HOA restriction on rentals

7 Replies

I purchased a townhome with the expectation of either 1. renovating and reselling it or 2. renting it. My preference is the latter and I want to rent it and add it to our portfolio. Most of the HOA in our area (Jersey shore) have some type of restriction to limit rentals. The most common is a waiting period of 2 years. The owner cannot rent for the first 2 years of ownership. And even then, there is a process that must be adhered to keep them happy.

We were aware of this when we bought and we wanted to flip it.  There are no restriction on flips.  But now we want to rent it and I wonder if I can get around this without having any problems?   

The house is worth about 160K and we have a 95K mortgage.  It was a 130K short sale purchase with 25% down payment but I did some renovations and we got it at a good price so I had some added equity at closing.  The home is in my own name and not an LLC.  This was done to maintain favorable interest rates and to keep the mortgage company and HOA happy because neither is fond of LLC's.  

I've been given lots of advice but we have some challenges.  

The most common advice was to put the home into an LLC and then add the LLC to a trust.  I can make the tenant a trustee in the trust without any voting rights so "technically" they would be an owner.  

This seems complex and expensive.   

The change in ownership could also trigger a "due on sale" clause in the mortgage. In addition, we live in Jersey where there is a fee for everything and the only thing we get in return for our fee is a receipt. We also have a Realty Transfer Tax that is applied anytime a home changes hands. A conversion to an LLC would qualify so I would have a fee of about $600 in taxes. In addition, the HOA charges nearly $2000 to join so I could possibly be subjected to that again if the property ownership changes. And we also require a township inspection and certificate of occupancy on all rentals in this town so the amount of checks and balances is overwhelming.

I've been given other advice such as: 

1. Rent it and keep my mouth shut.  

2. Tell the HOA that it is owner occupied (me or my wife) and that the other person living there (the real tenant) is our room mate. And, of course, I am never around because I travel a lot for business. I am sure their annual tenant questionnaire would also require proof such as drivers license and our address would not match.

3. Put it on the market or sale at a ridiculously high price and then put in a house sitter (the tenant) while I wait for an offer.  I am unsure if this is allowed but they can't expect me to leave it vacant so it's worth a try.  

4.  Do a lease-purchase instead of a standard rental agreement.  Technically, this would still be a rental but I am curious if they have the ability to restrict how or what method I use to sell my home?  Not everyone can get a mortgage right away so I could put in a tenant who wants to buy.  But he has crappy credit so he can't do it for a year.  Of course, this is also fabricated but I could easily draft up a lease purchase agreement giving the tenant the option which he would ever exercise. 

Any advice on how to creatively and legally get around this 2 year rule would be greatly appreciated.  



@Pat Garaffa

So the plan is to rent it for the long term.

If that's so, angering the HOA off the bat with the frankly rinky-dink theatrics you mention might not be the best strategy. The goal of limiting rentals is to keep the property desirable for owner-occupancy. So all the neighbors are also going to be on the HOA's side. I suggest you renovate and resell. Be done with the HOA and all their problems.

The way I see it:

1. There's many discussions here on LLC's. As to protection, in your case it's not only an overkill and presents many problems. I've been investing for 40 years, including condos and have yet to use an LLC.

2. I see a correction coming, so the best thing is to sell it before the crash. The last crash here is in 2007-2008.

3. You cannot expect the tenant from accidentally spill the beans, and sooner or later the HOA will find out. At the time I bought condos, my HOA keeps it's percentage of rental condos under 20%, else future buyers will have trouble getting loans, and current owners can't sell. Loan requirements might change but HOA rules may not have and my HOA even proposed changes to the CC&R reducing rentals to 10%.. Also, there's a prevailing opinion that renters are harder to deal with. For instance, my renter was annoyed by the renters of the condo next store, college students, who partied to the early hours nearly daily. This involves calling the PM for the HOA who called the tenants, and when it continued, call the out of state owner, who couldn't be located. Our tenant was annoyed why it's taking so long. What happened was the HOA, who never liked rentals to begin with, put more restrictions in, saying they want to review leases, and approve tenants, like they do for COOPs. When this happened, the value of my condo already doubled, I sold.

4. I heard of including tenants on the deed, for a small percentage, such as 5%, but it's something that I am not in favor of, so I never looked further into it or tried it.

Jim - Correct. That was the plan. And I agree and one of my biggest concerns is being in a bad position with the HOA by going against their wishes. I am hoping for a simple, legal solution that will keep both sides in check.

Frank - I've been getting similar info on the LLC's and am unsure which way to go. They serve a purpose in many cases but I'm not so sure I need it. There are other options that may be more cost effective.

This condo HOA does the same and they want to limit the rentals to conform to HUD's guidelines. They are actually way below their numbers and they maintain their HUD approval status allowing FHA mortgages. These all benefit me as an owner and I don't want to get caught up in a downfall if this status is lost or suspended and they become unmortgageable and my only buyer is another investor. It's a real catch 22.

I don't see a crash anytime soon.   The lending is not nearly as "creative" as it was 10 years ago but the buying frenzy is picking up speed.  We saw a condo property last week that was slightly discounted due to it's condition and the agent had 2 full price offers before the buyers actually went to see it.  I've used the same strategy to push away other buyers but it's happening more and more.   I am still buying properties today that were selling for nearly twice the price in 2006 so I think I have a bit of a cushion.  And even then, I am only grabbing the distressed properties so I am buying 10-15% below the current market prices in that community as a result of a short sale or foreclosure.  I think we still have a way to go here in Jersey.  

The short answer is you should sell. Now this may depend on how strict the HOA is, but if the bylaws that you agreed to say no renting, and you rent it, you can potentially piss off the people who have the power to add fines and liens to your property and put up a damn good legal fight. Why go through the headache if you don't have too? Sell for profit and move onto something that wont require jumping through these hoops.

You are seeking to become a landlord and the first thing you want to do is violate your landlords (HOA) rules. This is a very poor approach to our business and not a good idea. Respect your landlord and sell the property outright.

Time is money. The amount of time that you will invest in trying find a loophole just to irritate the neighbors isn’t worth the headache. Flip it or live in it for two years and then rent it out.

All good advice!  

Tom - Agreed but not my first rodeo. I've been a Realtor for close to 20 years, flipped about 18 properties and this is my 5th rental. All the rentals are similar and they have HOA's and each is starting to tighten the strings on these rentals. Again - I was looking to do it without creating a problem and I am not sure that is possible.

Ryan and Andrew - also agreed.  The equity is there whether I sell or keep it.  The profit on the flip will be miniscule and I would prefer the rental stream vs paying the commissions and taxes.   I'm just not sure I can do it.  I'm seriously considering allowing a family member to live there and pay the bills directly.  I need to check with the HOA first.  Some of these are difficult and the occupant must be on the deed even if the last names are the same.  Anything else (including an LLC) is considered a rental even if money is not exchanging hands and the person in the home (my daughter) is paying the bills directly.  There are a lot of calls to make.