During the construction boom of the 1990s, developers levied few restrictions so as not to deter prospective buyers. They wrote governing documents that largely permitted leasing of the units.
A decade later, as associations became established, many decided to tighten the reins on non-owner occupants. They went through the detailed process of hiring attorneys to write declaration amendments that restricted or even banned renters.
Next came the real estate market crash of 2008. Owners lost jobs and home equity, and they couldn’t pay their assessments or mortgages. Many went into foreclosure. When they petitioned for exceptions to rental restrictions, sympathetic associations amended their declarations again. Others tacitly allowed the rentals despite restrictions.
Today, property values remain depressed in many areas, and investors are scouting for bargains. Concerned about a possible influx of renters, associations once more are rethinking their positions toward them.
“It is very, very common now for associations to want to enforce or institute leasing restrictions of some sort,” said association attorney James Erwin at Erwin & Associates LLC in Chicago.
Are rentals good or bad? They can be both, depending on the association and market forces.
On the plus side, allowing financially strapped owners to rent their units can help stave off foreclosure, said Salvatore Sciacca, president of Chicago Property Services Inc. in Chicago.
“Renters also keep a unit from becoming vacant,” he said. “Vacant condos are sometimes left unheated, and that has resulted in water pipe breaks.”
“The good news is, people who are renting condos are getting good rents,” said real estate agent Connie Abels of Re/Max Edge in Chicago. “Even investors have to pay assessments. It’s a much better alternative for the building to stay healthy to allow tenants, and the assessments get paid.”
If a unit goes into foreclosure, the association could lose assessments for up to three years while the case drags on, she said.
On the negative side, a common belief is that renters do not care for a property or regard its rules as well as owners do. If that’s true, associations may see higher maintenance and insurance costs. And because tenants and nonoccupant owners tend not to participate in events or social gatherings, the sense of community suffers as well, Erwin said.
Some investors are nonresponsive to association matters and communications, while others are extremely involved.
“We find it tougher to enforce the rules when owners are difficult to locate,” Erwin said.
“Investors who buy up blocks of units in a community association would have a bigger political say in what goes on in a building even though they don’t live there,” Sciacca said.
Another concern is financing. When the percentage of nonowner residents reaches certain thresholds, associations don’t qualify for capital improvement loans or for Federal Housing Administration mortgage approval. A vicious cycle is created in which owners can’t sell and buyers can’t buy.
Many of the concerns easily can be addressed, said Abels, a condo owner.
“Renters get a bad rap, and sometimes it’s justified,” she said. “There are very good people who rent for a variety of reasons. Some are people with excellent credit, but they had to do a short sale themselves.”
She recommends boards screen prospective tenants for creditworthiness, require attendance at an orientation meeting that covers the association’s rules and expectations, and establish a procedure for violations.
As for financing, some mortgage lenders do not use owner-occupancy percentages as a criterion for qualifying a buyer, Abels said. “Not allowing rentals in an association can be more damaging than allowing them,” she said.
If you do institute leasing restrictions, Erwin said, don’t be rigid. Include hardship provisions that give boards maximum flexibility to make exceptions in difficult circumstances. Another suggestion: Set a minimum residency requirement, say, a year, before owners are allowed to rent their units. “That’s sort of a poison pill for investors,” Erwin said.