More Tales from the Trenches

We have some very good landlord s . They keep their units in perfect condition , because they want the most rent . The area is very competitive. Some of these interiors are magazine article. The latest in kitchen and bath trends are usually found in these rentals.

Do they understand that a rental ban could only apply to future owners, not present owners?

FWIW I agree: Leave those covenants that require 100% approval to amend alone.

Good job regarding pointing out the importance of not giving investors control via a lower percentage.

No, they do not understand. They want the rental percentages down, they're working with the current attorney and the new property management company, and by gum this is how they're going to make it happen! They want it to happen, therefore it must happen.

Never mind that there is no chance that this will succeed - we don't have the votes, we didn't have the votes the first time and we have more rentals now. IF there is no grandfathering exception the current landlords will vote no, and some of the owner-occupants will also vote no because they want to preserve their right to rent their unit in the future.

The board president insists on seeing my objection as an issue with the rentals. It's not. It's an issue with lowering the amendment percentage for things it shouldn't be lowered for - and for no purpose because that still won't change the numbers on the rental restriction vote. What is so hard to understand about this?

Oh well... they'll have to learn the hard way - we'll just waste $1000+ that could be used elsewhere. (And I'm unimpressed with both the attorney and the new property manager.) Meanwhile it's time to get serious about selling, I guess.

I think it's hard for him to understand because your knowledge on the subject is on a par with a competent, good HOA attorney. His knowledge is not even close to being as evolved, informed and wise.

100% is required for a very few, high-stakes things: changing the percentage of ownership, changing the boundaries of units, and the like. I think it's also needed if we wanted to condemn the property, after a tornado or earthquake or similar. These things directly affect what a person owns and how much that person is assessed. Unanimous approval is not required for lower stakes restriction-type items and similar, and some changes require a simple majority.

By lowering the percentage, it will be possible for the high-stakes things to be changed without an owner's approval. This is asking for a lawsuit.

And, as I pointed out, the change also makes it easier for professional investors to gain control of the association, which is the exact opposite of what they're trying to achieve. They're actively working against their stated objective. It boggles my mind.

The trouble is that is costs money even if you win the lawsuit. It's also a time-consuming distraction. It's much better not to get sued in the first place.

At least the President opposes rentals.

I have seen COA Presidents who were landlords in the COA be highly favorable towards rentals (which does not surprise much).

Oh sure; I agree. It's back to the philosophy of "The board may not be everything I want. But at least this board is not letting the place burn down. Plus I do not have to volunteer and deal with the sturm-und-drang of a HOA Board and HOA owners."

You're right about linking board decisions to a decision to move. Living in a community association means loss of autonomy, including in areas that can affect your net worth. Some people are OK with this, others aren't. Know thyselves.

In this case, though, I'm taking about moving because you believe that the community is in danger of deconversion. As with limiting a community's rental numbers, there is a window of opportunity that closes - after that you no longer can do anything about it.

If investors are targeting a community, those who see the writing on the wall early on can sell and still get a decent price for their home. Once rental numbers are high enough, the pool of buyers will be limited to those who can afford to pay cash - which often means investors and which can depress property values. And by the time investors have a controlling majority, they can vote to convert the property to rentals. The remaining owners may be forced to see their homes (at not very attractive prices) or else pay the investor/owners rent. There are court cases where holdouts sued the investors because they just couldn't believe that that this was legal. But it is. So not only do the holdouts lose their homes, they pay thousands of dollars to a lawyer to fight a losing battle.

It's like a snowball rolling down a hill. The sooner you get out of its way, the better.

Anyway, the possibility of deconversion is real. My community is attractive, attractively priced, and located in a very desirable area. It's also less than 20 years old, has "good bones", and can be upscaled easily with cosmetic changes. In short, it's a very desirable target for an investor group. And we periodically get mailings from investors wanting the buy our homes. They're out there, and they're circling.

And now our board wants to lower the percentage needed to achieve a controlling majority. They're assuming that lowering this percentage with somehow magically translate into the community approving an amendment to prohibit all rentals. This will not happen. They could lower the percentage to a simple majority, and it will not happen. The numbers aren't there. The current landlords will vote no, some number of owner-occupants will also vote no, and some number of people won't vote at all. No amendment will change this.

Not only does the board not understand how this stuff works, they clearly don't understand how people think. It's really hard getting people to vote against their own financial interests without some compelling incentive. It's this second part that boggles my mind.

I don't. About 5 years ago it was around 15-20% and it had been pretty stable for years. But according to the board prez, the numbers have been going up - and it's enough to set everyone's hair on fire. I'd have to do a records request, and we're in the process of changing management companies - so I doubt that I'll get much out of them at the moment.

What caught my attention was that the board wants to go for a complete ban on all rentals, not just a cap. There's a reason behind that. May be a good reason, may not be a good reason - who knows.

Anyway, we should soon be receiving a ballot from the association attorney for us to vote on the proposed percentage change. Hopefully that will be more informative. I want to see the justification for the proposed change. The rental problem isn't good enough justification in my book, because we don't have the numbers even if we were only at 25% rentals.

I thought of another possible roadblock in the board's plans to lower the percentage needed to ban rentals altogether: mortgage holders.

Our Declaration says the change requires "... the consent of eligible holders of first mortgages on Units to which at least fifty-one percent (51%) of the votes of Units subject to mortgages held by eligible holders of first mortgages appertain." (Don't you just love legalese?)

Anyway, a number of current landlords originally owned their units as their primary home, and any mortgage they took out was a residential one. Once someone converts that unit to an investment, they no longer qualify for a residential mortgage. Among other things, mortgages for investment property carries higher interest rates, and (I think) the interest paid is no longer subject to the same tax treatment on their tax returns. Their unit also no longer qualifies for the preferential tax treatment given to capital gains on a primary residence if the unit would be sold at a profit.

(Disclaimer: I'm not a lawyer or tax professional, this is not tax advice).

Do you suppose any of these folks want to get their lenders' or the IRS's attention as to what's going on? Do you suppose they want to be forced to sell their units?

Do you suppose any of them would choose to fight the board's plans legally?

I'm really tempted to lay in a supply of popcorn, kick back and enjoy the show - except the consequences could be, um, interesting.

I wondered about this, too. I’d expect that if they’re looking to reduce from 100% to 75% that they would first make very sure that less than 25% of the units are rentals. But I’m not getting the sense that this President can be relied upon for proper due diligence.

Bill

It's likely a moot point now due to the "shakeup in the power structure" (ha!) but when we tried to amend the rental restriction previously, we were hovering around 15% rentals pretty consistently. I'm sure there are more now, but around 25% is a reasonable guess based on some questions the board asked me about rental numbers.

The thing is, based on our previous experience with only 15% rentals and a proposed amendment that was written to maximize the chances of it being approved, it still only received around 65% yes votes. A number of the resident owners weren't willing to give up their ability to rent out their units in the future (and at least two owners voted no because they thought the proposed amendment wasn't strict enough, lord have mercy).

It would be ironic if I end up back on the board and this project lands in my lap....