Rental Restrictions and the FHA

There have been posts recently about both rental restrictions and conforming to FHA regulations to get FHA financing and it got me thinking, so I thought I would pose the question to the group. Our CC&R’s and Ohio condo law both allow the Board to change the CC&R’s without a homeowner vote to:

5311.05 Condominium declaration.

(E)(1) Without a vote of the unit owners, the board of directors may amend the declaration in any manner necessary for any of the following purposes:

(a) To meet the requirements of institutional mortgagees, guarantors and insurers of first mortgage loans, the federal national mortgage association, the federal home loan mortgage corporation, the federal housing administration, the veterans administration, and similar institutions;

(b) To meet the requirements of insurance underwriters;

(c) To bring the declaration into compliance with this chapter;

(d) To correct clerical or typographical errors or obvious factual errors in the declaration or an exhibit to the declaration;

(e) To designate a successor to the person named to receive service of process for the unit owners association. If the association is incorporated in this state, this may be accomplished by filing with the secretary of state an appropriate change of statutory agent designation.

I know I have seen similar language in other CC&R’s and I wonder if that is enough to cap rentals and limit the number of rentals owned by any one person. What is your opinion?

Glen,
Our condo documents do not contain anything like what you posted. I wish it did. Do you know when these covenants were included in the documents.

SC is pretty conservative and with absent ownership and the property not being cheap we often hear, things like, this is my property and I'll rent to anyone I want, and if you don't like it, sue me, or you put arental restriction on my property I'll sue you, or go away, you don't have enough to do (which means do what you want as far as it is what I want you to do.

I have always felt a condo association or an individual owner would have the mandate to insure the health of the association and one way this is done is to keep the property values at a decent level by good management, and it is a good business decision to open the property to as many mortgagors as possible. Another issue to me is: If the individual property owner wants to sell his property and the Board has disallowed probably the biggest lender in the country, they are restricting the free market place to the owner that wants to sell. It will be interesting when the housing market picks up and second home owners or investment owners find they might need some cash now and will start putting their places on the market. On one hand they will want to push the rental capability of the property and on the other they are going to find FHA won't back a mortgage for the complex. Crunch time. The application for FHA approval is demanding and strict, not to mention time consuming and will require some BOD's to toe the line, and get to work.

Glen,

Interesting point of law.

I would still caution any board from changing those documents to comply with FHA guidelines without at least consulting the membership. It might be legal, but it can cause fractions within the membership. Worse, if the membership voted to not to change them and the Board chose to change them anyway (which of course would still be legal).

Tim

A SCENARIO FOR DISCUSSION PURPOSES

Robert (and others),

You posted that you wished your Association or State had such language as Glen provided. Lets go with the scenario that your association did have this language and your board changed the CC&Rs, without a membership vote, to limit the rentals to 50%.

You are required to transfer to another state (military, job related, etc.) but you are upside down in your mortgage (owe more than it can sell for at present). You were able to find a renter, but because this would place the rental property over the 50% mark, the Board won't allow it.

Would you still be glad that the board changed the rules without membership input or approval? If your military, you can't refuse the order to move. If your private sector and your job is moving and you don't, you will lose your job. Still happy you had no vote on the changes?

People buying into property controlled by HOA's agreed to live under one set of rules when the property is purchased. Normally, if the rules change there was a membership vote on the change and it passes or fails as you agreed to. However, these rental rules were changed without your vote, consent or ability to change them back (as per the law, the board could just change them again so the Association complies with the FHA guidelines). Therefore, it could be argued that the Association, by enacting these rules, is forcing you to sell at a loss or chose to lose your job. Since you had no vote on the changes and will suffer damages isn't their potential litigation against the Association?

Tim

Tim,
I understand your service member issue. I am retired military.

Like all of us we speak from personal observations over time. Having lived here over twenty years I have an opinion OUR association would benefit if we had rental controls. We have a Rental Policy, no one pays any attention to, neither the owners or the Management. It always goes on the back burner to be addressed. So, this is my personal opinion for my condo, and since my condo is just one of millions, I suppose, I imagine there would be other condos that would benefit from rental controls. I hope I didn't indicate this is applicable for all associations. Regards the FHA new laws, it appears we are going to find out if this is going to cause disruptions in the status quo of many condos.

Robert,

I would suspect that if your Association isn't enforcing the rental policies currently in effect, that they probably wouldn't enforce the new guidelines.

I agree that the new guidelines can cause issues for some Associations and that only time will tell. I also expect that if the guidelines do not harm condo sales, that these same guidelines will be placed on all HOAs sometime in the future. This is why I believe everyone in an Association should be paying attention on how this develops.

Tim

Tim,
Well, we have our annual meeting next weekend. Two leaving two nominations so the complexion of the Board will change somewhat, we will see what we will see.

I also agree this FHA thing is going to sneak into the HOAS somehow. I don't think many will agree with this, but, that's the way that goes, it's just what we think.

What you are proposing about the FHA observing how the condo's handle the new rules if also a pretty good guess. It seems the states have done exactly this about state statutes. Seems to be many states now actively trying to construct controls on the HOA's, and at least in SC the language is in part that contained in the Horizontal Property Act (Condos).

Just a mention that there is always something else effecting these associations, condo or HOA. We now have the Coastal Council of SC changing the set back lines along the coast. God know how this will turn out for our little island, but it is real and active right now.

Mary, you know how legislation works, is this a fair assessment?

For discussion purposes I can say with some degree of accuracy that I did some case law Internet "research" a couple years ago. If I recall correctly there are many instances of Courts ruling that associations (Condo's) have the right to set rental limits. So let's say associations can set rental limits for the sake of argument. Does this mean they can have this authority based on a single reason or is there more than one justification for doing it, or would it apply to the condo down the street.
Can location of the complex have a bearing? How about state law?

It is interesting that the conditions of a uncontrolled mortgage market is in part responsible for the Housing Recession and now we have restrictions (maybe) that actually can curtail sales, which is a good thing I suppose if it rights the wrong of years past, but it also appears to create new problems for the condo associations because now they are demanding compliance, where the same requirements for the most part were already in place, they were just ignored by everyone, including the government.

Matthew,

I believe the FHA rules do not apply to VA loans. As far as I know the VA does not have these condo rules.

If your assn is mandatory then the only way you can get out is to sell your unit. However, if it is a volunteer assn you can opt out any time you so choose.

Your CCRs should contain an article titled "termination" which would outline the procedures to terminate the assn. However, this only terminates the HOA; the corporation must also be dissolved. Normally the state nonprofit corp statutes will outline the procedure to dissolve a corp. In some areas, the city/co in which the HOA is located must approve termination of the HOA. Also, if there are common areas and/or amenities which must be maintained, buyers must be obtained otherwise each property owner will be subject to liability should an accident occur. In many assn's the common areas often consist of water retention areas which cannot be used for any other purpose so most likely cannot be sold.

Don,
Among other things what do you think about 55age restricted associations?

What would you suggest the rental restricted associations do? If you are condemning the associations that have rental restriction you can't very well just ignore them because they are doing it and in your opinion getting away with something. You are really saying the associations that do have rental restrictions are invalid, not the fact that the folks that post here and say there are such animals, are invalid.

Don,
In my dotage i sometimes find things are going to fast for me. I know there must be an answer to this, but it escapes me.
r
If you say rentals restriction must apply uniformly and your Board has decreed that there are no restrictions on rentals for long term, how is that uniformly if some one wants to rent short term, and you apply different conditions. And what is short term and long have to do with anything other than the preferences that were set at some point in time by people that probably don't live there anymore. If you allow all units to rent long term, what happens to the FHA requirements. Doesn't the requirements of the new FHA restrictions estblish the legality of rental restrictions, because if you are going to allow rentals and don't control them to below a certain level, then the whole complex is disqualified from participaqting in the FHA program. What are you all doing about the FHA law.

Don: Your....The CCRs are not required to conform to FHA regulations.
See (((((((( )))))))))) (((((Nor can the CCR's be constructed to disallow anyone's participation in a Federal Program,,,,I expect))))))))

Suppose you and I live in the same CID. You apply for a FHA loan. Would that mean that I am bound by the FHA requirements when I am not a signatory to your loan? (((((((Do you mean if I want to refinance? If my application was for the unit I live in it would have to be a re-finance or I suppose if your mortgage was paid off, could you apply for a new mortgage loan. Now that's an interesting question. I agree it does not mean you are bound by any financial arrangements I make to buy my property. I also expect you can not make any agreement that would prevent me qualifying for an FHA Loan or any other.))))))))))

It will be interesting if someone makes these arguments in a claim that the FHA loan requirements are discriminatory.
((((((((((As you know Don, all this regulatory stuff is like throwing a stone in a lake, it's makes a big splash and the water gets roiled where the stone hit, then the ripples start spreading out and go on until there is no more water.)))))))))))

Thanks for your interest and replies.......always insightful.