Most Common HOA Bylaws Real Estate Investors Should Know
Condominiums and townhomes seem to be the perfect place to park extra cash and make it work for you. But as a savvy real estate investor, owning real estate that is also a part of a homeowners association can give less control than you might think.
Homeowners associations are typically governed by a formal set of bylaws in addition to any covenants, conditions, and restrictions that run with the community.
Subsequently, buying into or owning within an association may restrict you from using the property the way you initially intend to. On the other hand, as a landlord, your HOA’s bylaws can sometimes work in your favor.
As a real estate investor, it is imperative to fully understand the homeowners association’s bylaws before finalizing any purchase. Sellers are usually required to provide a copy of the bylaws for your review early in the sales process, or as an owner, you should be able to request a copy of these rules at any point in time.
Here are the most common HOA bylaws you should note if you are a real estate investor who is buying into or already owns a property located within a homeowners association. If you are curious about the essential bylaws for owners – we have them covered as well.
Are There Any Leasing Restrictions?
Most HOA bylaws are written to provide the homeowners association with a lot of power to implement and enforce leasing restrictions for the community. Not only that, but they can even limit the number of leases allowed (if any) on an annual basis.
Don’t take it personally if you find your HOA does have leasing restrictions. One reason why the bylaws may crackdown on rentals is to impact the community’s property values as a whole¹.
For example, disagreements between unit owners and tenants cause tension within the community¹. Lessees also generally care less about maintaining communal areas and shared spaces, since they don’t have any vested stake in the community. These things can ultimately impact the quality of life for the community as a whole.
Another reason why your HOA may impose leasing restrictions is that it can make it harder for other homeowners within the community to obtain mortgage financing¹. Unlike other real estate developments, properties located within an HOA must meet specific project requirements and standards set forth by investors in secondary mortgage markets.
Fannie Mae and Freddie Mac, the most notorious purchasers of conforming conventional home mortgage loans, have set guidelines that HOA projects must adhere to that could otherwise inhibit owners (or potential buyers) from being approved for conventional mortgage financing.
An example of Fannie Mae’s specific criteria includes that 90% of the units (in most cases) within an established or new project must be conveyed and sold to unit purchasers². Furthermore, projects usually should be 100% complete, and the project shouldn’t be subject to any additional phasing or annexation².
In particular, Freddie Mac requires that if the occupancy of the subject property within the project is to be used as an investment property, 50% of the total number of units must also be owner-occupied residences (although there is some flexibility for small communities)³.
Additionally, 15% or more of the total units cannot be 60 days or more past due on their HOA dues³. Project budget and reserve requirements may also apply.
Both aggregators typically require that at least 10% of the association’s monthly budget also goes toward cash reserves and can only be used for specific purposes, including repairs or maintenance or covering insurance premiums and deductibles. Learn more about reserves.
Keep in mind that other investors, such as the Federal Housing Administration (FHA) or the U.S. Department of Veterans Affairs (VA), also have their own set of project requirements.
Homeowners Association vs. Owner’s Insurance: Which Policy Covers What?
If you want to protect your real estate investment, it is essential to understand whose insurance policy covers what.
Your owner’s policy can help protect against common perils sustained to your unit’s interior, such as a fire or water damage4. It also may cover personal property within the unit. Essentially, your owner’s policy is restricted to your unit. For additional coverage, also consider requiring your tenets to carry a renter’s insurance policy.
On the other hand, an HOA’s master insurance policy can be quite extensive, but primarily covers all public and common areas or elements of the development4. These common walls, stairways, shared roofs, as well as pools and more4.
Insurance provider Allstate notes that coverage extends to both damage and personal injuries, covering situations like fire, wind, and other natural disasters as well as slips or injuries that occur in common areas4. It can even cover vandalism in some cases. These coverages are usually paid for and built into your monthly or annual dues.
It’s important to note that the HOA’s policy doesn’t typically cover appliances or fixtures within your unit, nor does it cover any personal property. In some cases, the association’s insurance may cover some of these, but up to the cost of the original built4. Upgrades or improvements you made to the property may have to be covered by your policy or paid for out-of-pocket4.
It may also not cover any living expenses if the damage is incurred to the unit and your tenants have to live elsewhere while repairs are made4.
If you are looking to rent your property, you should also consider obtaining liability insurance and property coverage.
For example, if you are found liable for an injury or accident sustained on your property, the homeowners association’s master policy may not cover any damages.
In general, liability insurance comes standard with most landlord insurance policies that can protect you against medical and out-of-pocket costs incurred if you are found legally responsible for injuries sustained on your property by a tenant, maintenance worker, another unit owner, etc.
Liability insurance may even help cover costs if you are found liable for damaging other people’s real or personal property.
Traditionally, investors focus more on their property insurance protections when evaluating their insurance coverage needs. Most lenders will require some owner’s insurance policy to be in place before they finance a property. However, it is equally important to consider liability coverage, especially if you are renting your unit.
What’s Included in Your HOA Dues?
Honestly, nobody likes to pay homeowners association fees; however, we should understand that they serve a greater purpose. Your HOA’s bylaws should indicate some general expectations for what expenses your dues will cover. Learn more about HOA fees and expenses.
For example, routine maintenance for mowing, pruning, and maintaining the landscaping and green spaces around the community is a typical expense covered by your dues monthly or annual dues5.
In some cases, the bylaws may also indicate that your dues include essential utilities, including sewer, water, trash, recycling, and even gas5. This can help simplify and consolidate your overall monthly expense for the property5.
If your association dues go towards specific amenities such as a pool or tennis court, check the bylaws to see who, when, and how to access thеse features. There may be specific restrictions on when you can use certain amenities, and if tenants can access them at all.
Are There Other Restrictions That Could Inhibit Rentability?
While some HOA bylaws attempt to restrict rentals altogether, other associations allow some flexibility in allowing investment properties. But just because an association allows rentals doesn’t mean they are always synergistic with your investment needs.
It’s essential to research any other restrictions that an HOA’s bylaws may have related to any unit’s rentability within the project.
For example, some states permit HOAs to charge move-in and out fees for owners who rent out their units. In particular, California recently set a precedent that found it permissible for an HOA to charge an annual fee to owners who rented their units as short-term rentals6.
The case of Wyatt vs. Oak Shores Community Association is explicitly important because it exhibits the power HOAs have to enforce their bylaws6.
It is also essential to take note of any right-of-first refusal clauses in the homeowners association governing documents. This clause allows the board to vet new buyers before an accepted offer can be made. In some situations, the board has the power to reject a bid altogether.
This can be tricky if you are either an investor looking to buy or an owner looking to sell, as all situations are different. Maybe you’re cash-heavy, but your credit is subpar. On the other hand, if you are selling, it could restrict your pool of potential buyers.
Other things you should consider that may impact the rentability of your unit include restrictions on pets. Some associations only allow pets of a particular breed and size. Restricting what pets are acceptable minimizes the pool of available renters.
Ultimately, if there are excessive restrictions that hinder your ability to rent your unit, it may be better to back out of the purchase while you still can.
1 Katz, L. (2020, September 17). Can an HOA Restrict Rentals? (Spoiler Alert: Yes). Retrieved September 22, 2020, from https://www.fool.com/millionacres/real-estate-investing/rental-properties/can-hoa-restrict-rentals-spoiler-alert-yes/
2 Fannie Mae. (2020, September 02). Selling Guide: B4-2.1-01, General Information on Project Standards. Retrieved from https://selling-guide.fanniemae.com/Selling-Guide/Origination-thru-Closing/Subpart-B4-Underwriting-Property/Chapter-B4-2-Project-Standards/Section-B4-2-1-General-Project-Standards/1032996351/B4-2-1-01-General-Information-on-Project-Standards-08-05-2020.htm#Project.20Types
3 Freddie Mac. (n.d.). Freddie Mac Single-Family Seller/Servicer Guide. Retrieved September 22, 2020, from https://guide.freddiemac.com/app/guide/content/a_id/1000689
4 Allstate. (2018, April). What’s Covered By A Condo Association’s Insurance Policy? Retrieved September 22, 2020, from https://www.allstate.com/tr/condo-insurance/whats-covered-association-policy.aspx
5 White, M. (2018, May 16). The Pros and Cons of Moving to an HOA Community. Retrieved September 22, 2020, from https://www.moving.com/tips/the-pros-and-cons-of-moving-to-hoa-community/#:~:text=Basic utilities typically covered in,into a monthly HOA payment.&text=Your HOA will do it,drawn from your monthly fees.
6 Offord, S. (2018, June 08). HOA Rules Upheld Once Again. Retrieved September 22, 2020, from https://bayarearealestatelawyers.com/hoa-litigation/hoa-rules-upheld-once-again