Q: We are buying a vacation condo, which we plan to use in the winter months but also hoped to rent it in other months. We just learned that the condo association has recently adopted new rental rules.
Current owners can rent with 30-day minimum stays. The new rule is that new owners now must own for two years before offering rentals with a minimum rental time of three months. We assume that current owners agreed to this knowing that the new rule would not affect them.
Is it legal to have separate rules under grandfathering conditions? The condo bylaws, which are available online, do not show the special rules for new owners — although we found meeting minutes that mention the new rule with an effective date of May 2018.
A: Have you already closed on the property? If not, you now have the opportunity to decide whether to move forward with the purchase. Frequently, buyers fail to review the association documents in enough detail (or at all!) and then get themselves into trouble when they try to do something that goes against the rules once they own a unit.
In general, Airbnb, VRBO and other short-term vacation rental websites have caused much consternation among homeowner associations and local municipalities that are trying to figure out how to regulate this gray-market part of the economy. That makes rental restrictions a hot topic of conversation these days, and there are no easy, one-size-fits-all solutions.
One type of restriction is for associations to prohibit daily rentals of properties. In this instance, the association wants to control who comes and goes in the building and wants to prevent the building from becoming a place where people come to stay for a night, while the unit (typically a condo or townhouse) ceases being a primary residence for many owners. In other words, a hotel-like configuration.
Rental restrictions against daily rentals and weekly rentals usually don’t cause as much controversy in condominium buildings as other types of restrictions. Banning all rentals, limiting rentals to no more than one year or limiting rentals to emergency situations are far more problematic and tend to cause the biggest stir in associations.
There are good reasons to limit rentals in condominium buildings. Fannie Mae and Freddie Mac have certain rules for condominiums, such as limiting the total number of units that may be rented and still have the property qualify for Fannie Mae and Freddie Mac financing. If a project fails to meet those rules, Fannie Mae and Freddie Mac won’t lend funds to someone who wants to buy in the building or development. Since Fannie Mae and Freddie Mac back the majority of conforming mortgages, it would hamper a buyer’s ability to qualify for a variety of loan options.
A second reason condominium associations like to restrict rentals is to keep the property owner-occupied. They believe that owner-occupied units tend to be better cared for and that owners tend to be better neighbors than renters. Also, renters tend to stay in units for shorter periods of time than homeowners and the turnover uses more resources.
Some of these statements are true, but we've found many "bad" homeowners and great tenants. We've also seen tenants live in one place for much longer than owners. So it's not an exact science.
At the heart of your question is whether a condominium association can have two sets of rules: one for existing homeowners and for new homeowners. Well, maybe. We’ve talked to attorneys who represent condominium associations who say it’s perfectly fine to have two sets of rules, and others who argue it creates two classes of owners: those who were there before and those who come after. To prove that point, they say that condominium law prohibits having two classes of owners in an association.
We’ve seen homeowner associations go both ways and haven’t yet seen a definitive answer to your question. (To our knowledgeable readers: Send us your thoughts, experiences and insights, and we’ll publish those in a separate column.)
But the real crux is whether you can change the rules for existing homeowners without those homeowners making a stink. Let's say you purchased a condominium unit as a rental. If rentals are prohibited, your property rights have been taken away, and you may suffer a loss. A middle ground is to say that existing homeowners retain their rights to rent, but once they sell, the new owner must abide by the new rule.
Short-term and long-term rentals is one thing, but what happens when associations change the rules on pets or smoking? If someone purchased the unit and they have a pet or smoke, would it be fair to change the rules to prohibit pets and smoking? Would the pet owner have to get rid of their pet? Would the smoker have to quit? These rule changes can have a profound effect on homeowners and unintended consequences on home values. For this reason we think that associations have grandfather clauses that apply only to some new rules.
Whether the grandfather clause will pass litigation is another story. We look forward to any comments from our readers on these questions.
Ilyce Glink is the author of “100 Questions Every First-Time Home Buyer Should Ask” (4th Edition). She is also the CEO of Best Money Moves, an app that employers provide to employees to measure and dial down financial stress. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact them through her website, ThinkGlink.com.