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You've bought a beautiful condo in a resort area and spent the summer in it, and now you're ready to rent it out and make some money. Then your broker asks: Can an HOA restrict rentals and thus throw a wrench in your plans?
A homeowners association (HOA) board has lots of leeway to create lease restrictions, from limiting the number of leases allowed per year to disallowing certain pets and screening prospective renters.
Disagreements between HOAs and owners are commonplace, and rental restrictions can absolutely be a major point of contention. Homeowners may feel that HOAs are overly controlling or nitpicky. But from the HOA’s point of view, they’re trying to minimize the elements that can impact quality of life and bring down property values in their community.
While the bylaws of most HOAs can seem intimidating or draconian, they often show a much softer side in person. (During a screening interview with one in Florida, I was actually told “If you’re not an international criminal or a murderer, you’re fine.”)
All that said, HOAs and owners need to work together, not at cross-purposes. Here are just a few of the restrictions and requirements you might encounter in your HOA’s governing documents that may impact your ability to rent out your home.
Lease restrictions in condominium associations
In many cases, HOAs are not simply trying to limit owners’ rights; they are trying to implement the best practices that will allow the entire complex to be FHA approved at best, or Fannie Mae approved at minimum. For most people looking to get a mortgage, FHA loans are the best possible deal, while Fannie Mae approval allows people to buy with only 10% down. But if a condominium complex does not meet the Fannie Mae guidelines, then no one can get a conventional loan to buy in that complex. FHA approval is even more difficult for a condo complex to get.
In order to be Fannie Mae warrantable and/or FHA approved, condo complexes must meet certain specifications for the percentage of owner-occupied units, the number of units owned by one individual or company, and the amount of reserves and must be in good condition and free of litigation.
These requirements not only protect the federal banking entities from excessive risk but also protect homeowners from potentially getting stuck in an undesirable housing situation, such as a financially insolvent condo community or one with a ton of absentee landlords. So from one perspective, stringent rental rules are in the community’s and/or development’s long-term happiness and best interests.
Typical reasonable restrictions
- Owners can only rent their unit a certain number of times per year -- once a year is the most common, although some complexes will allow twice a year.
- Another variation of this is to set a minimum lease period; i.e., 30 or 90 days. This can get frustrating for an owner who is allowed to rent their unit twice in a year and wishes to do so twice during high season, then keep the condo free the rest of the year for their own use. If, for example, there’s a minimum lease period of 90 days, an owner won’t be able to book two back-to-back vacation rentals of 30 days during peak season.
- Many HOAs have a mandatory waiting period; i.e., someone must own a unit for one year before renting it out. A stricter version of this stipulates that the owner must occupy the unit for the entire first year before renting it out.
- A rental cap is a restriction over the community at large, which sets a maximum threshold of number of units in the complex that can be rented. If the cap is set at 20% (a common limit), and you decide to rent out your unit when 20% are already rented, you will likely be wait-listed until someone decides to stop renting their unit.
These are all under the umbrella of “reasonable restrictions,” defined as a restriction that serves the overall best interests of the community, particularly maintaining property values and keeping the development in the best condition for its homeowners.
Requirements for prospective renters
It often comes as a surprise to new landlords and renters looking to live in an HOA-governed building when renters have to be screened by the board, and the board rather than the owner gets final approval on who moves in. Indeed, this isn’t legal in every state -- but when it is, the board often puts renters through many of the same steps owners have to go through.
Renters may have to:
- Meet certain financial criteria and provide proof with regard to salary/income, credit ratings, and bank account in good standing.
- Prove that they were good tenants in their past homes and departed in a responsible manner.
- Agree to a background check.
- Go through an interview in person with a member of the HOA board.
HOAs are cautious about doing anything that might bump up against the statutes of the Fair Housing Act, which says that people can’t be turned down based on religious beliefs, race, sex, or other protected characteristics. HOAs also tread lightly around denying people based on nonfelony criminal records. (This is why many of them actually come out and say “If you haven’t committed a violent crime or fraud, you will pass.”)
HOAs oftentimes have an application packet, available on their website or through their management company, that is handed out to all prospective tenants. While the background information requested won’t delve into race, religion, etc., it will give a very clear picture of an applicant’s financials, work history, and residential history.
What might the application packet include?
- Federal background checks, and if foreign nationals, an INTERPOL check.
- In some states, you will be asked to get fingerprinted to be run through a more thorough criminal database.
- Several months of bank statements for proof of income.
- The last 10 years of residential addresses.
- Vaccination records of pets.
- Finally, they might ask a fee for processing -- $150 is fairly typical.
Collecting all this information plus a fee serves the purpose of weeding out people who aren’t sure they’ll pass.
Once your renter has been approved, they still need to abide by the HOA bylaws the same as any owner would. This might encompass anything from what they put out on their balcony to how they display a parking pass or how often they have visitors.
They will be expected to maintain the unit to the same level an owner would -- although you as the owner would presumably support them in the financial aspect of that. In the event of building-wide upkeep issues, a renter will need to provide access to the unit and go through the onsite management with questions, the same as an owner, but they may not get the same information and options that you, the owner, will.
If a tenant does not abide by the bylaws (say they Airbnb the unit in secret) or doesn’t participate in maintenance, it will most likely be you, the owner, who is fined and otherwise penalized. It will be your responsibility to evict them and deal with the long-term consequences.
What can an HOA not do?
HOAs can’t make decisions to change bylaws suddenly or without due process. They need to be somewhat transparent with homeowners in terms of providing access to meetings, allowing participation in votes, and providing disclosures, including financial information about the property. Make sure to request and review the development’s condo questionnaire before you decide whether to buy.
An HOA cannot impose rental policies that infringe on homeowners’ property rights unless those policies are provably “reasonable restrictions” for the good of the community. However, there’s endless debate about exactly where the line between “reasonable” and overreach lies -- which is why there are so many disagreements and legal actions taken between HOAs and homeowners.
More clear-cut, and certainly carrying a heavier weight of authority, are the Fair Housing Act statutes, which protect people from any outright discriminatory behavior by HOAs .
Can an HOA prohibit rentals?
Yes, theoretically, an HOA can ban rentals altogether, particularly if that measure is supported and/or voted in by a majority of homeowners. It’s not particularly common, and in many cases when a ban is voted in, existing homeowners and tenants get grandfathered in so no one’s current stable living situation is disrupted. However, this type of grandfather clause may run out when someone’s long-term tenant moves; depending on the HOA, the owner may not be able to get a new tenant.
It’s much more common for homeowners associations to ban short-term rentals these days, as more and more people find their neighborhoods disrupted by the Airbnb effect.
Potential pros of rental restrictions
Since much of this post has gone through the various ways that HOA governance can impede a new homeowner’s rental property ambitions, it seems only fair to touch upon the positive aspects before wrapping up:
- Rental restrictions, though they may not serve an investor’s desire for maximum profit, protect the entire development from an endless influx of transient guests who may not respect the property or their neighbors.
- By limiting these short-term renters, the development also reduces how much security and maintenance it will need, since naturally, fewer people coming in and out of the complex means less need for staff and upkeep resources.
- Pre-screening of tenants also serves the overall community security, as it discourages people with criminal backgrounds, unstable employment, or a history of evictions and nonpayment from moving into the development.
Many people still believe that HOAs create more problems than they solve -- and you may be one of them. It’s better for a prospective buyer to review the governing documents and realize immediately that this community is not a fit than to invest in a property with the intention of ignoring or disregarding the bylaws and encountering more problems than they had expected.
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