News From My Realtor: HOA Condo Rules Won’t Allow Investors At This Time
photo credit: JohnHallAssociates
This last week I was given some unfortunate news about a investment condo I was interested in purchasing for a rental property. My agent contacted the sellers agent and asked if any offers had been made on the condo. He learned no offers had been made, but the sellers agent did ask if I was going to be occupying the condo or make it an investment property. The condo has 100 units and only allows a small percentage to be rental units. The sellers agent is going to find out what the exact percentage of rental units is allowed under the current HOA restrictions. If the percentage is close, I could purchase the condo and sit on it until the numbers are lower, but risk my investment return. Also, if another unit doesn’t convert to an owner occupied condo, I could lose out on my investment completely.
Another option is to petition the HOA and show them that I’m willing to increase the value of the property and have them screen tenants. This process would take time and I might lose the property to someone who is planning on making the condo a primary residence. It’s looking like I need to move on to another property and put this one behind me. It has been a fantastic learning experience and I’ve learned much more about HOA rules and regulations. At this point I’ve invested nothing buy my time, so I feel fortunate compared to some recent stories shared by my Realtor.
I spoke to my Realtor about four potential investment condos when he shared an interesting story about a client of his. The client purchased a condo several years ago and decided to move to a bigger home nearby. He contacted his HOA for another set of keys for a common area for a new tenant that just signed a rental agreement. The HOA admin game him a shocker when they stated that he was not allowed to rent his unit under the HOA rules. The client had to petition the HOA for several months and meet with the current board to plead his request. To make matters worse, the HOA President was also his next-door neighbor and did not want his neighbor to become a renter. The client finally was able to rent out the condo, but lost out on 6 months worth of rent, or $8,000.
After hearing this story, my plan is to contact any HOA and receive a written letter authorizing the purchase of the condo for investment purposes. I can’t imagine buying a rental property and finding out it can’t be rented out. I feel that this has been a wonderful learning experience and another passive income investment property will be found. This week I’m going to be looking at several condos around the same part of town and my Realtor will pre-screen them with the sellers agent to make sure they are available to investors. But, I’m still going to demand a letter from the HOA if an offer is made.
Do you have restrictions on your condo HOA? Have you tried purchasing a condo for an investment property?
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Brian Said:
I’m finding this process fascinating, and I’m glad you’re writing about it here. At some point in the future I would like to look into rental properties, and HOA complications are not something I would have thought about.
Posted on March 23rd, 2009
Steve Said:
I belong to a real estate investing organization, and I know of many investors who invest in townhomes. The advantage of this is that the HOA fee takes care of all outside maintenance of the units. But I would definitely agree with you that you would need to be allowed by the HOA to rent it out, or it would completely defeat the purpose! There are HOA’s who don’t allow renting, and there are those who do.
Posted on March 23rd, 2009
The Almost Millionaire Said:
Good thing that you did your homework, sounds like you avoided quite a bit of frustration!
Posted on March 25th, 2009
Steely Dad Said:
Good for you for looking to buy in this market. If I had access to cash, I would be buying everything in site! If you are in a position to buy, you’re sitting pretty.
First, I would look into the legality of the rent restrictions. It seems a violation of law that some owners can rent out and other cannot. I own a few condos in different associations and having too many rental units can be bad for the property but also can impact how lenders treat the property for re-fi’s and new purchase loans. So I understand that aspect but that sounds like the HOA might be overstepping its bounds. I personally detest HOAs. To me, they are a legalized Mafia. There are the pros as far as them taking care of the outside of your space but that’s IF they actually do their jobs. They take a lot of money away from the association and they spend without any regard to their fiduciary responsibility to the homeowners. The other thing I would mention is if you do require financing, because you are not going to occupy the space you could be looking at a much larger downpayment AND a much higher interest rate. Banks are much more cautious about lending in these situations so you’ll definitely need cash, awesome credit scores AND be able to prove income. It’s not like the good ol’ days of fogging a mirror and getting a $500,000 loan at 4.875% interest only. Before making the purchase, definitely read the CC&Rs as well as the by-laws. Read them carefully. For example, if it’s a newer development, it could be the case that the developer controls a majority of the board. Walk, no, run, sprint in the other direction should this be the case. You don’t EVER want to live in a building where the board is controlled by the developer. YES, believe it or not this is legal (at least in Cali it is). Good luck!
Posted on March 27th, 2009
jj-momscashblog Said:
‘Great post Scott,
I have to tell you that I had just read an article regarding that “these times” while are scaring a lot of people and I do realize that there are also a lot of families who are in dire straits. Everywhere you read some experts are saying that this is the perfect time to invest your money in real estate,or even to start a new business.
Posted on April 5th, 2009
Greener Pastures Said:
There’s so many different rules right now, it’s hard to know what the heck to do. We have a 5.85% 30 Yr right now, not sure if we should refinance or not.
Posted on April 9th, 2009
jj-momscashblog Said:
Hey Scott, I had to come back to add one more thing that I’ve been thinking about. The HOA , Home Owners Ass. that concept to me is one that I can’t wrap my head around. I live in a very rural area, and can not imagine anyone telling me what I can and can’t do with my property. But the reality is soon it will come to that even for those of us who do live in the rural areas. That scares me. JJ
Posted on April 10th, 2009
Maria @ Residual Income Web Said:
It’s not a condo, but we rent out a single-family home in a subdivision with a HOA. Luckily there are no restrictions.
I would not recommend buying it and hoping to get approved for renters — your ROI will suffer drastically if you go that route.
Another poster brought up an interesting point about looking into the legality of those stipulations.
Posted on May 1st, 2009
Dan Said:
I live in a condo/townhouse development that currently does not allow the units to be rented out. We are considering changing the rules regarding this so that 1) owners may be able to rent out their unit instead of being forced to sell and 2) to attract potential buyers.
What are the potential issues associated with allowing rentals? Financing issues? Insurance? Legalitites? Anything else??
Posted on August 10th, 2009
Matt SF Said:
I dealt with something similar a few years back on a townhouse, but I was attempting to rent it after living in it versus buying a new property as a cash flow investment.
At the time, the HOA only allowed ~15% of properties to be occupied by renters, but we were able to work around the issue fairly easily when I presented the renter’s personal information (no arrest record, steady job, had his kid on the weekend, etc.).
Something else you might want to try is dropping off the letter by hand to speak with the HOA manager. If you’re not local, give them a phone call to see if there is any way you can work around the issue. Since you’re in a time crunch, the willingness to build a personal rapport with the HOA staff might put you over the hump and make you a more attractive buyer in their eyes.
Posted on December 26th, 2009
Scott Said:
Matt
I think you are 100% correct. Building a rapport with HOA is key. I wish I new some people on the board so I could attend a meeting and discuss how I would be a responsible owner.
Posted on January 18th, 2010