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    Rental Restrictions – Short Term Fix or Long Term Problem?

    I’m seeing a new trend that may have potentially harmful results for homeowners’ associations: rental restrictions. I’m sorry to say that in a softened real estate market, tightening restrictions may lead to a long-term financial problem.

    Recently, my client’s condo association voted to stop allowing future rentals. On one hand, it makes sense. The building is less than 50% owner occupied and the developer still controls the association (they still own 5 of 15 unsold units). The owners living there don’t want it to become a rental building, so on one hand it makes sense.

    However, they haven’t done anything to change the current owner occupancy, as the current rules only preclude renting from owners who purchased after a certain date. However all of the current rented units were owned already – so nothing will change the owner occupancy level of the building.

    Due to the owner occupancy rate, a buyer can’t finance his or her purchase in this building – it must be cash. In this neighborhood and price point, cash purchasers are nearly always investors. So we have a problem – the people with the money can’t spend it. And that leaves owners who need to get out with 2 options. Pay for a home they aren’t living in, or default. If no owner occupant buyers exist for the property, and the change in rental rules doesn’t provide for more than 50% owner occupancy, there’s really no gain.

    In fact, it may produce a loss. Foreclosing in today’s world can be financially advantageous for many homeowners (there’s that issue of your credit taking a bath and affecting your credit for 7 years, of course). The stigma of foreclosure simply isn’t what it used to be. While most people will serve their own interests first, instead of the shared fate of an association, here’s how that may affect associations. When an owner stops paying their mortgage in Illinois, the timeline until that property is repossessed by the bank, and then re-sold to a purchaser, can take anywhere from 12-24 months. Most small associations can’t survive, financially, without each unit owner paying their assessment fees each month.

    It begs the question – are these buildings simply applying a band aid? A smarter decision would be to put more checks and balances in place for leases to ensure quality tenants (minimum credit scores, right of the board to review and approve any tenants/leases, etc.). This, instead of risking the building’s financial future and position. Or at least allowing owners a special dispensation if a need to rent arises. Otherwise, we’re just prolonging our market downturn and hurting our own property values.