What are other condo associations doing, if anything, to limit renting to comply with mortgage financing rules (such as those under FHA)?

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Topic: What are other condo associations doing, if anything, to limit renting to comply with mortgage financing rules (such as those under FHA)?

Real Estate July 25, 2012 at 7:35 am

What are other condo associations doing, if anything, to limit renting to comply with mortgage financing rules (such as those under FHA)?

Our small condo association recently fell below 50% owner occupancy (i.e., 9/10 out of the 17 units are being rented out). This severely limits the pool of qualified buyers since mortgage insurers such as FHA, PMI, Freddie and Fannie, etc reject loans if the condo’s owner occupied ratio is too low. I’m writing to ask what ratios are of other condos in the area and what associations have done to keep owner occupancy ratios up? Additional fees, rental restrictions? I’m interested in hearing the range of options, and also have you’ve dealt with the politics. 

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Your association needs to adopt covenants requiring owner occupancy as their legal, primary residence for a minimum of something like 2 years, and that all sales contracts carry that stipulation.  They must impose a maximum number of rentals that are allowed at any time; require that any owner wishing to rent must obtain association approval before letting, and such approval cannot be granted if it jeopardizes the owner-occupancy requirements.  Set higher condo fees for rental units.  Add a convenant that the association may revoke its authorization for any rental, requiring the owner either reestablish primary residence or put the unit up for sale within 60 days.  Diminish the voting rights of absentee owners so they cannot vote unless granted permission for a specific matter. For owners who do reside in the building, limit them to only 1 vote if they own more than one unit.
The problem (not just in DC) is a lot of condos lack a solid core of long-time residents to ensure there is continuity of policy and enforcement.  If you don’t have enough owners willing to stand together and enforce the rules, it doesn’t matter what the condo documents say.  You need to organize your resident owners, take inventory of your association rules, make any needed changes to tighten them up, and then lay down the law.

Our association caps the number of allowed rentals at 20% (I think.. could be 25% but the difference would only be one person, it’s pretty small building). This is all explicity laid out well beforehand so potential buyers know that they should not purchase in our building as a rental investment property.
Owners interested in renting could get on the waitlist and when a landlord/owner moved or decided to stop renting a space would be available. However… as you can imagine, there was no movement on the waitlist and people were getting frustrated and illegally renting their unit.
So, we enacted a policy to cap rental terms at four years. After four years, an owner can either sell or move back in – and go to the bottom of the waitlist. Our thinking is that we understand that people move, get married, etc, and can’t always sell right away. But after four years of renting your unit you should make a decision on whether you want to sell or move back in or what.
It works out well. We comply with our FHA requirements, there’s plenty of movement on the waitlist and it’s cut down on the number of illegal rentals substantially.
Hope that helps.

1) See a lawyer. I’m pretty sure PoP links to recommendations for lawyers specializing in association law. 
2) Be careful about time limits. In DC, tenants rights trump your condo laws. If you tell an owner they must stop renting after x-number of  years, but they have a tenant who won’t leave, your association will lose that fight and possibly be subject to damages. 
3) That being said, my old co-op went through the same thing. We had a 20% cap on units allowed to be rented with a first-come, first-served waiting list, with the exception that the Board can vote to temporarily go over the cap if an owner can demonstrate hardship/extreme circumstances. Instead of a time-based restriction, we implemented a tenant-based restriction…whenver a tenant left, the owner had to re-apply for the ability to rent. If we were under the cap, there was no problem and he/she could rent again to a new tenant (who also had to be approved by the Board with full credit/background checks). By restricting it to tenant based instead of time based, the thought was we could avoid any issues where an owner’s time was up but had a tenant refusing to leave (and in DC you can only kick out a tenant under very narrow circumstances, and I’m pretty sure an association’s bylaws aren’t one of them).
4) Not sure how Co-op’s are different than condo associations here, but my guess they have similar operating structures, with the caveat that a co-op board has far more power than a condo board to police itself. As someone already noted, if you don’t have committed people to do this you are pretty much SOL. Everyone thinks it’s someone else’s problem until they go to sell and can’t find buyers because too many people are renting, and then they blame the Board. Your problem is that if you already have a majority renting, the people currently renting probably all individually want to keep on renting because it is in their short term self-interest, even though when the time comes for one of them to sell they will then be stuck holding the bag. They either can’t appreciate/don’t understand the larger implication of their individual actions. Apathy and indifference for condo associations is just as bad as busybody/micromanaging boards. It’s why I moved to a single family home. I got tired of relying on other people for my financial security/well being. There seem to be too few people willing to put in the time an effort, and a large number of people just don’t seem to understand that “owning” an apartment in a condo or co-op doesn’t mean that your responsibility stops at your door. Our old law firm told us their biggest problem was owner participation…they had some buildings where the association couldn’t even get an official quorum year-in, year-out, and were stuck in perpetual limbo. And renting is a particularly stick issue, since people who “own” something feel they should have the right do what they want with it, even it means everyone suffers.
Good luck!

A private home or condo rental agreement (versus an apartment building or a condo specifically purchased to rent) can stipulate that the tenant must vacate (with reasonable notice, typically 60 days) if the owner will be recoccupying.  Automatic right of first refusal does not apply if selling, and the new owner is not obligated to continue renting to a tenant if they intend to live there.  The owner just needs to make sure it is properly spelled-out in the agreement.  A friend of mine just prevailed in a case where he was out of the country for a couple of years, rented out his place, the tenant did not want to leave and sued him to stay.  Court decided that since it was a private residence and the conditions were adequately and properly specified, tenant had no standing to contest.  
As I said, this does not apply to investment properties, which are subject the usual DC rental housing laws; but if you have to rent-out your place for a while, just have your lawyer draw up a rental agreement (do NOT call it a lease).  What my friend did was he had an initial 1 year term with automatic 60 extensions until he returned, up to the maximum time his condo allowed for a continuous rental (I think his was 3 years).  If he didn’t return within the time limit, tenant had to vacate regardless.  Tenant could leave after the first year with 1 month’s notice.

We too cap our allowable rentals at around 20%.  Rather than telling people they can NOT rent after we hit the cap we simply assess a massive monthly rental fee/penalty to discourage people from exceeding it.  We also have fines for not providing copies of leases or tenant contact information.  We also will not permit a unit owner (or their tenant) to have his or her name and number in our call box or access the gym or other amenities if the unit is not registered or doesn’t come within the cap.  So far we have been very successful and once we developed our anti-renter environment and made it very taxing for people to rent we have found rather than renting people just sell when they move.  We are around 85-90% owner occupancy at the moment so we are happy with our results…oh and we cleared them with our lawyer first so we knew they were legal when we implimented them.

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