Archive for November, 2010

My Rental House was Broken-into…..

November, 2010

We provide here a few questions that have been posted in the Community Forums and our answers to them.

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Q1                                  

My rental house was broken-into while the tenant was on a 2-week away vacation. She then moved out afterwards, 6 months ahead of the specified time in signed lease contract. I agree with her moving out, but asked her to pay all the costs (rent, repair etc) until the time I find a new tenant.

I have asked her to report to police if it was a burglary case. However, she didn’t do so. My questions are:

1. Can the break-in be an excuse for a tenant’s early exit? Do I still have a right to collect the other 6 months due?

2. If she didn’t report the case to police, can I? If I do, does it affect my future leasing? Does landlord have to disclose this break-in history to future tenant although the house is in a very good city?

A1

Usually, a break-in of a rental home is not the responsibility of the landlord and does not give a tenant an excuse to break the lease or require the landlord to let the tenant terminate the lease early. However, this general theory can be significantly modified by terms of the lease agreement, actions of the landlord, and/or the laws of a particular state.

Tenants must provide their own insurance for their belongings and landlords should include a clause in the lease agreement wherein the tenant acknowledges the issue.

Damages to your property resulting from the break-in should be covered by the landlord’s insurance policy.

Although entirely possible, it would be unusual for a lease agreement to purposely modify the general theory.

Marketing of the rental unit in ways that promise security or even imply that the property is safe and secure can result in a landlord becoming liable for damages, losses, or injury to a tenant if the promised or implied security is not provided. Such liability can be incurred by the words in an advertisement or brochure, even by things stated orally by a landlord or manager.

Some states have specific laws regarding security that must be provided by the landlord. For example, CA requires that locks be provided for doors and windows, with those locks meeting state defined specifications. Failure to meet the requirements of such a law would both give the tenant a potential cause for breaking the lease without penalty and/or put the landlord at risk for liability for damages, losses, and/or injury resulting from the criminal acts of third parties.

Furthermore, a landlord usually has a responsibility to provide a certain degree of security even when not required by a specific law. For example, the premises must be capable of being reasonably secured. As examples, there should be deadbolt locks on exterior doors and windows and patio doors should be lockable, shrubs around windows and doors should not provide hiding places for those who might attempt to break in, there should be adequate exterior lighting, and locks should always be re-keyed between tenants.

You may have had the right to collect the rent for the remaining lease term, but whether or not you do can’t be determined without knowing exactly what was agreed to and whether the agreement was in writing or otherwise probable. If you allowed her to terminate her tenancy without a provable agreement regarding additional rent you may have waived that right. Absence of such a written agreement would leave it up to a judge if the tenant takes the matter to court. The fact that the tenant refused to report the break-in would allow you to question in court whether there had really been a break-in, but you may have lost that argument by agreeing to her termination.

However, many states require that the landlord minimize damages by making reasonable effort to re-lease the premises as soon as possible and will not allow the landlord to receive rent from the old tenant when a new tenant begins paying rent.

You can probably report the break-in yourself, but this may depend on how long ago it occurred. Whether you should consider disclosing the break-in depends on a number of factors including previous crime history and whether a reasonable person would expect future crimes. You may have some protection against claim of failing to disclose it, as you can take the position that there was no break-in because the tenant refused to report it.

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Q2

Where can I get a lease option agreement?

A2                                                                

While there are certainly many sources of lease option agreement forms available in books, in office supply stores, and on the Web, I would be very careful about using a generic format agreement. There are a number of potential problems that must be considered and it is unlikely you will find most available forms cover all issues that are important to your particular circumstances. A few of the issues are as follows:

1. Obligations regarding inspection issues – It is usually best to require that all inspections that are a contingency be performed prior to move-in as a tenant. However, since the tenant can fail to exercise the option for no reason, this doesn’t guarantee that an inspection issue won’t in the future be the cause of no-sale.

2. Maintenance obligations should always be clearly defined in any lease agreement, but it is much more important that all details be covered when doing a lease option. Concerns include who is responsible for (1) high cost replacements or repairs, e.g., heating/cooling equipment and (2) costs to repair of major damage caused by acts-of-nature not covered by insurance, particularly the often not covered hazards of floods and earthquakes. Another issue is what happens in the event of total property destruction.

3. There are numerous issues to consider in determining the option price as well as a number of related issues including the rent premium, the portion of rent to be credited toward purchase price, the security deposit, and the length of the option. It’s a matter of negotiating mutually acceptable terms that are legal under your state’s laws.

The bottom line is that one should seriously consider having a competent real estate attorney or a real estate broker with experience in lease options review the transaction documents. However, you must also consider all the issues yourself as they relate to your particular property and other circumstances and utilize the professionals as a check rather than depend on them to worry about every possible issue that might become important to your situation.

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Q3

We understand that new leases in California need to include Lead Disclosure and Pest Control Service language for buildings older than 1978. Our leases do not include either. But as far as we know, there are no known lead-based paint hazards. Also, the initial treatment for the pest control service started in 1988, way before some of the current tenants moved in and service continues monthly now. Do we still need to inform the tenants? If so, is it too late to do that now as an addendum to the lease and give the tenants the Lead Disclosure Pamphlet as well as a copy of the initial pest control contract?

A3

For many years now, federal law has required landlords of rental units built prior to 1978 to disclose to tenants any known lead-based paint or lead-based paint hazards in rental premises and to give them the EPA pamphlet titled “Protect Your Family From Lead in Your Home.” Both the landlord and the tenant must sign an EPA-approved form titled “Disclosure of Information on Lead-Based Paint and/or Lead-Based Paint Hazards.” In most states, the disclosure information and form can be part of the lease agreement, but I’m not aware of any state requiring that and the disclosure and form are usually a separate document. However, you should check current CA law regarding the issue.

Owners who fail to comply with EPA regulations face penalties of up to $10,000 for each violation and treble damages if a tenant is injured by willful noncompliance.

Many states, including CA, have their own lead-based paint laws, with many states’ laws being more stringent than federal law.

I cannot advise you regarding whether you should now do the required lead-based paint disclosure if you didn’t do so before the current tenancies began. Although it may bring you into current compliance, it may also flag the fact that you violated the law when the tenants moved in, perhaps resulting in options for the current tenants. More detailed information than you provided would be required to make such a decision, including how many units, how old the tenancies, and how much is time left on the leases. I recommend that you consult a competent landlord-tenant law attorney regarding the matter.

California’s required notice of periodic pest control treatments is found in Cal. Civ. Code Section 1940.8. I believe it applies to all properties, not just to pre-1978 buildings. You should read the law yourself. You should also be aware that CA has potential disclosure requirements for about half-a-dozen other issues, most of which are found in Section 1940.

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Additional Information

Most of the issues discussed in these Q&A’s are covered in considerably more detail in our eCourses and/or in our Mini Training Guides.

Carport Damage..Who’s Responsible?

November, 2010

We provide here a few questions that have been posted in the Community Forums and our answers to them.

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Q1

The carport of my rental house collapsed during a big wind storm and the tenant expects me to pay for repair of his two cars which were damaged. What are my responsibilities?

A1

There are several separate issues that I will discuss briefly.

In most states the landlord is responsible for repairing damages to the leased premises of the building which result from an act of God. If the premises are uninhabitable, the tenant has the right to immediately terminate his lease and find other housing. The landlord and tenant have the right to agree to a mutually agreeable plan to avoid termination. For example, the landlord might pay for hotel/motel accommodations if the repair is expected to occur within a short time because the cost for a week at a motel would be significantly less than a vacancy that might take one or more months to fill following completion of repairs.

If only part of the premises is unusable but the overall premises are still habitable, the landlord might have to reduce rent for the part that remains usable. For example, if a one bedroom of a 6-room house were unusable, the rent might be reduced by 10 or 15 percent. This would not usually be acceptable if the unusable room were the only bathroom or the kitchen. A judge would usually award a tenant a reduction if the matter went to court.

The discussion of the previous paragraph is probably relevant to your situation. The rent charged was almost certainly based partly on the availability of the carport. Accordingly, some reduction in rent should be made. The amount of reduction would depend on a variety of factors including the size of the living space and availability of on-site parking in spite of the damaged carport.

Regarding the damaged cars of the tenant, the landlord is generally not responsible for damage to property of a tenant that results from acts of God unless the tenant can show that the landlord’s negligence was somehow specifically responsible for the damage. For example, the carport did not survive a “not-unusual” storm because the landlord had built the structure himself and had not followed building codes. Tenants are responsible for providing their own insurance coverages for their own property. For your case, damages to the tenant’s cars should have been covered by the tenant’s auto policy and/or by a separate tenant insurance policy.

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Q2

I have a tenant who claims that 3 out of 4 jacks in the rental house don’t work. Is it my responsibility as the landlord to ensure they all work or does my responsibility end with ensuring jacks are in place in the house or the fact that at least one works? I actually don’t know if they’ve ever worked since he moved in.

A2

It may depend on clauses in the lease agreement and/or the adequacy of your move-in checklist. In general, problems regarding things that are not a habitability issue can be avoided by disclosing the problem with the selected applicant up front, listing the problem in the checklist, having a statement in the checklist that such discrepancies are accepted “as is,” and requiring that the tenant sign the checklist.

For problems unknown to the landlord and unacceptable to a tenant after discovery, it will depend on the nature of the problem. It may depend on either building codes in effect at the time the property was built and/or on what is usually expected by today’s standards. For example, building codes specify that there be a certain number of electrical outlets along each wall or outlets a certain distance apart along walls. Accordingly, all outlets should probably be operative. Landlords should consider that it is of benefit to them that all outlets work in order to reduce the use of extension cords which can create a potential fire danger. However, for a property built under an earlier less restrictive code or no code at all fewer outlets would have been required, fewer outlets would have likely be “grandfathered” and a landlord would not usually be expected to install additional ones.

Phone jacks are in a somewhat different category. Building codes do not require that there be very many jacks (perhaps only one) for even new construction and phone line extension cords do not normally create a fire hazard. There is no way to know whether a judge would require repair of one or more of the non-operational jacks or not unless you end up in court. A judge may take the position that a tenant is correct to assume that all installed jacks are operative, that modern living requires two or three jacks, or that one operating phone jack in a house is adequate.

The inoperative phone jack is a latent defect that the tenant had no practical way of knowing prior to having phone service turned on. Because of this fact, it may depend significantly on whether he reported the problem soon after moving in or not until months later. You would more likely be responsible for fixing it if the former than if the latter.

The cost of repairing an inoperative phone jack should be fairly minimal. The price will likely be much lower from an independent phone installer than from the phone company. I haven’t priced such a thing is some years now, but it would have cost $25-40 during the a decade ago using an independent. It would likely cost very little more to repair all three inoperative jacks than to repair only one. This is something that many nominally-priced handymen could handle and even many landlords would be capable of doing the repairs themselves.

Even if not legally required, one should consider the value of good landlord-tenant relations, i.e., keeping good tenants happy. If the tenant is month-to-month and you don’t care if the tenant stays, you could tell him/her that you will not repair it and that he/she is free to move in 30 days. You can then disclose the inoperative jack to future applicants who can decide not to rent the property if it matters to them. In this case you would be safer to replace cover plates of inoperative jacks with blank plates if the type. However, I would expect the cost of vacancy, including preparation, advertising, and downtime for rents would be much more costly than fixing all the jacks.

There are various other issues that could be considered, but those mentioned above must suffice. In deciding whether or not to repair the jack at your expense, you need to consider the nominal cost of repair compared to (1) the cost of going to court, (2) the very substantial cost of having a vacancy, and (3) at least the more likely cost of having an unhappy tenant.

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Q3

I want to put my Florida home up for sale. The home is occupied now by 4 tenants with a lease ending in 6 months.

What are the steps in notifying the tenants about the sale and showing of the home while occupied?

A3

First, the existing lease agreement is valid and enforceable until its expiration date.

Second, most lease agreements and the laws of most states require tenants to cooperate with any agents of the owner including real estate agents, appraisers, contractors, etc. If your lease does not contain such a clause, you need to check your state’s statutes. However, entry to the property must be preceded by a notice period as required in the lease agreement or by state law whichever is greater unless state law allows for a lesser time being specified in the lease. Although the period is 24 to 48 hours in most states, my reference says that Florida’s is only 12 hours. This would, however, be overridden by any longer period specified in the lease. However, the entry time must be at reasonable hours unless for an emergency. That is, they cannot require entry at lunchtime or midnight if not convenient for the tenants. As long as proper notice is provided by the landlord, the tenant cannot usually require that entry be made only when the tenant is present.

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Additional Information

Most of the issues discussed in these Q&A’s are covered in considerably more detail in our eCourses and/or in our Mini Training Guides.

Reasons (Excuses) for Not doing a thorough Tenant Screening

November, 2010

Reasons (Excuses) for Not Doing a Thorough Tenant Screening

Without a doubt, the biggest headaches that a landlord can experience come from problem tenants. One bad tenant in a rental unit can cost much more than all costs associated with a typical vacancy. Inadequate tenant screening will likely result in having tenants who pay late, don’t pay at all, damage the property, and cause other problems for the landlord and/or neighboring tenants.

Of particular interest is the applicant’s history of credit use, evictions, and criminal activity. Past behavior tends to be indicative of future behavior, which is why the landlord must do adequate tenant screening. A prospective tenant that pays the majority of his or her bills late will likely pay the rent late.

With tenant screening, the landlord is helping himself to protect his investment. By doing everything he can in the first place to adequately screen applicants and select a good tenant, a landlord will save himself headaches, time, and money.

Knowing all this, why do landlords fail to follow through on tenant screenings? There are many reasons why landlords fail to perform adequate tenant screenings. As with many tasks in life, we too often find excuses for not doing what we know should be done.

The reason/excuse “I don’t have the time” is more likely “I don’t want to take the time.” Certainly there are multiple demands upon a landlord’s time, however, consider the adage “pay me now or pay me later.” Time spent upfront on screening and selection is more effective use of your time than later spending time battling bad tenant behaviors; processing evictions; and/or collecting judgments.

With today’s technologies, screenings can be conducted in less time than was possible even just a few years ago. If time is money, then the key is to use your minutes well. Determine your level of risk management, pick the screening options that make sense for your properties, pick the screening vendor that offers products to meet your needs and make the screening process a standard business practice. It is truly a mistake to short-cut your standard practices and thereby short-changes your business.

“It’s too complicated” is often used with “It takes too much time.” It may seem more difficult than it really is if you don’t understand the issues, processes, and products associated with tenant screening. Before finalizing on a vendor, ask customer service what to expect. What exactly do you need to do in order to become a tenant screening customer? Keep asking questions until you understand the requirements and timeframe to both sign up for the desired services and to conduct typical screenings.

“It costs too much” is another often used reason/excuse. If cash flow is in crisis, it is prudent to minimize cash expenditures. However, some screening items can be done by landlords themselves at the expense of only their time those items that require third-party vendors are available at relatively low cost. If money is the issue, poor decision making on tenant selection will only add to the cost.

It is important to differentiate between price and cost. What you pay now does have an immediate impact on your checkbook, but the cost of adequate screening is usually returned many fold by the benefits of a good tenancy.

“I don’t know how” or “I don’t know where to start” is a valid concern, but one that can easily be remedied. Landlord associations, landlord help Web sites, print publications, and seminars devoted to helping landlords succeed are numerous and varied. Landlord Web forums are great opportunities to learn from others. Fellow landlords freely share the wealth of their experiences and offer encouragement and advice.

There is no need to feel alone or that adequate screening cannot be accomplished. It will, however, take effort on your part to assess what you know, determine what you should know, and apply yourself to education. Of particular importance is becoming knowledgeable of all applicable federal, state, and local laws associated with tenant screening.

Take time to analyze what your true screening needs are. If you have made your process to be complicated in of itself you may want to step back and determine if you really need all of that. If you do get all of that, what are you going to do with it? Remember too that fair housing compliance will mean that each and every applicant is screened exactly the same. So any report you order for applicant A will need to be ordered for applicant B as well.

“I trust my gut instinct” is of course your prerogative, but are you really comfortable in turning over possession of your significant investment to just anyone who walks in off the street? If your gut is wrong, that’s exactly what you will be doing. Not to say your character assessment isn’t better than most others but why trust to luck. Most landlords would be reluctant to give the keys to their car to a passing stranger, even a nice stranger at that. Giving away the keys to a investment property even to a nice stranger is downright foolish.

 “I tried it once, but still got burned.” Although past experience does provide opportunity to teach us lessons, if we didn’t take the time to analyze what happened and adapt and adjust we haven’t learned. We probably learned the hard way more than once, but it took getting back in the saddle again to realize the benefits. No one size fits all in spite of what the label says. If you gave it your best shot, would do nothing different, and can handle inherent risks, then your decision is the decision that best fits your business.

“I just don’t want to be involved.” Landlords who might have this reason/excuse need to realize that they are involved by the fact that they own rental properties. Landlords who don’t want to be personally involved must pay others to perform the task. However, landlords must still first understand the issues, decide which screening items will be utilized, and make sure that screening and selection is performed in accordance with all applicable laws. Screening and selection should be undertaken as a critical task not just going through the motions.

“I leave screening up to my property manager” is another reason/excuse for those who utilize professional property managers. Many landlords are surprised to learn that they are responsible for the actions taken by the property manager, including those related to inadequate screening. A rental property owner can be held partially, even totally liable for tenant screening/selection actions by a property manager that violated fair housing laws. Accordingly, owners should understand fair housing and be familiar with policies and procedures utilized by their property managers.

Landlording is management of the real property and of real people who become tenants there. In the course of every day management, there are situational decisions to be made. Sometimes landlords, even those who understand the issues and have adequate screening and selection policies and procedures in place, must consider reducing their standards in order to fill a vacancy. This is usually due to market conditions that result in fewer applicants, with none meeting the landlord’s standard criteria. Perhaps the applicant is desperately in need of immediate housing and the information supplied on the application meets the stated criteria. The applicant may be willing to provide a large security deposit to compensate for bad screening information. Will it hurt to bypass standard procedures or ignore certain screening results and accept the applicant for tenancy? The real answer is “it depends.” However, as a rule, if you ignore good business practices you will regret it. Even if this applicant is the only applicant and you feel that your cash flow demands immediately filling the vacancy, stop and reconsider. The costs of installing a bad tenant are potentially significantly greater than allowing the vacancy to remain unfilled for a while longer.

A Condo Ownership Concern

November, 2010

A Condo Ownership Concern

Many residential properties are governed by a Home Owner Association (HOA). This can vary from an association that only maintains a small greenbelt area to an association that is responsible for every detail of a development including even the exterior walls and roofs of the individual units.

While we will use the term “condo” (short for condominium) in this article, the discussion also applies to any other community which has CC&Rs or other legal documentation which might be used to restrict rental of a unit. In addition to true condos, this will include subdivisions of any other names, whether within multi-unit buildings or separate buildings (e.g., townhouses and planned unit developments) or even single-family homes.

Investors who might consider buying condos for rentals, current owners of rental condos, and even owner-occupants all need to be concerned about current and future restrictions, even associations’ prohibitions, against renting units.

These restrictions are not limited to the current housing market. For many years now, newer condo developments have been providing for rental restrictions, even prohibitions. Developers have created more restrictive CC&Rs regarding rentals and other issues in an attempt to provide homeowners with more protection of property values. The rental issue can also impact the financing for a property within a development.

In addition to investors who originally purchased condos for rentals, owners who had purchased condos for personal residences are now renting their properties, or at least trying to do so because some reason required them to move from the area and they were unable to sell their properties in today’s bad housing market.

Increasing numbers of rental units, or the potential therefore, and changing financing requirements are motivating HOAs of developments which did not originally restrict rentals to consider limiting or reducing the number of units that are not owner-occupied in order to maintain or improve property values for owners, at least as perceived by the Directors and by the necessary majority of owners.

If CC&Rs or Bylaws don’t already limit rentals, they would have to be amended, typically a lengthy process. Changes to CC&Rs and Bylaws will require approval of owners of a certain percentage of units in the development as specified in the association documents and/or state law, often two-thirds and always at least one-half of unit owners.

Restrictions and even outright prohibition of leasing arise for two different reasons. First, there is a perception that tenants do not maintain a property or otherwise follows the rules and regulations as well as do owner-occupants. It is also assumed that unit owners who lease units are less concerned about maintaining their properties and less likely to pay association fees in a timely manner. Both issues, if and when true, potentially result in lower property values. Second, there is the fact that for developments having a large percentage of tenant occupied units, loans may be more costly or may be available from significantly fewer sources. The second reason is based on the fact that lenders are concerned about the first reason.

Investors can, of course, determine before purchasing a unit whether a particular development prohibits or otherwise restricts rental use. Even when there is no outright prohibition against rentals, there can be restrictions that critically impact rental. For example, some communities that allow leasing involve the association in the tenant approval process. If prospective tenants must be approved by the association, investors need to be concerned about two issues. First, the rental applicant needs to be informed of the matter and the fact that it might result in delay. Second, it is not unknown for associations to violate fair housing laws in their approval criteria and this can create liability for the owner.

However, even when there are no current restrictions on leasing, investors should consider certain factors that might affect rental use in the future, particularly the percentage of owners required to change CC&Rs. Owners who already rent their condos should remain alert for potential changes that will restrict rentals.

Owner Associations usually have considerable control over (1) the physical condition in which a property must be maintained (2) uses of a property, and (3) how a property can be modified. Even though many condo owners may think that rules and regulations are overly dictatorial, Courts have, in general, upheld them because the CC&Rs and Bylaws were agreed to when the unit was purchased. Disallowing rental of units within a community would not in itself violate fair housing laws and such restrictions have been upheld by courts in some states.

In addition to rental restrictions, borrowers may find it more difficult to obtain government backed financing. Two issues for discussion are (1) percentage of units that are owner-occupied and (2) percentage of units for which association fees and assessments are delinquent.

The Federal Housing Administration, Fannie Mae, and Freddie Mac for a long time had rules setting limits on the number of units in an association that can be leased. For example, with an FHA-insured mortgage the property had to be at least 50% owner-occupied.

The Federal Housing Administration recently changed its policy and will no longer approve mortgages on a loan-by-loan basis on condominium units. Now, the entire project must be cleared by the agency before it will insure a mortgage on a unit in that community. Part of the approval process is making sure the percentage of non-owner-occupied units doesn’t violate the rules. Similarly government run Fannie Mae and Freddie Mac have changed their requirements for condo financing.

New condo financing policies of Fannie and Freddie require the evaluation of the condo association and operations. This is in addition to the usual evaluation of the credit qualifications of the borrower. The federal agencies now have requirements pertaining to the association’s financial statements, status of dues and assessments receivable from residents, insurance, and even the ownership breakdown of the units in the development.

Lenders are also less likely to approve a purchase or refinance loan for a condo if a significant number of owners in the development are past due on their dues or assessments. In particular, if dues or assessments are 30 or more days delinquent for more than 15% of the units in a condo development, the entire development earns a “non-warrantable designation” and loans insured by the above government entities are unavailable.

Even loans that are not government insured may be less available and/or more costly because of similar rules.

These requirements have an impact on obtaining purchase loans by prospective buyers and refinancing by existing owners, because loans that can’t be purchased or guaranteed by Fannie or Freddie are both more costly and harder to get.

There are a number of ways associations may try to encourage owner-occupancy and reduce rentals including the following:

  • Require that no person or entity can own more than two units,
  • Require that in order to own a second unit or lot require that the buyer must live in the first one,
  • Limit the number of times a unit or lot may be leased or the length of time that it may be leased during each calendar year,
  • Have a cap on the percentage of units or lots that can be rented. If the cap has been met, the homeowner goes on a waiting list.
  • Charge the owner a fee each time a tenant moves in or out.

In order to win the approval for increasing restrictions on leasing from the necessary number of owners, the association board will usually have to show some flexibility to both those who already rent their units and to those who can think of reasons why they may wish to or even need to rent their units in the future. Ways to reduce the impact of restrictions for certain classes of owners including the following exemptions:

  • Allow limited periods of rental for military or other transfers in which the owner intends to return, with maximum flexibility being given to military owners who have the least control over their destinies.
  • Allow owners to rent their units for a limited period during difficult economic times, with determination of what constitutes hardship and who interprets the rules being well defined.
  • Grandfather those who were owners when the rules were changed.

Parties on opposite sides of the issue – owners who wish to increase restrictions and those who want to oppose restrictions – should speak with an attorney who specializes in homeowner association law. Those for restrictions will need to ensure that the association doesn’t violate state law and those against restrictions will want to protect their rights.

Those who are renting units or who consider that they may want to do so in the future should probably consider the fact that long-term values of their units may actually be enhanced by reasonable restrictions.

Additional Information

For additional discussions regarding Associations and many other subjects see our “Buying Income Property” and “Managing Income Property eCourses.