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Condominiums- Know the rules regarding rentals!Condominium ownership can seem “ideal” for renting. Often, all the amenities that would serve a good rental property- location, exterior maintenance, a pool, even on site repair support would seem ideal for a “hassle free” rental experience. Unfortunately, and to the surprise of many, what seems ideal has turned into nothing short of a nightmare in some cases. It would seem intuitive at least that the right to rent one’s real estate would be a right of ownership. With condominiums, this is not necessarily the case. Many Foreign Service Officers (FSOs) have found out that they cannot rent out their condominium units at all. McGrath Real Estate Services has been an active advocate for the rights of unit owners and has participated in lobbying efforts (in Virginia) which support the rights of military personnel and FSOs in particular, the right to rent their property. While progress has been made over the past few years, we remain far from achieving the absolute right of ownership for an individual to rent out their condominium.The limitations on owners’ rights to lease came about when problems began arising during the market correction that took place between 2007 and 2009. During this period, many recently constructed condominiums sat vacant, and many were foreclosed upon (both locally, but in extreme cases in different markets nationally (Miami and Los Vegas were among the most affected markets).There are two (2) tracks that must be followed to understand your rights and limitations as a condominium owner. While they are related, they are in fact separate and are often “cross threaded” in conversation s about the suitability of “condo’s” as rental property. The first tack is statutory and defines rights of the condominium owner. The second is financing.Statutory rights- All condominiums in Virginia, are formed under the regulatory requirements contained within the “Virginia Condominium Act”. That act defines the requirements to be formed as and operate as a condominium. Included in the necessary filings are both a “declaration of condominium” and the initial “by-Laws” which contain the operating rules which govern the association of the eventual unit owners. In the original by- laws of the condominium, restrictions on rental concentration can be included. That means language in the document such as “there shall be a limit so that at any one time, no more than xx% of the units may be leased to non -owner occupants”. In this example, if the condominium had in total 100 units, no more than 49 could be rented at one time. If 49 were rented and you as the 50st unit owner went to rent yours, you could be restricted by the condominium association from doing so. How some unit owners would have more rights vested in their ownership – granted through the exact same type of deed containing the same provisions- than others is apparently not a concern to state legislators who gave condominiums this power. The “why” these restrictions were included relates to the second “track” – financing. The limitations on rentals as defined in the by-laws when such limitations were included, often tracked the exact same limitations imposed by the Federal Housing Administration which insures “FHA” mortgages. The FHA required that not more than 49% of the units making up a condominium be rental property to qualify for FHA financing- both owner occupant and non-owner occupant FHA financing. These mortgages with their low-down payment requirements have been traditionally suitable to condominium purchasers. The objective of the rental restrictions put in the creation documents was often for the purpose to keep the properties themselves approved for FHA financing for its purchasers. This is a key point to remember- FHA may (and has) amend its requirements, but those in force when the by-laws were created- even if they were intended to match FHA requirements, still remain in place and remain enforceable as they were written by the original declarant of the condominium.There was recently an article in the “Washington Post” (fall – 2016) about the loosening of requirements on loans insured by the Federal Housing Administration (FHA) for the purchase of condominiums. The article points out that while the FHA is moving towards a new policy that will require 35% (rather than 51%) of owner occupied units for a condominium to qualify its insured loans - other issues like the level of reserves held by the specific condominium may also be a reason FHA may not lend regardless of the investor concentration. ?In some cases, this new policy will disqualify some condominiums from qualification for FHA financing that are below the original 49% concentration limit for non-owner occupied units- that would have qualified under the previous concentration restrictions!There are also other loan programs available today that may be used for the purchase of a condominium that were not available in the past. This has somewhat diminished the importance of the units qualifying for FHA financing. However, it is important not to confuse changes in FHA policy or the greater availability of alternative financing options to purchase a unit and infer a right to rent it. Solve one issue relative to financing ability and the statutory issue of restrictions in the by-laws when the units were created still exist.In recent years, some condominium associations have tried to impose rental concentration limitations that did not exist in the formation documents. There has been some progress made to limit these restrictions. In 2015, the Virginia legislature passed a law which in effect limited the condominium association’s right to impose rental restrictions unless such restrictions were included in the organizing documents – by laws or declarations- of such condominium. In effect, if a condominium was not formed with rental concentration restrictions, they could not subsequently impose a concentration limitation upon its unit owners. As property managers, we have seen more and more condominium associations act as if their right to control concentrations of rentals somehow gave them rights to in effect become a party to a lease and as such granted upon themselves excessive rights such as the right to enforce leases. To that end, effective July 1, 2016 a law went into effect to restrain condominium associations from expanding their boundaries as summarized below: Condominium and Property Owners' Association Acts; rental of units and lots; disclosure packets. Prohibits a unit owners' association or property owners' association from charging an annual or monthly rental fee or any other fee not expressly authorized in the Condominium Act or Property Owners' Association Act, respectively. The bill also (i) provides that an association has no authority to evict a tenant; (ii) provides that if an owner designates a person licensed by the Real Estate Board as the owner's authorized representative with respect to any lease, the association shall recognize such representation without a formal power of attorney; and (iii) adds certain definitions regarding delivery and receipt of disclosure documents. The bill conforms the Property Owners' Association Act to the Condominium Act relating to provision of disclosure documents in electronic form and charges therefor. We continue to lobby for what we believe is unfair provision to those who serve our country abroad. In previous discussions with elected officials within the state, there seems no problem in agreeing that FSOs being transferred overseas to represent our country should be exempt from anything limiting their ability to rent their home. The hang up seems to be the applicability of an exemption being granted for a foreign service officer at a state level being effective on a federal level within the definition of concentration of non-owner?occupied units as applied by, as an example, the FHA. This could literally take “an act of congress” to resolve, and even then, perhaps “an act of god” as well before condominium associations accept and embrace such a change.The associations themselves often negatively impact the investment value of their units. By restricting rentals, they are restricting buyers and thus reducing the demand for their units. It is not like a “renter” is going to negatively impact the aesthetics of a condominium as they could if they chose not to keep up the exterior and landscape of a town house or single family home. In almost all cases, the association itself contracts for all exterior and common area maintenance and upkeep. Many well-located projects do not have rental restrictions and do have favorable rent to cost relationships. Many are near metro stops, some are in Arlington. ?From this perspective, they can be attractive to investors. Be aware that even if a condominium that you own or are considering buying does not limit rental concentrations, there are additional levels of compliance required (to rules of the association by the tenants) and there are more members with a say in other rules that may be promulgated in the future. Also, the supply of condominiums can change dramatically with new projects weakening the demand for the units and thus the rents. On any street corner, 300-500 condos can be developed in about the same amount of area that would house 20 townhouses or 10 single family homes. In 2004 there was a rental inventory of approximately 7,000 condominium units in Arlington. By 2016 there were over 15,000. As you can see, it is critical to know what restrictions do exist before purchasing any condominium unit. Many associations have their declarations and by laws on line. Work with agents who understand these issues. In all cases a purchaser is provided a disclosure packet upon contracting for a unit so restrictions may be identified. In such a case a purchaser has three (3) from the time documents are delivered to review and if necessary rescind the contract in the event that condominium’s regulations or restrictions are not compatible to a purchaser’s plans for the unit. Feel free to call us if you have any questions!The Team at McGrath Real Estate Services, Inc ................
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