Rental Restrictions: Maintaining the Balance

Rental Restrictions: Maintaining the Balance

July 1st, 2007

Author:  Jason L. Grosz
The real estate market in Oregon and Washington has been “hot”, and an ever-increasing number of homeowners are looking at the option of renting out their existing home and purchasing a second home. Real estate investors, big and small, have increasingly begun buying units or lots with an eye toward maintaining them as rental properties. As a result, homeowners associations are looking for ways to balance the competing interests of landlords desiring to rent their units with owner-occupiers who want to preserve the aesthetics and character of their neighborhood. Thus, many homeowners associations have looked to rental restriction amendments as a means to maintain this sensitive balance.

What are Rental Restrictions? Rental restrictions are a controversial but effective means of restricting the number of units that can be rented in a community association. Members who own their units as investments often view rental restrictions as an unfair restriction of their property rights. By contrast, owners who live in their units see rental restrictions as a means for preventing their community from becoming a loose affiliation of rental properties.

Why restrict the number of renters in your association? Owners who live in their association have a number of concerns about renters. Many owners think that renters, being more transient than owners, are less likely to comply with rules and regulations in an association’s governing documents. Additionally, some owners perceive renters as taking less pride in their community and property. Others fear that renters will let the aesthetics of their units suffer, or be irresponsible with the use of association property. Finally, the prevalence of renters in a community association tends to increase insurance rates and make it more difficult to obtain resale financing.

How can my association regulate rentals? Associations can restrict renting in a variety of ways. In recent years, rental restriction amendments have become overwhelmingly popular. Whatever method an association chooses, the restriction should set up clear lines of communication between the association and any potential tenant. New renters should receive a set of the association’s governing documents and understand that they must abide by the same rules as owners. Many times, establishing good channels of communication with tenants can alleviate the need for a rental restriction amendment.

Associations use different types of amendments to restrict renting. Many associations adopt an amendment which limits the percentage of units rented to either 20 and 30 percent. When an association has more than 30 percent of its units rented, secondary mortgage lenders may designate it “non-owner occupied,” making it more difficult to obtain financing. Owners who want to rent out their units sign up for a waiting list which is reviewed by the Board of
Directors on a first come, first served basis. Limiting the number of renters to 20 percent allows the Board to exercise some discretion in granting the remaining 10 percent of rentals to those association members with special needs. Sometimes an owner who occupies his or her unit will have a job transfer or family emergency requiring him or her to rent out their unit. This type of amendment allows the Board to accommodate those with special needs.

Another option is to pass an amendment limiting the maximum number of units that one investor-owner may purchase. This prevents an investor from purchasing a large group of units in the association and then using his or her voting power to block the passage of a rental restriction amendment. Similarly, some associations have attempted to deter investors by establishing a minimum period of occupancy after which a unit owner may rent out his or her unit. These choices are attractive because they preserve rental rights for owners who originally purchased their units as a residence.

Whatever method is used, Associations should take an honest look at the treatment of renters in their community before attempting to pass an amendment. Are renters invited to social gatherings and Association meetings? If not, owner-occupiers should be sensitive to renters’ desire to be part of the community association. Renters who are active in their communities are likely to stay longer and take pride in their Association

Jason L. Grosz
Attorney at Law
jlg@vf-law.com