Rental Restrictions Help Some, Not Others, Let’s Get Real.

The following is a note from a reader about rental restrictions:

 

“Please keep your articles on rental restrictions coming! Our story relates to our board’s lack of uniformity in rule enforcement.  Our HOA that passed a rental restriction in 2006. All current owners were grandfathered in so even those who were not currently renting out their units could do so in the future, but anyone purchasing after approved would not be permitted to rent out their unit. We were okay with this and did not think this would be a problem. We certainly did not see the economic crisis of 2008-2009 coming and bought a home we could afford at the time, but lost jobs and ended up having to relocate to another state to find work. There has been at least one foreclosure in our development and the HOA assessments are high, and we have been unable to sell our townhome unless we can come up thousands of dollars. We are morally opposed to intentional foreclosure or short selling our home, although that probably would be the financially prudent thing to do.

 

We are currently managing to pay two mortgages (one in California and then our current home out of state), but it is not easy. We requested a hardship exemption from the board and even offered money to buy the right to rent out our unit knowing that plenty of homes in our community were not paying their monthly assessments. We were accused of trying to bribe the board. We know of at least one other situation where a neighbor violated the no renting rule while we were still living there and there were no repercussions to them.  We are going to have to make a difficult decision soon.”

 

Honestly, I feel for people like this who have a conscience against total abandonment of an obligation, who are caught in the rental restriction dilemma. I was dismayed in 2009 when I heard financial advisors, famous ones, were telling people to walk away from “underwater properties” because I knew from being in this business that condos and townhomes were being hurt badly by abandonment of units. Besides adversely affecting the flow of assessments, it caused blight, and with lenders stalling foreclosures, the problems often went on for months and sometimes years. Of course I understand why a financial advisor would advise an investor to dump upside down investments, but I never heard any of these famous financial advisors telling owners that they cannot walk away from assessment debt with a clean slate, like they can an unpaid mortgage. Even investors need to know that associations can pursue them for accrued assessment debt and collection costs if they don’t pay the assessments, even after they have abandoned the unit, even if they move to another state.

 

There are many, many innocent hard-working people that have been hit very hard by the economic downturn, and so this dilemma with rental restrictions is not that uncommon. It is just one more complication for boards. In advising associations on this kind of question about hardship, an attorney has to take into account that any action that allows additional owners to rent – if that action puts the association into the “danger zone” of rental percentages with secondary markets like FNMA and FHLMC, that affects the pool of financing options -and not in a good way. Banks that sell mortgages to the secondary market have to attest to things like the loan is not in an association whose rental percentage exceeds the particular providers’ restrictions (which tend to shift around but commonly range from 30%-40% – and 50% rentals cuts out even more lenders).  It’s a real catch 22 situation. If the rental percentage goes up, the lending “pool” for refinancing or selling is diminished. And hardship exceptions granted do add to the rental percentage. And also, the buyer pool shrinks when investors cannot buy and rent out the units. So a board has to balance these competing factors against enforcement of an amendment duly approved by members.

 

I cannot make any blanket recommendations but can say that I know some associations have expanded the hardship exemptions criteria to get through this “recession” – with the idea that bringing in assessments is more important than holding firm to the percentage of rentals, and others have not. Of course if an HOA makes an exception, it should be conditioned specifically on the owner keeping the assessments current.

 

The best choice depends on a lot of factors. But I can say, from what the state insurance experts have been telling us for the past couple of years, is that the number one cause of D&O claims against HOAs based Board actions is inconsistent enforcement of the rules or regulations and so if a board knowingly chooses to enforce against once owner, and not another, it can get into hot water. And enforcement can be tough, and expensive, but defending a claim can be too. So clearly, boards, the goal is to ind a way to be consistent in enforcement.

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