Who will win the battle over rental restrictions in HOAs?

By Deborah Goonan, Independent American Communities

debgoonan@icloud.com

In the U.S., we have a raging battle between two different kinds of property owners: traditional homeowners and investors.

The former buy a home as a place to live. The latter purchase homes for the purpose of generating rental income.

The heat of the battle is concentrated at the lower end of the housing market, limiting the supply of affordable housing for sale and for rent in America.

In HOA-ville, the hot-button issue is rental restrictions.

Some communities are scrambling to adopt rental restrictions, they say, to enhance quality of life.

Some HOAs want to preserve property owner rights to rent their homes by prohibiting any and all rental restrictions.

Trade group Community Associations Institute recently weighed in on the issue. Sr. VP of Government Affairs, Dawn Bauman, sounded the alarm in opposition to state laws preventing HOAs from enacting rental restrictions.

Recently, I heard from a very reliable source that the real estate investment companies’ lobby is planning an aggressive pursuit of legislation in 2020 to prohibit community associations from adopting covenants that restrict long-term rentals. — Dawn Bauman, CAE
Sr. Vice President, Government & Public Affairs

SourceRental Restrictions
by Dawn Bauman, CAE | Aug 28, 2019 | Common Ground (Sept/Oct 2019)

 

As usual, CAI’s stance walks the thin line between supporting owner-occupants and investor-landlords. Bauman writes:

If most homeowners believe rental restrictions are right for the community, the association should adopt covenants accordingly. If most homeowners want to allow rentals, that’s great too. What’s important is that community associations have the authority and autonomy to make these important decisions without government interference.

Translation: CAI doesn’t appear to take a stand on the issue at all, preferring to let the HOA vote determine whether or not a community will restrict rentals or not.

Ironically, CAI fails to acknowledge the HOA-industry’s own role in creating incentives for investors to take over association-governed communities.

More on that later.

 

Once upon a time, housing was more affordable

For many generations prior to the rise of HOA-ville, property owners enjoyed the freedom to rent all or a part of their home to tenants, without requiring the permission of their homeowners or condominium association.

And yet, with the exception of neighborhoods adjacent to colleges and universities, it was rare for an entire neighborhood to transition from owner-occupancy to tenant-occupancy.

In most cases, cities and small towns would house a mix of owners and tenants on the same street, mostly in small multifamily buildings of 4 units or less. A homeowner was free to divide their home to accommodate extended family or paying tenants, or both. Whatever was necessary to make ends meet.

Mutual benefits

The arrangement offered mutual benefits for homeowners and tenants, but still gave an owner the flexibility to convert back to a large single family home, if needed, in the future.

In fact, in my youth, I rented several second-floor apartments, where the landlord-owner lived on the main floor. The rent was very affordable, plus the landlord had a vested interest in keeping the home well-maintained.

When my husband and I were expecting a baby, we purchased our first home. At the time it was a duplex, but with some simple modifications, we converted it back to a 3-bedroom 1.5 bath single family residence.

That first home came without deed restrictions, and it was located in a city that didn’t require a zoning variance to subdivide a single family home or lease to tenants.

HOAs and condos were rare or non-existent.

Affordable housing was relatively easy to find. And many young families and elderly homeowners benefited from collecting rent to offset their housing costs.

It was a win-win situation.

So what happened?

 

Apartment complexes

The 1960s and 1970s saw an increase in construction of rental apartment complexes. This type of housing was more or less separated from single family residential neighborhoods.

For many Americans, an apartment was a temporary place to live, until they were ready to purchase a home. For single people or older Americans, an apartment was a long-term residence.

When mortgage interest rates and property taxes soared, and as housing price began to rise in the 1980s, small landlords began to disappear. They were slowly replaced by corporate-owned apartment communities.

That was the beginning of the end of affordable rent for many cities and towns in the U.S.

 

The rise of the suburban HOA

New construction of single family homes in planned communities took off in the 1970s and 1980s. That continued the physical separation of renters, mostly city apartment dwellers, from homeowners living in cookie-cutter homes set on plush, green lawns in the suburbs.

At the time, tenant occupied homes were a rare sight in residential HOA-governed neighborhoods.

With the exception of resort style HOA communities, everyone assumed that single family homes were for owner-occupants, and apartments were for tenants.

At the turn of the century, easy-money mortgage policies led to an increase in homeownership, with less need for rental properties.

But the housing market grew more and more volatile  — change was in the air.

 

Real estate market crash benefits investors

By now it’s well-know that, when the real estate bubble burst in 2007-2008, millions of over-extended homeowners found themselves facing foreclosure.

Bottom-feeding real estate investment companies swooped in like vultures, scooping up one in five starter-homes, and turning those into rental properties.

Experts agree that the high percentage of investor purchases is responsible for driving up purchase prices for homes in more affordable price ranges.

Increasingly, however, investors are targeting single family homes in HOA-governed communities.

Why?

 

The elephant in the room

Well, for one thing, most of the new home construction in fast-growing markets is HOA-governed. This is because, for at least 4 decades, many local governments either mandated or fast-tracked common interest communities with mandatory HOAs.

Local officials have favored planned communities with HOAs, which shift the cost of ongoing common area maintenance and community services to private communities.

But there’s another huge advantage for investors of HOA-governed housing: the power of the HOA vote.

Consider this:

At the local government level, any adult resident can register to vote, whether a homeowner or not. And each registered voter gets ONE vote. The landlord-investor, the tenant, and the owner-occupant each have the same voting power at the ballot box.

By contrast, in most modern-day HOA-villes, political power in the community is tied to the amount of property one ownspolitical power in the community is tied to the amount of property one owns.

In a typical planned community with a mandatory-membership homeowners association, only homeowners can vote in elections. And, furthermore, an owner is entitled to one vote for each home owned.

So…in an HOA, the institutional investor who owns ten homes within the same community gets ten votes in each HOA board member election or referendum. The owner of one single home gets a single vote.

Power imbalance

In other words, investors gain more political power in the HOA as they continue to buy more homes — even if they don’t reside in the community.

Also, as a group, it’s not uncommon for investor-landlords to form a majority voting bloc that overrides the preferences of owner-occupants.

At one time, this trend was seen mainly in resort-style planned communities, or condominium and townhouse associations. But, in recent years, as more investors buy up single family detached homes, some residential planned communities are beginning to transition from homeowner havens to rental home communities.

Upon closer examination, CAI’s stance on “letting members decide by vote” hands the clear advantage to real estate investors — except in HOA communities that haven’t seen a notable decline in owner-occupancy rates.

CAI protects HOAs

To be clear, CAI is not interested in property rights for individuals. Its priority is protecting the rights of HOAs, with power vested in a governing board elected by majority voting interests.

At the same time, real estate interest groups are pushing state legislation which would eliminate the power of HOAs to enact rental restrictions. But, considering the unbalanced HOA voting structure, it appears corporate advocates are merely setting the stage for large-scale investor takeover of planned communities.

In the battle for property rights, corporate investors seem poised to win.

That is, unless state legislatures break status quo, and restructure HOAs to protect the rights of individual homeowners, rather than the rights of corporate property owners. ♦