How Investment Properties Can Harm the Market and Helpful Solutions

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By Michael J Posner

One of the effects of the great mortgage foreclosure recession is the large increase in rental properties in communities that were once generally owner-occupied (i.e., primary residences or vacation homes).

As prices plummeted after the foreclosure, investor groups sprung up to buy the now-cheap properties and turn them into rental properties as a long-term investment. One such company is Invitation Homes, founded in 2012, that now owns 80,000 properties in seventeen markets, including a substantial number in South Florida. A Property Appraiser search for IH3-IH6 Property Florida, LP (subsidiaries of Invitation Homes) showed ownership of 1,138 homes in Palm Beach County alone almost all available for rent.

Level of Care

The main problem with a vast number of rentals being controlled by one company is that the level of care is only as good as the company that stands behind the properties. As a Special Magistrate for the Village of Wellington, my quarterly docket is filled with violations against Residential Real Estate Investment Trusts (REITS), the main owners of large quantities of rental properties and publicly traded companies like Invitation Homes (which now trades on the New York Stock Exchange under the symbol INVH).

Most violations are basic property maintenance issues, dead and bare areas in the lawn, dilapidated fences, stained roofs and walls, missing property numbers, and other issues. Once prodded, these companies do tend to respond, but their attitude is often a sense of, “We know and we’ll get to it, but….”

However, the blight on the communities can be substantial, as evidenced by the number of citizen and association complaints.

Solution:

Communities are responding to these issues using two approaches: first, by stepping up code enforcement; and second, by adopting rental registration requirements. This serves to both keep track of rentals in a specific town and educate landlords on their obligations regarding leasing and tenant behavior.

Property Values & Loans

Rental issues have also hit condominiums and homeowners associations hard. Some communities that were built on owner-occupied concepts have become mostly rental communities. This can reduce property values and even make certain loans unavailable.

For example, FHA prohibits loans in communities where fifty percent or more of the units are investor-owned or rentals (though recent updated guidelines allow for loans in certain communities with only thirty-five percent or more owner occupants if it is a loan in an existing condominium complex with at least three years of stable finances, and low assessment delinquency rates).

Solution:

Given these issues, many communities have adopted new rental restriction rules, which include:

  • No rentals of any purchased unit/lot within the first one to three years of ownership;
  • Only annual rentals, no seasonal rentals;
  • No lease renewals, with a one-year gap between leases;
  • A percentage cap on the number of units/lots that can be leased at any one time, usually between fifteen and twenty-five percent; all other owners can rent on a first come basis when the rental cap is open;
  • Banning rentals to anyone convicted of a crime (misdemeanor or felony); and
  • Banning rentals to anyone with a credit score below 650-700.

Note that these restrictions, when adopted, cannot apply to existing unit condominium owners who do not vote for the change, as the Condominium Act specifically states,

An amendment prohibiting unit owners from renting their units or altering the duration of the rental term or specifying or limiting the number of times unit owners are entitled to rent their units during a specified period applies only to unit owners who consent to the amendment and unit owners who acquire title to their units after the effective date of that amendment.

The restrictions may be imposed upon a homeowners association retroactively, but subject to the requirement that an amendment cannot be arbitrary, capricious, or promulgated in bad faith and still subject to legal challenge.

In addition, HUD has promulgated guidelines regarding rental restrictions that it believes are, by nature, discriminatory. HUD’s new guidelines focus on restrictions that ban all felons, claiming that since minorities make up a substantial number of felons, any such restrictions that are not reasonable in time or limitation to certain crimes (sex offender, violent crime) will be void. Therefore, simple outright bans on renting to a felon would be unenforceable.

Some tenant advocates also argue that credit score limitations have a similar discriminatory nature. To avoid a possible HUD complaint (and the costs associated therewith), I recommend adopting reasonable rules for past criminals (five years) and credit scores, allowing for tenants with low scores to provide alternate security in the form of a guarantor or common area deposit. This helps to alleviate claims that the score restriction is designed to keep out undesirable minorities.

Have you been affected by this issue? Do you have an investment property, or are you living in a community intended for homeowners but filled with rental properties? Whatever way this situation may have affected your life, it’s important to realize the long-reaching effects of the mortgage foreclosure recession.

Michael J Posner, Esq., is a partner in Ward Damon, a mid-sized real estate and business oriented law firm with offices in Palm Beach County that represents homeowners and condominium associations throughout South Florida. He can be reached at 561.594.1452 or at mjposner@warddamon.com.

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