We have not enforced our leasing bylaws

I am on the board of a 16 unit condo building. I joined the three person board in 2007 right before the condo market started to get really bad in our area. We are now a two person board because one of the members got foreclosed on. Our building is very bare bones, and we do not even have property management company.

Our condo documentation provides a process for owners to lease their units. They must apply for a receive a permit, and no permits shall be issued if 25% of the units are already being leased. It also provides for hardship permits to be granted. Our problem is that nobody (current or past boards) has actually adhered to this process. It was not an issue before the market fell out, but now clearly there is much higher demand for people to lease their units.

As a result, owners have simply leased out their units without permission or consequences. I do not have an official count but I believe that approximately 50% of the units are now being leased. My concern is that as the percentage of units being leased becomes higher, it may become difficult or impossible for would-be buyers to secure financing from a mortgage company. I am worried that this exposes the association to legal liability, as a potential sale (or even short sale) transaction would not go through due to the board not making a good faith effort to enforce the terms of the condominium by-laws.

I am at a bit of a loss of what to do from here. I would like to just be able to grandfather in everyone that is already renting because I do not like the idea trying to retroactively punish people that have been renting for months. We could then force any new renters to adhere to the permit process. I question whether any of this would be legal for us to do, because we would just be making up this process as we went and there is nothing in our documentation to support it.

Ultimately I think it may be necessary for use to consult a lawyer, but I wanted to get the thoughts of this community first.

Sean

Just because something was not enforce does not mean it cannot be enforced.

The least painful way might be to allow rentals to continue for the existing people renting even allowing those presently renting the unit to renew their rental, but notify existing owners the 25% rentals is enforce and will be enforced. This way over time the rentals migh just get back to the 25% level.

This does not harm existing unit renters nor owners renting their unit especially if the renter renews.

You always had a hardship option so unit shows the association has a heart.

I do not see how the association has any liability. Afterall you were not approving rentals so how did you know. Yes it got away from us, but we did not condone it.

Sean,
We have been extensively looking into and dealing with this very problem for nearly a year. We have consulted bank loan officers, real estate agents, government wedsites,our lawyer and numerous other sources. I can't suggest strongly enough that you see a lawyer familiar with condo laws and find out where your association legally stands and what you can do to get out of the mess you are in.
Go to your local bank and sit down with the loan officer in charge of mortgages and explain your situation. It's there business and they usually are happy to help. Another good sorce is www.caionline.org ... click on issues and advocacy/ mortgage matters and then scan the left side of the page mortgages and the ...
You already are sensing the problems ... go with your gut feeling.
Associations can restrict rentals but check your documents carfully and your state laws that apply to condos.
The "undue hardship" clause is only helpful up until you get to 50% and it sounds like you have reached or are close to that level.

FHA sends out a form with about 25 questions to evaluate the "health" of a HOA. It is usually done during the closing process and signed off and filled out by a board member/officer. You or the seller may never see this form as it is for the HOA. The form asks things like is it Fee simple? The number of units, number of non payers, how many rentals (estimated) and other similar questions evaluating the financial situation.

Most people are unaware of this because it happens in the background. This form may fall under a HUD requirement that FHA and other loan companies use. I don't want to say it is exclusive to FHA as any loan backed government wise may use.

Keep in mind that this doesn't mean a buyer can't buy with a FHA type loan but may have to have a higher interest rate or more money down. It is a good thing for a HOA to be able to qualify for as many loan packages as possible as it allows more potential buyers and keeps values competitive. However, less loans doesn't mean less home values either. It just means the buyers will have to qualify for other type loans. Which could be a good thing there as it is a tighter selection process and less chance of buyers with credit issues...Is that so bad?

John,
Yes it should make a lot of difference since they were already in place.

As you pointed out, just because the rules weren't enforced in the past doesn't mean that you can't enforce them now. However, not an easy thing to do after the fact, which seems to be the case here and could result in legal problems and extra hardship for owners who now rent. As you pointed out associations need to have a heart. They are a business but also they are homes.

The tricky part is that it is a no win situation. Because the real estate market is so bad right now and many owners owe more than they can sell for, they may need to rent ...thus the undue hardship" clause. No harship clause or too strict an enforcement could force owners to become delinquent on their fees. The FHA does't allow more than 10% of the units to be more than 30 days in arrears, not to mention the fact that all owners assume the bad debts of those that are delinquent causing further hardship.
But if you go over the 50% mark then you have even bigger problems.It is best to keep as far away from that level as possible to allow more options for owners. Even owners who are renting may one day want/ need to sell and should be taking this situation seriously.

The one year residency clause is good and one of the more equitable clauses. It discourages "investors" from buying and using up the allowed rentals that resident owners may need. Homeowner associations were intended to be owner occupied residences not apartment buildings.

On the flip side, a lot of potential buyers in today's real estate market are looking for rental properties and "investor" owners sometimes are better able to pay their fees because they are basically income properties... as I said .. a no win situation.

To complicate matters more there actual laws in some states like Florida I believe that crack down on investment types..It is why I stated that mortgage companies can crack down on renting. They now have rules that one must own a property for a year, have a one year lease, or use the property as a main residence for a time period. So writing this in your HOA documentation may be unnecessary. Plus it needs to be in your CC&R's than by laws.
There were some scrupilous investors years back who flipped condo who did bad work. Laws were passed in some states that this can be a prison sentance NOT a fine only. Frequency of ownership is now a factor in renting property by banks. It doesn't stop those who can afford to pay cash, but it does effect those who depend on financing. I had to have a one year signed lease on my other house before I could purchase this one. So there are behind the scenes restrictions per each situation..

John..The property probably went to probate court which doesn't ;ean your HOA can't collect. It just needs to be part of the probate process which may get paid when the hose sells...

What a dilemma:

If you do nothing, owners will find it difficult to sell because buyers will not be able to get financing.

But if you do enforce the rental restrictions, the owners of the rental units will most likely put their units up for sale, flooding the market, and lowering sale prices for months or even years to come. What would realtors and prospective buyers think when they find half the units in an established condo suddenly up for sale? Would they see that as a really good opportunity or would they suspect trouble and go elsewhere?