Restricting the number of rentals in homeowner associations is often desirable -- but only when done for the right reasons.

For example, restricting rentals because "renters are irresponsible and ruin the property" is a sweeping judgment unlikely to stand up in court.

However, restricting rentals to protect mortgage financing options for unit owners can be justified.

The reason is that when the number of rented units exceeds about 1/3 of the total, some lenders won't make loans or will only offer high-cost "investor" financing. With "too many" renters, the property is viewed as an "investment property" even if people would like to buy and live in their units. Investment property loans are higher risk and investors are historically less willing to invest money in maintenance and repairs. This jeopardizes a lender's collateral even for owner-occupied units, raises resident owner costs, makes units more difficult to re-sell (because larger down payments are required for investor loans), and increases the odds of loan default.

When contemplating a rental restriction policy, closely examine the association's governing documents for existing restrictions and seek advice from legal counsel. Generally, one of the following applies:

No Restrictions. If the governing documents contain NO rental restrictions, then owners have the right to rent their units. To change this, an amendment to the governing documents is required that either imposes rental restrictions or allows the Board to make rules or regulations.

Minimum Rental Period. This restriction is usually intended to prevent short-term rentals at resort locations. To create this authority, an amendment to the governing documents is the required.

Rental Restrictions. In this case, there are specific restrictions in the governing documents allowing the Board to make reasonable rules and regulations regarding rental issues. The rules may not violate any state or federal statutes, such as the federal Fair Housing Act.

When it comes to enforcing rules, the Association has no authority to deal directly on tenants. And levying fines against non-resident owners for violations of their tenants is unlikely to quickly remedy a problem.

For this reason, the Board should rule that any breach by the tenant of the governing documents or rules is a breach of the owner's rental agreement. This requirement allows the owner to evict a tenant if appropriate.

Second, this policy should require an owner to take corrective action against a tenant, including eviction, in case of a violation. The policy should also require owners to provide their tenants copies of the governing documents and rules.

Rental restrictions, if imposed, should be formalized in a Board policy called a "resolution". Resolutions deal with issues that are complicated and far reaching. They incorporate an owner review prior to enactment as well. This is a very important step if the Board wants to get compliance. The resolution not only identifies what the issue is but what will happen if it's violated.

In fairness to many renters, owner and rental managers often "forget" to provide them with a set of rules and to quickly enforce them when notified of a violation. By holding the owner accountable, these problems can be reduced and renters better integrated into the community as they should be.

For more information on this subject, see www.Regenesis.net.

Published: May 2, 2001

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Richard Thompson owns Regenesis, a management consulting company that specializes in condominium and homeowner associations. He is a nationally recognized expert on HOA management issues. Regenesis publishes The Regenesis Report, a monthly newsletter for HOA boards, developers and managers. To subscribe, go to Regenesis.net. He can be contacted by email at .