New Battle Affects Home Values: No-Rental Rules


Article Courtesy of SmartMoney

By Brad Reagan

Published January 17, 2009


Renters: neighborhood contagion, or a lifeline to beleaguered homeowners?

In growing numbers of American towns and subdivisions, that question has become anything but academic, as homeowners associations abruptly ban rentals. Blame it on the huge slump in the housing market. For owners who have to move or who own houses as investment properties, short-term rentals can bring in some cash and keep them from having to sell at a big loss.

But instead of greeting renters with hosannas, many towns and subdivisions are barring their doors, arguing that tenants usher in neglect, misbehavior and even violent crime. Almost 60 million Americans live in developments governed by homeowners associations, and by some estimates as many as 40 percent of those communities enforce restrictions that keep owners from becoming landlords.

Indeed, many associations are enacting even tighter anti-renter rules — even in the parts of the country hit hardest by falling prices. Often the backlash comes after the rowdy-tenant threat becomes a reality.

In Sacramento an active-adult community recently erupted into a geriatric war zone over rental rules after tenants got blamed for diapers in the pool and other transgressions. The city of North Las Vegas had so much trouble with crime and vandalism, much of it attributed to renters, that it forbade new home buyers from leasing out their homes within two years of purchase.

Other communities see the restrictions as a way to put a floor under falling prices: The mayor of Madison, Miss., for example, began tightening that town's rules after the downturn started depressing prices.

The conflicts help explain one of the more bitter ironies of the real estate scene. Even though demand for rentals is at an all-time high, there are now 18 million vacant housing units in the U.S., according to the Census Bureau. More than a third of those properties are being left vacant by their owners intentionally, a trend that’s being exacerbated by local renting rules. To be sure, some communities are easing restrictions in a bid to lure buyers. But other subdivisions are digging in their heels even as homeowners beg for relief.

To see how the conflict is playing out, SmartMoney caught up with owners in communities from the bubble markets of California to the stable South, on both sides of the tenant divide.

Why Are Renters Seen as Undesirable?

The idea that renters are about as good for a neighborhood as an infestation of termites has been around for a long time, particularly in upscale communities. In May, in a ruling that upheld rental restrictions, the Indiana Supreme Court observed that it is “undisputed” that “an owner-occupant is both psychologically and financially invested in the property to a greater extent than the renter.”

Thus, the thinking goes, renters are less likely to maintain and improve their homes. But proof that this phenomenon affects property values isn’t overwhelming. A California study found that homes fetched lower prices in communities where more than 30 percent of properties were renter-occupied, but that study dates from 1987. Whether governed by perception or reality, anti-renter sentiment is pervasive: Even Fannie Mae and Freddie Mac refuse to underwrite mortgages in condo projects where a majority of units are rentals.

During the boom years, antipathy toward renters was heightened by the easy availability of credit — when any monkey could get an ARM, someone who couldn’t get approved for a mortgage seemed truly untrustworthy. This skepticism fueled a huge surge in restrictions, according to Joseph Cusimano, a Cleveland attorney who represents almost 500 condo and homeowners associations.

Some policies limited the number of homes that could be leased within a subdivision, while others banned rentals altogether. The rules don’t discriminate between hardened speculators and owners who have more benign reasons for renting.

The Upside of Having Renters Around

While short-term residents may have their downsides, so does a street full of vacancies. More than 7.5 million homeowners are underwater on their mortgage, meaning they owe more than their house is worth. There’s little to stop such strapped owners from mailing the keys back to the lender — “jingle mail,” it’s called — and letting the property sink into foreclosure.

Numerous studies demonstrate the ruinous effect foreclosures have on home values; one, by researchers from the Georgia Institute of Technology and the Woodcock Institute, showed that a home’s value declines by about 1 percent for each foreclosure within an eighth of a mile.

To avoid a similar fate, some neighborhoods are reconsidering their stance. In River Falls, a gated community in Roswell, Ga., where most homes sell for more than $500,000, rentals have long been limited to 7 percent of all units. But now prices are down 10 percent or more, and homes are languishing on the market. So the local board is exercising its discretion to grant “hardship exemptions” for owners who have to move, says board president Allan Price.

In Ohio many associations are taking a similar approach—though few want to advertise it. The goal is simply to keep homes occupied. Price, a mortgage lender, believes it’s unneighborly to enforce stern no-rental rules in these tough economic times. “We cannot turn our back on people and say, ‘You have to sell now and take a $100,000 loss,’” he says.

Still, that calculus doesn’t work out for every neighborhood. When Sun Meadows opened on the south side of Sacramento in 2004, the first wave of buyers into the 55-and-over development mingled affably in the evenings around the community pool, fitness center and putting green. “The first six months, it was paradise,” says Mitchell Geise, who paid $328,000 for his stucco, three-bedroom home. The market cooled before all 136 homes could be sold, however, so the developer began renting the unsold homes. Geise even became a landlord himself, when he bought a neighbor’s home out of foreclosure.

But the influx of renters proved to be the flash point for personality conflicts that soon split the community. One faction claimed the renters trashed the billiards room, while the other defended renters and pushed for them to have a greater say in setting the rules.

For Geise, the conflict reached its nadir when he got into a scuffle with a 69-year-old neighbor who was a leading anti-renter agitator. Today the two sides continue to squabble, and the conflict isn’t helping home prices: Two sales have fallen through after prospective buyers learned of the lingering discord. “This whole thing put the kibosh on the ability to sell here,” says resident Deborah Jessee.

One Town’s Battle Over Renters

One recent day, on a winding drive through the rain-swept streets of Madison, Miss., Mayor Mary Hawkins Butler illustrates her beef with renters. “See there? See what I’m saying?” she says, pointing to a 1960s ranch-style home that she says is a rental. The lawn edging has grown over the curb, and one of the window shutters has broken off and sits on the ground, propped up against the front of the house. “They don’t want to maintain the property,” Butler says.

She rolls the car forward and comes to rest in front of a similar home two doors down that Butler says is owner-occupied. The lawn is immaculate, with closely cut, bright-green hedges, and a wicker rocking chair adorns the front porch. An American flag flaps in the breeze above it. “Now look,” Butler says triumphantly.

To say that Madison is a master-planned community is true only if one acknowledges that Butler is the master. Dubbed Queen Mary by detractors, Butler has served as mayor for more than half her 54 years. Hers are the brains behind the Corinthian columns framing the pumps at the Chevron station and the simulacrum of a long-leaf pine tree near the center of town — actually a faux-botanical sheath for a cellphone tower that Butler deemed unsightly. As of the most recent census, 94 percent of Madison homes were owner-occupied, compared with 65 percent nationally. There is not a single apartment complex in town. All of that, Butler says, is a key reason why home prices in this Jackson, Miss., suburb are more than double the statewide average. “We promote home-ownership,” says Butler.

But Madison has also seen a surge in foreclosures that have pushed down property values. “For Sale” signs are abundant, many augmented with desperate appeals like “Steal me!” “We’re in a terrible pickle,” admits Carlton Melton, a retired school administrator who moved to Madison six years ago. His Northbay neighborhood, where he serves as president, contains a handful of vacant homes that have languished on the market, and last year the number of rentals spiked.

As tenants invaded, Melton for the first time didn’t know all his neighbors by name, and he wondered if it was still safe to let local kids trawl for catfish in the lake that abuts his backyard. Neither Melton nor Butler can cite any specific incidents of crime or rowdiness related to the new tenants. But after consulting with the mayor, Melton pushed through the resolution banning rentals. “It’s about having neighbors that you can count on and trust,” he says.

Caught off-guard by this move were Andy and Lorrie Bourland, who bought two houses in Madison with an eye to flipping the second home. When the housing market went south and the couple couldn’t find a buyer, they finally rented their second place to an endocrinologist and his family for $2,300 a month.

But then the homeowners association abruptly banned rentals, leaving them stuck with two mortgages. The couple argued that they would never have bought the second home if they’d known the association would enact such restrictions.

“You can’t change the rules after we’ve already anted up to play,” says Andy Bourland, a gambling lobbyist. They even filed a lawsuit, though they dropped it as costs mounted. Another landlord who ignored the new rule faced a nasty surprise: He was arrested. To back communities like Northbay, Madison had made it a criminal offense to violate homeowner-association covenants. (A judge eventually dismissed the charges.)

New Barriers to Renting

Butler and the city recently erected yet another set of barriers. Today anyone planning to rent out a home must pay a nonrefundable fee to the city, plus post costly surety bonds -— the latter process not unlike a prisoner posting bail. Although the ordinance specifically targets “absentee landlords,” in practice it punishes real estate investors of all stripes.

Fran Waldrup McDonald, who has lived in Madison her entire life, recently inherited two homes; she’d rather not sell, but she faces hundreds in fees if she rents. The city has threatened to fine her up to $300 per day if she leases out her properties without first paying the municipal fees. “I want Madison to be nice, and I want it to be clean. But this is not the way to do it,” she says.

McDonald is now trying to organize the landlords in Madison into a group that can fight the city over rental rules—sort of an anti-association association. Meanwhile, Northbay’s Melton says his community is sticking with its policy. Eventually, he insists, buyers will come back. “The solution for us is time,” Melton says. “This will shake out.”