Restricting rentals in an association can take on a complexity that few Board members have ever considered. The variations are vast. Lifestyle changes often result in hardship cases. An economic downturn can cause job losses and transfers for multiple owners. Concerned Board members often decide to “solve” the problems by amending the restrictions without realizing all the consequences. You need to understand the potential pitfalls before you leap into action.
A crisis such as an economic downturn spurs many Boards into action. Changing HOA rules is usually a time-consuming and challenging process because it involves homeowner meetings and meeting quorum requirements. Consult your HOA attorney to ensure proposed changes comply with state and federal laws before you start.
Another area to explore at the onset is how your proposed changes affect unit mortgages. Amendments to the number of rentals allowed can negatively affect financing options for potential and current owners. Lenders such as Freddie Mac, Fannie Mae and FHA reject loans when a community association fails to meet owner-occupancy percentage requirements. For more information on this, see Jeremy Cherry’s article in Tennessee Condo Talk.
As you’re looking at the legal issues, it’s also important to consider how owners will be grandfathered in. For example, if your Board plans to limit rentals to 15%, you may choose to “grandfather” existing rentals but prohibit subsequent rentals exceeding 15%. According to this maintenance company in Seattle the most common grandfather clause allows homeowners with existing tenants to continue if it doesn’t adversely affect the community. Other options include gradually phasing out some rentals as tenants move or imposing a future compliance date.
Hardship cases are the most difficult for most Board members to handle. Medical conditions, death and other lifestyle changes create financial problems that result in rental appeals. Finding the right balance between HOA owner occupancy percentage and each hardship case is challenging at best. Because each situation can be unique, your Board has to weigh the community effect of the different options: foreclosure, rental, empty unit, etc. It’s also important to note that the hardship situation often extends beyond the exemption timeframe, so it’s common to re-assess exemptions.
Community associations need rental restrictions. But, today’s world is vastly different from that of yesterday. Today, there are more job transfers, rental property investors and economic fluctuations. If past rental restrictions don’t meet your current association needs, turn to a professional for revision advice to avoid unforeseen consequences.
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Wise Property Solutions is a property management company serving East Tennessee with offices in Knoxville, TN and the Tri-Cities, TN-VA. Specializing in Condominium Association Management, Home Owners Association Management, HOA Management and Gated Community Association Management.