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Renting Out Your Condo: Problems for the HOA and the Owner

Most people do not know that condominiums are self-governed associations who create their own rules for operation and use. These rules are found in the condominium instruments, which ordinarily consist of the bylaws and the declaration. The condominium may also have house rules and other regulations that it passes from time to time, which become a part of the governing instruments. These rules are valid as long as they are passed using proper procedure as spelled out in the bylaws and the Condominium Act of that particular jurisdiction.

One common problem condominiums face high renter-owner ratios. This matters for a couple of reasons. First, FHA financing is contingent upon this ratio being less than 50%. This means that if more than half of the units are occupied by renters, the condominium is ineligible for FHA financing. This is critical because FHA financing enables buyers with moderate incomes secure loans with lower interest rates and lower down payments on their condo purchases. Without FHA approval, purchasers would have to have cash on hand to buy into that particular condo.

Second, tenants are not as vested in the condominium structure as owners. The biggest complaint I hear from my association clients is about tenant behaviors. Everything becomes a problem- from installing satellite dishes in flower beds to parking in owners’ spaces- when tenants do not understand the rules of the condominium. Owners are responsible for their tenants’ behaviors and I often advise my clients to levy fines or commence eviction proceedings if their bylaws allow. This gives owners a wake-up call that although they do not live in the condominium their tenants’ actions are still governed by the condominium instruments.

Prospective buyers should read the condominium instruments carefully before purchasing. Many condos now have restrictions on leasing where they do not permit it at all or they require owners to submit their leases to the Board of Directors to be approved before a tenant can occupy a unit. If an owner leases without Board approval, s/he can be subject to fines and a possible law suit. This seems like a harsh restriction, especially for owners who lose a job or are in the military and need to rent out their units to make the mortgage. However, FHA regulations, link owner-occupancy rates to the availability of premium financing for new buyers making it hard for condominiums to relax restrictions on leasing. Moreover, DC and Maryland’s Condominium Acts do not prohibit condominiums from utilizing restrictions on leasing to control renter-owner ratios. This may be bad news for you if you are an investor looking to lease as many properties as possible. But as the old adage goes, “that’s just the way it is.”