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The Unexpected Cost of Banning Rentals in Your Neighborhood

It’s self-defense.

That’s how most people think of their homeowner’s association. An organization that has its owners’ backs and can take care of bad actors in the neighborhood before problem properties tank everyone else’s property values.

It’s no wonder many feel there is a need for an HOA. Most people have had at least one bad experience with a neighbor who parked his project car on the front lawn, accumulated a metric ton of junk on his front porch or simply let his property go to seed in a way so aggressive that properties around it suffered by proximity.

The most recent neighbor conflicts revolve around the most challenging homeowner – the one who doesn’t actually live in the home but lets others do so, either in exchange for rent or as a favor. Whether the property is leased long term or whether it’s a short-term rental, neighbors are resorting to the power of their HOA to either prevent problems or address existing issues.

Generally speaking, homes built before the advent of HOAs are least likely to have them or anything approaching the sorts of conditions, covenants and restrictions (CCRs) that come with newer construction. Even so, the “generally speaking” caveat is advisable since it’s apparently possible for a 1970s neighborhood to be nevertheless governed by an HOA that was formed in the 1990s. And for that HOA to limit the ownership rights of its members to prevent rental issues.

And before you say, “what a great idea!” consider the cost to the homeowners themselves – even those who voted yes to create the restrictions.

The most serious impact will be the loss of an option that has saved homeowners’ bacon in difficult financial times. In 2008, when people lost jobs and could not afford to pay their mortgages, some bunked with family and then rented their homes to tenants who could afford enough rent to cover the mortgage. When the crisis passed, the homeowners were able to regain their homes. If they hadn’t used the rental option, they would have lost their homes to foreclosure or sold at a loss, with no equity to help them afford a rental of their own.

Consider, also, homeowners who would dearly love to offer their starter home as a below-market rental for elderly parents or as a rent-to-own option for grown kids.

One impact is almost never considered when HOAs resort to eliminating property rights: The damage to the value of the neighborhood when investors (some would say thankfully) and buyers who want full ownership rights – or who simply fear an activist HOA — bypass the house. Any time the population of buyers is reduced, it takes longer to sell the house and the longer it takes to sell, the lower the eventual price becomes. So, the day the owners moved to restrict their own rights, they were damaging their own home values.

One might argue – rightly – that one slovenly renter could easily do the same to property values.

But here’s the thing, there are other solutions.

An obvious one would be removing the bad tenant. Oregon during Covid banned evictions and has retained some of the most restrictive eviction laws in the nation since then. Still, removal for cause is very doable and most owners take too long to push that button.

And this is where an HOA could come in, levying a fine on a homeowner with a history of failing to attend to an eviction or correction when one is warranted. One or two stiff fines will do the trick for most negligent homeowners, and without removing a property right from everyone in the neighborhood.

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