SACRAMENTO : Condo Boards Seek to Curb Owners Who Rent

Many condominium associations are so disturbed by the number of non-resident investor owners who rent their units out that the associations are enacting rules that restrict the percentage of renters.

“There’s a lot of desperation out there because property values go down when there are a lot renters,” said Walnut Creek attorney Beth Grimm, who represents condominium associations that want to curb the number of tenants.

“More and more associations are adopting restrictions on leased units,” she said.

Only 21% of the condo projects in the state have no rentals, and 35% have more than one-third of the units rented out, according to the state Department of Real Estate.

There are no statistics to prove that a high percentage of tenants will drag down home values, but real estate experts warn that the presence of a large number of renters can hurt sales and limit appreciation.

Also, existing homeowners often complain that enforcing the association rules is more difficult when absentee owners are involved and that the leased units are often poorly maintained. Also, in developments with a large number of rentals, new buyers sometimes have trouble obtaining home loans.

On FHA loans, for example, the U.S. Department of Housing and Urban Development will not make mortgages on condominiums in projects that have more than 50% renters. Many lenders turn down loan applications when there are more than 30% renters, according to Douglas Kline, a Reston, Va.-based consultant who specializes in condominium associations.

“We begin to look at a prospective loan much closer when the tenant occupancy rate is over 35%,” said Steve Hawkins, public relations manager for Great Western Bank in Beverly Hills. “We don’t stop lending at that point, but we get more cautious and may require a larger down payment.”

But Kline points out that lenders aren’t necessarily consistent in their thinking.

“They get nervous when there are a lot of renters, but they also oppose having a rule against renters,” he said. “If lenders wind up with the property after a foreclosure they don’t want to be limited in their ability to rent out the property.”

Grimm advises her clients to approve deed restrictions that cap the number of renters, but she admits that lenders holding mortgages on the properties may resist such a change in policy.

“We point out to lenders that the limitation (on renters) is to their benefit in that they limit the number of units that can be leased and thereby enhance property values,” said Grimm, who concedes that such restrictions haven’t been tested in the California courts.

Another obstacle to restricting leased units may be getting approval from members of the homeowners association. If the majority are already leased, then the investor-owners are unlikely to approve such a restriction. Moreover, homeowners may get nervous about constraints on their ability to rent later on.

Few experts recommend a 100% ban on rentals. “It’s not very practical--divorces and deaths often create situations where it’s the only reasonable alternative,” Kline said.

In some resort communities, associations are more concerned about short-term rentals. For instance, the 64-unit St. Tropez project in Palm Springs has a policy that precludes condos from being leased for less than two weeks.

“We had an owner who had two units here and rented them out for $200 a night--it turned into a real hotel atmosphere,” said Sig Zeitlin, who is an association board member at St. Tropez.

Zeitlin isn’t bothered by full-time renters. “When they are here year round, they have an incentive to keep the place up--it’s almost like having an owner.”

A report prepared by the California Department of Real Estate recommends that associations take steps to involve renters. “As residents, they need to be contacted, kept informed and persuaded of the value of the association,” concluded a 1987 study, “Common Interest Homeowner’s Associations Management Study.”

The best long-term solution may be the improved condominium market. Condo sales began to surge in 1985 and have remained strong ever since, according to Chris Taylor, California Assn. of Realtors.

In the first six months of this year, prices were up 7% on condominiums, while the single-family housing market was flat.

This helps explain why “the renter ratio went down in the last couple of years,” said Beverlee Gordon, who is part owner of Property Management Network, San Jose.

“More and more people are buying into projects we manage and living in their units, and more renters are buying the condos that they were renting.”