Owning a home within a homeowner's association (HOA) comes with the advantage of having a supportive association that takes care of maintaining common areas and promoting a sense of order within the community. This arrangement can relieve homeowners of various responsibilities and contribute to the overall well-being of the neighborhood. However, amid the numerous benefits, there's one aspect that tends to be a point of contention for many owners: HOA rental restrictions.

The intention behind these restrictions is often to strike a balance between the individual interests of homeowners and the collective well-being of the community. While some homeowners might feel frustrated by these limitations, it's important to recognize that they stem from a desire to maintain the overall harmony and value of the neighborhood. This brings up the question…

Are HOA rental restrictions legal?

The truth behind HOA rental restrictions State laws that allow homeowners associations typically grant them the authority to impose limitations on property rentals. These restrictions are commonly outlined in the governing documents of the homeowner’s association.

From the perspective of homeowners, these rental constraints might appear unfair because they limit the use of the property. However, courts throughout the United States have consistently supported these restrictions when they serve a valid purpose or align with the association's overall interests. For example, a homeowners association might opt to cap the number of renters within the community due to the tendency for renters to exhibit less responsibility toward property maintenance which can result in lower curb appeal and property values.

Types of HOA rental restrictions

Two main ways an HOA can restrict rentals is by either placing a cap on rentals (usually a percentage of the total community) or imposing lease restrictions.
  • Rental Caps

    A rental cap is the maximum number or percentage of permitted rental homes in the community. For example, if an HOA has a 40% rental cap, it means that tenants can occupy up to 40% of the homes in the community simultaneously. Once this cap is reached, other homeowners cannot rent out their properties.

    Rental caps are typically implemented on a first-come, first-served basis. Additionally, many associations ask homeowners to live in their residences for a specific number of years before they're allowed to rent them out. This discourages large investors or businesses that buy properties primarily to turn them into rentals.

    While the topic of rental caps can be discouraging for some residents, consider discussing the issue with your association and encourage resident engagement. It’s a great opportunity to bring people together to discuss the future of the community.

  • Lease Restrictions

    Lease restrictions refer to the specific rules that landlords must incorporate into lease agreements when renting out their homes within an HOA. Among these, one prevalent requirement is a minimum lease duration. While this timeframe may differ between associations, many opt for a minimum of 30 days. Implementing this kind of restriction helps control the prevalence of short-term rentals within the community.

    Another frequently encountered lease restriction involves mandating that tenants adhere to the community's regulations. Consequently, a landlord retains the right to evict a tenant with legitimate cause if they violate any HOA rule, which would constitute a breach of the lease terms.

Can my HOA screen tenants?

Some homeowners’ associations might choose to evaluate potential tenants as a way to weed out undesirable renters. This typically involves homeowners submitting an application form that the association's board will assess. While awaiting the board's decision, homeowners may postpone finalizing lease agreements with potential tenants.

However, it's important to exercise caution in this regard. Not all states permit associations to implement this process. Apart from state regulations, associations also need to be mindful of federal laws. There's a risk of violating the Fair Housing Act when screening tenants, potentially leading to accusations of discrimination against the HOA. Even if the association's intent isn't discriminatory, a court could still rule a policy illegal if it has a discriminatory impact or disproportionately affects certain groups of people.

Should the association choose to screen prospective tenants, it's recommended that they speak with their legal counsel before proceeding.

What are the benefits of HOA rental restrictions?

  1. Protect property values

    The main purpose behind implementing rental restrictions is to safeguard property values. Renters are more likely to violate the community’s rules because they don’t have a vested interest in the association.
  2. Lower mortgage interest rates

    Many banks tie mortgage rates to the ratio of rentals to the total available units in the association. For many lenders, a rental rate of 20-25% is the maximum they’ll consider before charging higher interest rates for new residents who wish to buy a unit in that community. By keeping the ratio below this threshold, you can make it easier for new buyers to join your association.
  3. Reduce liability insurance rates

    If a homeowner’s association (HOA) permits rentals, its insurance company might increase the rates for liability insurance. Renters typically introduce additional liability to the association, prompting insurance providers to take steps to mitigate potential risks.
  4. Promote neighborhood stability

    A community with a significant number of renters tends to experience reduced stability. The majority of homeowners prefer residing in a community where they have a sense of familiarity with their neighbors, as it contributes to a heightened feeling of security and connection. However, a community marked by a high turnover driven by rental units can disrupt the harmonious balance that residents seek.

Creating an appropriate HOA rental policy

A good rental policy finds a way to weave renters into the fabric of your association. If, for instance, your policy goes beyond mandating a restrictive threshold and also requires that renters attend an orientation, then it’s a great way to include them and welcome them to the neighborhood. Many communities see renters as potential buyers...though they may not be in the position to purchase a home at that precise moment, they may be enticed to purchase at a later date if they’re made to feel at home.

Upholding rental policies can be a touchy subject, but if carried out fairly, judiciously, and with the intention of welcoming renters as contributing members, it can lead to a more positive view. Oftentimes, an experienced property management company can help with this.

To learn more about how FirstService Residential can support your community, contact a member of our team.
Tuesday August 08, 2023