Lease restrictions are typically birthed with noble intent – to foster owner-occupancy and ensure that buyers can get loans for properties within the community.
When new lease restrictions are forcibly applied to limit rental activity in buildings and neighborhoods, it is a taking of property rights which can set off litigation from disgruntled owners.
This issue has impacted me as a property owner, and I’m familiar with the emotions and frustrations felt by advocates and antagonists to lease restrictions. A recent situation with a buyer was frustrating enough that I want to share my experience (which is not unique) about how lease restrictions can adversely impact current owners, sellers, and buyers.
Lease restrictions will do two things, guaranteed:
1) limit the number of renters in a community
2) limit the number of buyers for properties within a community
Experience > Theory
We own two condos: one we live in (Shore), and one we lease out (Sabine). In 2008, we moved into a beautiful 1bd/1ba at Sabine. Later, we desired more space and we found it at the Shore. Just as we were closing on our new home, the HOA at Sabine decided to install lease restrictions which could have forced us carry the costs of a vacant property. Even worse, the resulting litigation also impeded most owners’ ability to sell (lenders don’t like litigation). The entire situation was bad for owners.
I was able to get our condo leased before the rules went into effect by lowering the rent to below market rate in order to quickly get a tenant. We didn’t set out to be investors, we’ve had good fortune to be what economists call “upwardly mobile”. Austin being a young city, we aren’t unique: we are par for the course.
Real World Consequences
Here’s a scenario from this past weekend. I’m representing an investor/buyer. They are an out-of-state empty-nester couple excited about investing in Austin. Perhaps they’ll retire here, but not for a few years. We previewed a condo that they really, really liked. They could pay cash or leverage historically low mortgage interest rates to buy the property.
But, they won’t be buying this property, and it’s not for lack of interest or money. It’s because they can’t lease it out per a new rule installed by the building’s HOA to cap the number of leases at 25% of the total.
A Tough Market Made Tougher
The seller of this property is collateral damage from the HOA’s new rule. This seller lost a buyer.
Lease caps will alienate investors and upwardly mobile buyers. The expected result will be longer days on market and reduced market value.
Furthermore, if an HOA installs lease restrictions improperly then they can face lengthy litigation, like what happened at Sabine where the litigation combined with the lease cap froze sales for over a year. Ouch.
I suppose there is a positive here: all things being equal, communities without lease restrictions are postured to receive a relative windfall of alienated buyers.
1) If more than 25% of a condominium is leased then buyers cannot get mortgages.
This is patently false. According to local mortgage broker Pete Fajkowski, for established condominium complexes, 90% of the units must be sold, all phases of construction must be complete, the Homeowner’s Association must have been under the control of the homeowners for one year, and Owner Occupied and Second Home units must make up at least 51% of the units sold. (link to Freddie Mac rules)
2) Renters won’t care for their homes and neighbors like owner-occupants do.
Make all the judgements you want about owner occupants being more desirable than renters. I’ve lived as both, and have been a neighbor to both. Most likely you have, too. I do prefer to be around other people vested in my community. But, guess what? Owners can be jerks, while our tenant at Sabine has actually improved the place.
I’m sympathetic to both sides of this issue. And, I do think there’s a tipping point beyond 50%. Otherwise, from a real estate perspective, lease caps can be damaging to market value. As a resident/neighbor, the renters vs. owners debate isn’t sufficient to warrant a lease cap which will restrict the use of the property.
Lease caps may have been a good idea back in 2008… in Florida… or wherever an entire community was at risk of becoming apartments. In today’s market, lease restricting is an over-kill solution to a debatable problem, and is more likely to hurt property owners.
This is my experience. What do you think? Are lease restrictions needed in Austin, Texas?