, Northfield and West St. Paul. Now, the Minnesota Supreme Court will take up the 3-year-old property rights case.
“I’ve received inquiries from all over the country in the course of this case about various restrictions in people being able to rent out their property and otherwise exercise their property rights,” Anthony Sanders, lead counsel for the Institute of Justice public interest law firm representing the homeowners. told the website. “So the eyes of property rights advocates and city planners are on us from all over the country.”
You can read more on this here.
“Our argument is you cannot be denied your right to rent out your perfectly safe house to perfectly safe tenants just because a neighbor of yours has decided to do the same thing,” Sanders said. “Otherwise the government is just picking and choosing who gets to exercise their property rights.”
The fallout could be disastrous for some investors and homeowners. Watchdog.org’s story provides the following examples:
– – Plaintiff Ethan Dean lost his house to foreclosure due to his inability to rent the house to pay the mortgage.
– – Holly Richard, another plaintiff, lost nearly three years’ worth of rental income because the city mistakenly denied her rental permit application.
– – And Ted and Lauren Dzierzbicki finally sold their house after four years but are seeing the lawsuit through.
Similar scenarios are taking shape in cities across the U.S., including Austin, Texas; Sacramento, Calif., and Las Vegas, Nev.
“The old mindset was that ‘we want this (community) to be strictly owner-occupied.’ And that was good at a certain period of time,” says Gary Pallini, executive director of the Independence, Ohio-based Great Lakes Real Estate Investors Association. “The problem is that (homeowners’ associations) suffered to a greater extent from the correction in the market.”
Pallini notes that the greater default rate made this time particularly challenging for condominium owners. “(At one point) I was looking at a condo in Las Vegas, and at the time it was $150,000. A friend of mine is an agent out there and I said, ‘When it gets down to about $100,000, call me and I’ll put an offer in.’ He said, ‘You’re crazy. When it gets to $250,000, I’ll call you and tell you how crazy you are.”
The punchline: The condominium eventually sank to $30,000 – and wasn’t selling.
“My friend calls me probably two years after our discussion and said, ‘You can buy the entire complex for $255,000.” Pallini laughs. “What happened was that the homeowners’ association went broke – so now they couldn’t give away the condos because lenders were not giving any money on them. … It made that property worthless.”
Why weren’t properties selling? According to Pallini, it was because the association mandated that rentals were only allowed if property owners themselves were already occupying a unit.
“It’s lack of education,” he says. “They fear for the life of their association, they fear for the demise of their communities. If they were educated on how to properly set up and control the rentals, it would provide greater opportunity. They’re not helping themselves. They’re at a crossroads right now, from what I see.”
Are there compelling reasons for rental limitations?
San Jose, Calif.-based real estate attorney Jeffrey A. Barnett sees the issue in a different light. Barnett believes there are compelling reasons for limits when it comes to the declaration of a common-interest development prohibiting or restricting rentals.
“Directors, managers and attorneys who deal with homeowner associations on a daily basis know that in many ways rental use is incompatible with the operation of condominiums and planned developments,” Barnett writes on his website. “For example, frequent move-ins and move-outs result in noise and property damage and create an atmosphere of impermanence and of a transitory lifestyle. Homeowners who are exposed to constant weekend moving vans do not feel they are living in a stable community.”
Barnett also asserts that tenants are more likely than property owners to violate community rules, such as illegal parking, noise disturbance, unlawful storage and overburdening of recreational facilities. “These rule violations,” he writes, “result from renter ignorance of the CC&Rs, Bylaws and Association rules, or from an attitude of disrespect, borne of a lack of commitment to the success of the community.”
Investors are a permanent force in residential real estate. According to the National Association of Realtors’ 2013 Investment and Vacation Home Buyers Survey, 80 percent of respondents bought a vacation property for personal use, but 23 percent had made the purchase with the intent of renting to others. The 2012 Invaluable Investor Study — sponsored by The Home Depot, RE/MAX, Real Property Management, National Tenant Network and written by Real Trends & this magazine and helped by Harris Interactive — found 25 to 28 percent of all residential sales were buy-to-rent. These rentals are home to 38 percent of Americans; nevertheless, the social importance of this function is ignored or discriminated against.
Barnett says that rental restrictions derive “not only from a need to maintain the single-family residential character of the project, (but) to reduce rule violations and to increase the pool of needed volunteers.” Additionally, he writes, tenant population impacts funds for buyers and refinancing owners as well as fees for liability and casualty insurance.
Are courts backing home owners associations more often?
David Granzella of Sacramento, Calif.-based NorCal Real Estate Investors Association feels that the legal system is growing stricter when it comes to upholding homeowners’ association restrictions.
“The economy and real estate market got slammed in the late 2000s,” he said. “So all of a sudden you’ve got the value of the property depreciating … and when you’re buying a property for $50,000 versus $250,000, you’ve got a whole different clientele.”
That means while some buyers were committed to living in their properties, he says, others were buying with the intent to rent – and this was particularly prevalent in the lower-priced market.
“The value wasn’t there, but there’s a different person acquiring that property. … A lot of times people were buying for rental. It was a good value.”
Pallini also sees the courts as holding firm when it comes to maintaining restrictions.
“It’s a condition of purchase; you have to belong to an association and you have to abide by their bylaws,” he says. “I think (the courts) are holding true. The associations need to come together and examine themselves, similar to investors coming together in associations and looking at taking a different approach to our industry as real estate investors … to be more professional and more engaged in the legislative and political process so that we can help craft instead of react.”
He encourages real estate investors to be aware of legislation that affects them – not just in this topic area, but in general.
“I live by a mantra: you either have a seat at the table or you’re on the menu. If you don’t have someone guiding our interests when these laws are crafted, generally it’s costing us in some way.”
However, Granzella sees fighting the homeowners’ associations as a bit of a fool’s errand. “I know people who personally own properties and it’s impossible to fight (the associations). They can afford an attorney, or a layman to compensate for that. Really, there’s no battle to be won.”
Pallini agrees. “I don’t know if you see pushback (from investors); they just avoid the communities where they are not welcome,” he says. “I don’t see a way out. As more and more vacancies occur in those closed communities that don’t allow rentals, the more units that are on the market and for sale with extended periods of time on the market, they have to do something. They can’t let the percentage of vacancies go too high because they’re not collecting their homeowners’ fees. They’re in a catch-22.”
What about the new peer-to-peer rental sites?
With peer-to-peer property rental sites such as AirBnB and VRBO gaining in popularity, issues of rental restriction aren’t likely to fade anytime soon.
Eric Smith knows this firsthand. As co-founder of Corporate Housing by Owner, a Littleton, Colo.-based corporate housing solutions provider seeking to connect residential landlords with tenants, Smith is no stranger to fielding rental restrictions.
“We always encounter these objections,” he says. “Homeowners associations are monitoring more and more the length of the stay, more or less, of the individual units with the new AirBnb and vacation rental sites coming up and individual owners wanting to rent out their property or a room for a short amount of time – and the homeowners’ associations are having issues.”
The firm typically looks for a rental-friendly homeowners’ association with a one-month minimum stay. Most corporate housing properties, Smith says, see an average of a three- to five-month stay.
If an individual property owner abides by the homeowners’ bylaws, Smith says, things tend to go fairly smoothly. “But that’s not uncommon in corporate housing when you have a strict homeowners’ association. Corporate housing seems to fit better than these vacation rental sites,” he says. “You have one individual person who stays longer, typically. It’s not uncommon to get a six-month or even a year lease on a particular property.”
In addition, month-to-month rental agreements with a 30-day notice policy gives corporations some flexibility – and they are willing to pass that on in the form of higher rents on shorter-term lease environments. The lower the minimum stay requirement, the higher the rents a property owner can command on this sort of housing.
CHBO, which has been in business for eight years, doesn’t just locate in upscale areas. “It really can be any neighborhood, any area,” Smith says. “You probably want to have a decent neighborhood from which somebody can commute back and forth to work. … Those properties are always going to stay rented. When you get out on The Outer Banks, you’re going to have more previews in order to get that property rented.”
Resources
Corporate Housing by Owner
www.corporatehousingbyowner.com
Jeffrey A. Barnett
www.hoa-law.com
David Granzella
NorCal REIA
916-791-8322
www.investorsworkshopsnorth.com
Gary Pallini
Great Lakes REIA
(440) 941-7342
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