Condo associations rethinking rental restrictions

by Joseph Askins on 11/16/10

“It’s a concern, but I have a sense that most buildings in this neighborhood have put their concerns about rentals on the back burner as long as assessments keep getting paid.”

- Gene Fisher, executive director of Diversey Harbor Lakeview Association, on the leniency many condo associations are showing toward rentals within their buildings. According to the Tribune, associations are raising caps on rentals, making hardship allowances for units that are not selling or are at risk of foreclosure, or doing away with rental restrictions altogether.

Any condo owners in our audience want to chime in about the discussions their condo associations are having about rental rules right now?

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{ 16 comments… read them below or add one }

Jeff Baird November 16, 2010 at 2:16 PM

We are definitely struggling with this issue in our 25 unit building in Irving Park. We have a number of one-bedroom units in the building and a lot of 20- and 30-something singles and couples who are at a point in their lives where they’re getting married, having kids, getting new jobs, or trying to move around. I think most people like the idea of living in a building that is owner-occupied, but also have their eye on some time in the not too distant future when they might want to lease out their units rather than sell. It’s hard to forge a consensus in a situation like this and, as the article mentioned, bylaws amendments require super majorities, sometimes as high as 75%.

Associations are in the unenviable position of deciding if they want to allow more rental units or force their owners’ hands into selling prematurely–either via a short sale, deed in lieu, foreclosure, or just to sell grudgingly for a low price in this market.

The guy quoted on this page probably echoes many associations’ thoughts: they’d rather not allow rentals, but they’d REALLY rather not have owners walk away from their units because they want to move one way or another.

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David November 16, 2010 at 5:02 PM

R+D 659 never implemented rental caps in the building, though for now it remains predominantly owner-occupied. Move-ins began in 2009, so that may start to change in a year or two. We’ll have to see. I’m not aware of any significant interest among residents in implementing caps on rentals.

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SD November 18, 2010 at 4:21 PM

Question for you: What’s better – to have low sales prices in a bldg. – or over 20% rentals? My condo. board is facing the conundrum now.

Advice would be appreciated!

Thanks,

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SD November 18, 2010 at 4:32 PM

See this Tribune piece by a real estate attorney affirming condo. boards’ right to limit rentals via a board-adopted rule under IL Case Law, which does not require a super-majority of unit owners.

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Joe Zekas November 18, 2010 at 5:59 PM

SD,

I don’t believe the Apple II case stands for that proposition. A more accurate reading of the case, I believe (and it’s been a while since I read it), is that a board can recommend and initiate changes to the declaration to ban rentals, but can’t unilaterally do so if the declaration allows rentals or doesn’t affirmatively prohibit them. A board can adopt reasonable rules governing rentals on its own.

Your board isn’t facing an either – or in the way you frame the question. Over 20% rentals probably (just probably) equates to lower sales prices.

The answer to the rental conundrum is going to differ for each association based on a variety of factors. There’s no one-size-fits-all easy answer.

Give us a few more specifics about the size and location and price range of the building and perhaps some owners from other associations can help answer your question.

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Jeff Baird November 19, 2010 at 11:37 AM

Here’s a quick summary of the most recent advice we’ve gotten from our attorneys: if the association amends the bylaws, then any disgruntled owner filing a lawsuit will definitely lose. If the board adds the leasing restrictions to rules & regs, it MAY stand up to a court challenge; then again, it may not, and the loser pays the winner’s legal fees.

For us, this is not a chance we’re willing to take and we are pursuing an amendment.

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Joe Zekas November 19, 2010 at 1:02 PM

Jeff,

A few more specifics would be helpful, as I’m sure your attorney’s advice was based on the specifics of the proposed restrictions.

I don’t know who your attorney is, but there’s one very bad and very well-known condo attorney out there whose advice is very suspect. His game is suckering boards into expensive and protracted litigation. A partnership I controlled spent $700K in legal fees in the 80s warring against this guy before a fixed judge in Cook County Chancery Court.

From what you describe your guy isn’t that guy, but I’m mentioning this to caution boards to be very careful about who they retain as counsel.

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SD November 19, 2010 at 1:07 PM

Thanks Joe and Jeff.

Joe, perhaps our situation is somewhat different in that our original bylaws prohibited rentals from the get-go but for “hardship” requests – to be approved by the board – with a 2-year maximum to lease a given unit… (One unit-owner is already in violation of the maximum.)

Due to the diminished market value of their units, several unit-owners wanted – and still would like – to lease their units under the hardship provision. (A couple of them were/are looking to “move-up” to take advantage of diminished sales prices on the buy-side, but want to have the ‘best of both worlds’ by not selling their current home at its current, lower market value.)

Consequently, this spring a litigation attorney amended our bylaws via a board-adopted to define “hardship” as “…the commencement and pendency of mortgage foreclosure proceedings in a court with respect to the subject unit.” (Btw, regardless of any prohibitions re leasing by the association, if a unit-owner is in foreclosure, they are entitled to lease their unit under IL law.)

To help facilitate sales in the bldg., we are in the process of applying for FHA-project approval, as FHA no longer allows “spot” approval for condominiums: The entire project must be approved. Particularly for condominiums that are largely first-time buyer properties, FHA-approval, allowing for as little as 3.5% down vs. the 20 – 25% now required by conventional loans, seems to be a must… (We were just approved by a bank’s preliminary project approval person who is now submitting our package to FHA for underwriting. It’s quite a bit of work, but should be well worth the effort.

My question to you is, are we better off exceeding 20% rentals or dealing with reduced sales prices? This is a small building comprised of 13 units. Just 3 leases put us at 23% rentals (ouch)…

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SD November 19, 2010 at 1:21 PM

p.s. In our case, the board’s intent is not to be hard-hearted…

In a small, 13-unit bldg. such as this, just 2 more leases – in addition to our 1 unit-owner leasing in violation of the rules – would put us at 23% rentals. We fear we may need some “wiggle room” for those who may get into real financial trouble, as, again, unit-owners facing foreclosure are entitled to rent their units under IL law.

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Sue February 9, 2011 at 5:44 PM

Thank you so much for mentioning the IL law allowing renting when units are in foreclosure…exactly our situation. Can you cite the specific law? I’m already violating the association’s rules – facing foreclosrue & bankruptcy as an alternative.
It seems a NO BRAINER that if you can’t cover your expenses via leasing, you’ll be forced into foreclosure that will lower the selling price or will sell your unit at any price you can get.
Additionally, if board were to oversee the tenants coming in AND premium rental rates, that could “seed” future buyers.

I did hire a lawyer for “foreclosure defense” that apparently not many do. I’m lucky enough to have parents who can float me money for the lawyer.
I’ve already started talking to my legislators about our dilemna and the root of the problem: the mortgage groups and their scrutiny of the rental rate in the condo village.

Thanks again! -Sue

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Horace February 22, 2011 at 4:47 PM

Hmm. My association didn’t enforce rental restrictions, which lead in great part to the demise of what was once a great condominium community. Our community wound up having more renters than resident owners and it soon became worse than a typical apartment complex – worse because there was no central landlord to field complaints.

Absentee owners rented to anyone just to stay afloat, which led to vandalism, graffiti, over-occupancy (e.g. 3 people in a one bedroom unit), mailbox break-ins, abandoned vehicles, and lower property values. Association board members rarely lasted 6 months due to the never ending stream of complaints about noisy renters and calls for legal actions to bring owners back into compliance with bylaws they had agreed to. The cost of that would have exceeded the budget. There were months when we had no leadership since no one wanted to be on the committee.

Just be very careful if you ease up on rental restrictions. Its hard to put the lid back on. Once someone has their condo mortgage covered and they are living comfortably elsewhere they tend to forget about their obligations to the condo community and its bylaws. Its unfortunate but its more often the case than not that owners will accept a less than ideal renter just to get the cash.

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Don February 22, 2011 at 9:10 PM

Thanks to everyone for a healthy discussion of this subject, which has become more critical in the past couple of financially stressful years. I think Horace’s situation is the exception rather than the rule in well run associations. Of course, the key words are “well run.” My guess is that Horace’s association does not employ a professional property manager, nor does it have persons on the board who understand their rights and responsibilities as board members to other owners (to act diligently in all owners’ best interest).

When condo or homeowners’ associations decide to allow rentals, they actually are increasing the value of the properties under their control. Property becomes less valuable as more restrictions are placed upon its use. Thus, an outright ban on rentals will cause members’ holdings to be less valuable to potential purchasers.

Consider that condos are typically less valuable than other single-family properties of similar size and qualities nearby that are not restricted by a homeowners’ association. Furthermore, properties in an HOA that has onerous rules and regulations will be less valuable on the open market than properties with sensible reguations.

In sum, owning a condo comes with responsibilities. Many people who buy them think they are avoiding them altogether. Association members should participate in meetings and keep in touch with board members. Owners should keep in touch with each other and serve at some time or another during their ownership on the board, if possible.

Sensible restrictions on renting in any homeowners’ association can balance the needs of all owners and residents. Such restrictions may include a limit on the percentage of units that can be rented; a time limit on leases; “right of first refusal” of the board for potential tenants; right of approval of tenants based on credit and personal references, etc. The board members must educate themselves on what management techniques and rental restrictions they can impose to protect association members while not reducing the potential value of all units. That, after all, is their job as board members.

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Horace February 23, 2011 at 10:06 AM

Don, What I didn’t take the time to explain in my post is that lax administration of rental policies began during the “bubble” when times were good and people could sell their condos with little difficulty. Of course many owners chose to rent out their units with the later expectation of turning a big profit. We did in fact have a professional management that ,with the influence of some of the more established owners, allowed this to happen since it gave the owners options. During the bubble no one really complained although as a relatively new owner I wasn’t aware of the relaxed restrictions until I noticed how transient the population of the community was. I made inquiries to the board whose new president disclosed the policy of lax rentals. Anyway, for reasons detailed in my earlier note, I sold before the bottom fell out of the market though I still have friends in that property.

Is my case extreme ? Maybe. Maybe not. But the point here is that this did in fact happen in what was supposedly an upscale and at one time, well maintained, safe community. Does this mean that relaxed rental restrictions will invariably lead to a situation such as mine ? Of course not but its quite difficult to bring owners back into line with the stated bylaws after several years or more of non enforcement.

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PD April 8, 2011 at 9:50 AM

Our condo association has a maximum of 30% of units allowed to be rented, which is currently maxed out and there is a waiting list for the rest of us. The problem is, there is no rental time limit, so those units renting have a monopoly, and are also enough to not let us reach 67% majority to change the decs. Does this create two classes of homeowners? The IL Condo property Act says there should only be one class…

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Joe Zekas April 8, 2011 at 11:57 AM

PD,

That’s a novel legal argument – and an interesting one.

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PD April 11, 2011 at 9:44 AM

The situation is forcing homeowners in the complex (some of whom are on the rental waitlist and just have to leave for whatever reasons) to sell… which in this market means selling for a price below what is owed on the mortgage…The board has refused to grant hardship exemptions as well.

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