Are you an HOA board member? Before you start charging property owners fees for short-term rentals, read this article, you may change your mind. These 10 reasons are by no means all-inclusive. Prevent economic damage to your properties, and consider all of the potential issues before deciding to impose fees.
Learn how you can accomplish what you probably really desire without punishing all of the property owners including yourself.
Homeowners association boards are elected by property owners. The HOA rules were originally adopted by the builder of the property. If the property has been around for a decade or more, chances are that the HOA rules never considered short-term or vacation rentals.
The need for regulations is clear
With the proliferation of short-term renters and in particular, within HOA communities, the need for regulations is clear. Keep in mind that this article is not promoting uncontrolled HOA short-term rentals. A little background may help.
During the last housing crisis in 2010, I owned a rental condo unit in an association in Las Vegas. I bought the unit new from the builder five years earlier. When the housing crisis started, many people who were renting condos found themselves upside down on their mortgage payments because rents dropped.
With lower rents, people could not make their mortgage payments, and as we all know property values dropped. In fact, I purchased my unit for $140,000 at the time, it went as high as $220,000 and then dropped to $60,000.
Banks were dumping properties
There were many empty units so banks began selling at fire sale prices to investors who paid cash. Within a short time, more than 60% of the condos were owned by investors who were renting them. At that point, people who wanted to sell their properties were finding it difficult to sell.
The reason, more than 50% of the units were rentals. FHA loans are restricted in buildings with more than 50% of units rented. This is because FHA loans are insured by the federal government, and the government is concerned about the risk of default if there are too many rental units in a building.
Most lenders have a threshold regarding investor vs resident ownership. This problem kept prices low for a few years. Compounding this, people who had to relocate rented their units because they could not sell them.
Fortunately, in my case, I had planned for worst-case scenarios and weathered the storm. 10 years later, I sold the property at a substantial profit even after deducting the rental losses. Most people could not do that. I bring this up because it has relevance in 2023.
We could be closing in on a similar crisis
We are closing in on a similar housing crisis, not as bad as in 2010 but it could affect every owner of a condo.
What is your motivation for creating a fee for short-term rental owner properties? I suggest that the primary motivator is that rental guests are unwanted by those who live full-time in a condo development. Before going further into our 10 items, let me explain my motivation for writing this article, I:
- Do not currently own a condo in an association but I have many times over the years.
- Fully understand how the board of directors works and must consider the long-term interest of the owners.
- Do own vacation rental properties not subject to HOAs. Also, I am a real estate broker and I have an ownership position in a property management company.
The point of mentioning my position is that I have seen all of the arguments from every angle. As an owner, as an investor, as a property manager, and as a real estate agent. I have attended many board meetings, I live in a housing development with an HOA and I vote on issues. So bringing perspective to the issues is the point here.
Back to the reason for imposing fees. Noise complaints and noise levels are too high. A guest is playing their stereo too loud. Of course, this never happens to owners, right? Parking issues are another topic. Guests on occasion will park where they are not supposed to. And again, owners never disobey governing documents. Full-time residents are always perfect correct?
The point is that while I will concede that on occasion and not often from my experience, guests will disturb residents.
All will suffer for what a few do
Ever heard the old saying “throwing the baby out with the bathwater”? When you punish every investor and owner who will occasionally be in violation of parking rules, you are setting a precedent where all suffer for the issues created by the few. This does not fix the problem if there indeed is one.
I understand that some full-time residents just don’t like the idea that people are renting in their development. It’s a valid concern. However, anyone intending to buy into a condo development must understand that due to the nature of the property, it is ideal for rentals of all kinds including long-term rentals.
Another of my example. My wife and I bought a condo as our primary residence. We lived in the condo for three years and decided it was too small and parking was an issue. Guess what, it was an issue because other owners would not use their garages for parking.
My wife parked in the single garage and I had to park in a parking space. I came home after 6 PM most nights to find every parking slot within a reasonable distance full.
The HOA told people with garages to park their cars, no response. They passed a rule that said you could not fill your garage with stuff that would prevent parking. At least one resident decided to park two cars (they had a two-car garage) in parking spaces and leave their garage empty.
We could not sell our condo at a good price
We decided to buy a house and found that as we were trying to sell our condo the prices kept dropping. I decided to rent it until the market stabilized. That was my first investor-owned condo but you see how it came to happen.
It was not my intent when I purchased it to rent it, I was put into that position due to the current economy. Guess what, it’s happened again. This 2023 economy is going to force people to rent their property or allow it to go to foreclosure.
Key reasons fees are a bad policy
The following are key reasons why it’s bad policy to create fees based upon “per stay”, “Income”, “cars”, and other similar reasons:
- Creating a fee for existing property owners who are Airbnb hosts will raise their rental costs. This means fewer rentals because they will not be competitive in the area
- Higher fees mean fewer residents leaving the property vacant longer which can attract squatters, insect infestations, and deterioration of the property
- Investors who can not earn enough to pay the bills will offer their property for sale.
- In 2023, prices are dropping meaning condos offered for sale will drag down the comps particularly when they are fire sales ahead of foreclosure.
- Finance companies look at the number of foreclosures and reduced HOA fees as a result. It’s possible higher interest rates will affect sales
- Vacant properties are not good and this happens when investors are forced to abandon or sell because they can not make their mortgage payments.
- Employing retroactive fees on existing property owners is not ethical. When owners purchased their properties their decisions were based upon facts at that time.
- As prices fall due to investor sales, residents will suffer losses in their property values meaning those with variable-rate HELOCs may have to increase their payments.
- Out-of-the-area investors without a property manager are not likely to maintain their property or pay HOA dues without income
- The market for vacation rentals is down in 2023, property owners are trying to make ends meet, and with higher rates, fewer rentals means this is a very bad time for fees
Prices of condos are falling nationwide
The above is just the starting point. Please understand the current market for single-family homes in most areas of the country indicate falling prices. While inventory is more available than it has been, the only reason that prices have not fallen further and faster is inventory.
Foreclosures can change the inventory picture. If more inventory comes to the market as a result of foreclosures, prices will drop further.
Lower prices are exactly what homeowners’ associations don’t want. Here is an example. Assuming that your property value in an area such as the Mississippi Gulf Coast is $280,000 for a two-bedroom condo near the beach.
When property owners lower their prices, it sends a signal to the market that there is too much supply and not enough demand. This can lead to a vicious cycle, as more and more property owners lower their prices in an attempt to attract guests. As a result, prices can fall to unsustainable levels, and property owners can end up losing money.
Research on Bard- Wall Street Journal 2022
In addition, lowering prices can also lead to a decline in the quality of vacation rentals. As property owners compete for guests, they may be tempted to cut corners on things like cleaning and maintenance. This can lead to a decline in the overall quality of the vacation rental market, which can make it even more difficult for property owners to attract guests.
If you are a property owner, it is important to be realistic about the current state of the vacation rental market. If you are not able to attract guests at your current price, you may need to consider other options, such as selling your property or renting it out on a long-term basis.
Profits at these prices are on the edge
This means that anyone buying one of these properties for use as a vacation rental must earn at least $x per year to cover all expenses. Buying a property for $280,000 with 20% down puts the ability of that property in this current market right on the edge. Here are the dynamics:
- Mortgage and interest are stable
- Insurance near the beach has been increasing putting pressure on owners and HOAs
- Vacation rental income on average has fallen. This is due to the larger inventory of vacation rentals and lack of visitors. Four and five stays are down to weekends.
- Inexperienced property owners are lowering their prices (where there are no HOAs with fees). This reduces income, and profits before any HOA fees
HOA charges $75 per night
The chart below indicates that in Mississippi the nightly average rate would increase by 30% if a $75 fee was added to the average projected 2023 per night rate. Properties in the neighborhood would have a price advantage
Put yourself in the position of an investor
Put yourself in the position of an investor who without knowing buys a condo within your homeowners’ associations and only then finds that there is a $75 per stay fee added to their cost. The problem is that you also have found that occupancy is down and you think you need to lower your fee.
After considering the situation, you find that you can’t lower your fee or you will be short on your monthly obligations. Ok, you can manage this for a while but then your company lays you off or your child is going to college and you can’t afford it.
Back to the real reason why some community members want to charge fees. To prevent investors from buying so they can rent their property in your HOA community. This is the real reason for the fees. It’s not for the extra income because you can always increase fees for that purpose.
12.6% of Condo owners vs 9.5% of house owners were underwater on their mortgage payments 2022
National Association of Realtors indicates that Condo owners are more likely to have their property forclosed.
Work is required to collect and maintain
Such fees will generate extra cash but then it must be accounted for. Someone must track all of the data. My company has clients in community associations where the board members decided to impose a fee for every guest night. They want a report by the 5th of each month.
The burden it puts on owners to provide this information is a big one since many owners/investors work for a living and the extra money they earn from their vacation rental is a side thing. Who will manage the data received? Who will keep owners honest? Do you have the right to audit their books? Do they keep records? The condo boards have to create proper procedures and that takes time.
This article was not created to discuss the issue of short-term rentals, it was written to lay out all of the issues relating to any rentals in homeowners’ associations including long-term rentals. Our discussion is aside from local laws and state laws which may come into effect.
Full-time residents have reasons to prevent rentals in their properties, some are valid and some are not. Let’s propose a compromise that may work for the American Dream and take care of the rental property issue at the same time.
Please consider the following solutions:
- All properties that are rented short or long-term must register with the HOA, Why?
- The HOA will know who to contact if there are issues with tenants.
- Damage caused by tenants can be recovered from the property owners
- Tenants will be informed of HOA rules before or when they arrive
- Rental properties must
- Have a functioning fire extinguisher
- Method of evacuation in case of fire and understanding what that is
- Fire alert devices are installed and functioning, and batteries are replaced each year
- Well-maintained exterior areas painted, landscaped, and in full compliance
- Guest book explaining all rules of the association, full-time residents receive a list of rules they agree to.
- Tenants must
- Be advised of parking spaces they can use
- Be advised of the maximum occupancy
- Understand how to dispose of trash
- Understand the noise ordinance and how to prevent disturbing other owners
- Use of common areas, tennis courts, swimming pools, and other public spaces
- Owners must
- Appoint a local company or individual who is responsible and can respond to issues e.g. police, trash, parking, etc.
- Report the local contact with all information including phone, email, and location.
- Provide the local company or individual with a power of attorney or other authority to act on behalf of the owner to secure and maintain the property
- Pay an annual fee of $x for the specific purpose of:
- Managing the vacation rental process
- Enforcing rule violations
- Maintaining the listing of rental properties and their type.
- Provide a one-time refundable deposit of $1,000 to cover damage done to the association or individual property. The deposit will be returned when the property has been sold or is no longer used as a rental property.
- The Board must at each board meeting
- Report on rental fees collected
- Number of rental properties and percent of rentals vs resident properties
- Issues reported during the previous period
- Resolutions of issues reported
- Create a committee of investor-owners to advise the board
- The investor sub-committee presents any issues at the meeting.
Property owners can help
Of course, there are many more points that can be added to the above to improve issues at the condo development. Communication is often the biggest problem. More often renters show up, causing an issue and no one knows how to contact the property owners. I believe that property owners can do a lot to help their situation such as:
- Meet the neighbors next door
- Provide the contact information for your property manager or responsible individual to your neighbors. Tell them to call if there is any issue, and not to wait until it becomes a bigger problem.
- Make sure the property is visited by the property manager or responsible party at least monthly if no more often
- Tell the neighbors if they see any issue with the property e.g. screen is torn to please bring it to the attention of the property manager.
- The object of this communication is to prevent the HOA to become involved each time a minor incident occurs.
- If there is a problem, the property manager should visit the neighbors affected and apologize to you.
- Keep your property well maintained
- Participate in the HOA or give a POA to your property manager or responsible person to attend meetings and act on your behalf.
Full-time residents have a role
And then there are the full-time residents who are the ones that have brought the idea of property rental to the forefront. These individuals have responsibilities as well because there may be a time when they have visitors who spend the night which may cause issues. No one’s perfect. Full-time residents should:
- Meet the new owners, it’s a two-way street.
- Understand what the new owners want to accomplish with their property.
- Tell the new owner that you would be pleased to keep an eye on it for them and let the property manager know if there are any issues
- Agree to communicate first with your neighbor or property manager before you go to the HOA.
- Be a good neighbor, and try to cooperate. If you see overnight guests parking in the wrong spot, mention it to them.
HOA Boards consider the downside
It is my hope that both residents and HOA boards give significant consideration to the downside of attempting to force investors out of their developments. If you really want no more investor renters, hope that property values increase. Do everything you can to see that the property is well maintained and that your neighbors understand the real value of properties in your development.
The higher the prices the fewer investors. There is a fall-off as prices go up and investors can no longer make a profit. This system hurts no one.
Work with a real estate agent that “really” understands the value of properties. Invite this person to an HOA meeting to give a market analysis on selected condos. The reason I say this is because some people may undervalue their property. A sale for less than the owner could get will affect comps for all owners.
Making sure that investors earn enough to maintain their properties will help your values. If your properties are for example selling for $275,000, when the price starts going over for example $300,000 then rentals may be economically unfeasible. Let the market and some reasonable rules do your work for you.
Conventional wisdom won’t work
Resident owners of condos probably believe that renters and guests are bad for their property values. The facts speak for themselves. The City of Ocean Springs started allowing vacation rentals in 2015. To experience the concept firsthand.
They allowed only a couple dozen. Within a few years, the amount was increased to 50 then a while later to 75. Recently they raised the number to 105. This does not prohibit the dozens who are located in mixed-zoning areas.
The City took all of its years of experience with vacation rentals into consideration and determined that allowing vacation rentals was very good for the local economy and in particular their residents.
City elected officials listened first to their residents then to investors and those with vacation homes. Their conclusion was that while there may be a few bad actors, their experience was overwhelmingly good.
Why was Ocean Springs’s experience good?
It became clear to the City that people who owned short-term rentals often completely rehabbed the properties. STR owners keep their properties in great condition often better than the surrounding properties. This adds value to the area.
Also, the city requires a local property manager. No internet managers and no managers 200 miles away. They want someone who can react quickly to any issue including taking in the trash can. They created a great communication program between owners/managers and the City.
Issues are handled in the early stages as a result. Do you think this experience can be implemented by HOAs who go through the knee-jerk reaction of thinking all short-term rentals are bad?
Investors
Please visit us at our Short-term rental site ChristiesGulfBeachRentals.com and check out “Christies Vacation Rental Management Program”. Please read our blogs on this site and Christies Gulf Beach Rentals website. Listen to our podcast, visit our Facebook page.
If you would like to speak to us about managing your long-term rental please contact us through the form on the right of this page. We manage the property on the Mississippi Gulf Coast. Thanks for dropping by.
Considering buying or selling your investment condo? Visit Logan-Anderson Gulf Coastal Realtors by clicking here. Logan-Anderson Gulf Coastal Realtors specializes in investment property. Occasionally a fully furnished vacation rental is ready for sale at a discount. Contact us.