Q. We live in a small patio home development (37 units) that has a homeowners’ association (HOA). Other than a statement that the homeowner is responsible for all requirements in our restrictive covenants, there is no statement in the restrictive covenants themselves that specifies the number of units that can be rented.
Is it correct that the presence of rental units depreciates home values in a development? Can the bylaws be changed to limit the number of rental units? If so, what would be a reasonable number and what procedure must be followed to change the bylaws?
A: Restricting the number of homes that can be leased in a community is a hot topic, mostly in multifamily developments such as condominiums and townhomes.
The prevailing notion is that renters do not have a vested interest in the condition and value of the properties being rented, and that tenants are more likely than owners to violate the community’s covenants, rules and regulations.
In addition, as tenants move in and out of the rental units, it may increase wear and tear on common areas and facilities, thus increasing costs to the HOA. Federal regulations dictate that condos will not qualify for federally-backed mortgage loans on condominiums (FHA, Freddie Mac, Fannie Mae) if more than 50 percent of the homes are occupied by someone other than the owner. If the HOA has the authority to screen and approve tenants, that also will prevent a condominium from qualifying for these federally-backed loans.
The conventional wisdom is that these restrictions on such federal loans and loan guarantees can reduce the number of potential purchasers, which could have a negative effect on home values.
Whether or not these beliefs are true, we have seen a significant increase in the number of multifamily communities that have come to us asking for an amendment to their governing documents to limit the number of rental properties.
Limiting rentals can’t be accomplished through a simple resolution, rule, or regulation adopted by the HOA’s board of directors. It must be done through an amendment to the Declaration of Condominium or the Declaration of Covenants, Conditions and Restrictions (for town homes and single-family communities). The amendment typically must be approved by at least 67 percent of the owners and then recorded at the Register of Deeds.
You’ll need an attorney to draft and record the amendment. Although there is very little North Carolina case law dealing with the enforceability of such amendments, the courts here and elsewhere generally have upheld amendments when they are reasonable and drafted as narrowly as possible to achieve a legitimate objective.
An earlier version of this article was published in the Charlotte Observer, Feb. 26, 2010.