Taming Transient Turnmoil Managing Renters in Condos

Taming Transient Turnmoil

As housing markets in many parts of the country—including Chicago—have foundered, many developers have opted to convert portions of communities originally intended to be condominiums into rental properties. When a development with no owner-occupied units converts to rental, it's not such a big deal—after all, no units sold means no unit owners are affected.

But sometimes, rental conversions take place in buildings where a handful or more units have been purchased—meaning that new unit owners are living side-by-side with rental tenants, or that unit owners are renting out their units as income properties. In both scenarios, inter-residential relations in a mixed community can become complicated. The growing numbers of renters in Chicago condo buildings and HOAs present these communities with challenges—but also opportunities. There’s a lot at stake, since having a fully occupied community keeps property values up and maintenance fees low.

Status Quo

Financially speaking, rental tenants don’t have the same level of investment in the unit they call home as owners do in real property they’ve bought. This doesn’t mean that all—or even most—renters are going to be irresponsible, or that renters aren't interested in the upkeep and well-being of their units. But the perception of differences between the two types of residents lingers, and can be a source of friction between building residents, board members and property managers.

“When renters and owners live side by side there has always been conflict. In reality there’s bad owners and there’s bad renters too,” says Matthew Hohl, CMCA, an assistant vice president of Legum & Norman Midwest, a property management company in Chicago. “It depends on the community. It also depends on the economics of the community and the demographics as well.”

Mixed communities with many owners and renters together is a market reality—and buying into or living in such a community needn’t be a big gamble. Providing they know how to plan for and react to different situations, unit owners and board members can successfully manage the owner/renter dynamic. And when a community has clearly defined policies on renters, as well as open communication and community-building events for all residents, conflicts can be eased or altogether prevented.

Economic pressures are changing many communities from what they once were or from what they were intended to be into something new. Due to the recession, the glut of units on the market has meant that many Chicago area condominiums and homeowner associations have had to either adopt a total rental strategy or partial rental strategy to get units occupied and offset maintenance costs. Across the region, thousands of units have been converted and are being converted to rental, experts say.

“In the last four years, there was a very large increase in the number of renters in the condo and co-op market. I think the main reason was over-saturation of the marketplace,” says Hohl. “Another reason was you have lenders giving out mortgages they shouldn’t have, therefore you have people who are top heavy from the get-go.”

“I think there’s an increasing number of renters in condo and homeowner associations because people are having trouble selling their homes and getting what their worth,” says Kara Cermak, a portfolio manager and president of Rowell Inc., a community association management company in Elgin. “If people have to move or they are relocating and can’t sell, they have no other option but to rent. There’s no question that renters are increasing in condos and HOAs.’”

“In Chicago, a number of developers had to adopt a rental strategy and rent out units in bulk as the credit crunch dried up the buying pool,” adds Patrick Kennelly, CEO of Phoenix Rising Management Group, Ltd. in Chicago. “Interested buyers simply could not obtain financing. Many of the associations that came online from 2008-2010 are still predominantly rental properties. Recently, we began seeing investment groups coming in, buying out the development group and slowly selling off the units.”

There’s no question that having rental tenants in a co-op or a condo community affects a building’s profile with lenders and buyers, but so does having many unsold or empty units in the community. Fannie Mae and others have passed rules stipulating that they won’t give a loan to a unit owner of any building that has more than 30 percent renters.

Still, with numerous condo associations in the state, mass vacancies in partly-filled communities and the many defaulted units empty have left associations with few choices to recover losses and stabilize faltering buildings.

Increasing numbers of people are choosing to rent rather than buy a home because of the potential loss of property values and the financial risk involved in buying. Others have been forced to rent due to loss of their home. These and other factors have affected the local economy so that the rental market is now hot. For many communities and owners these days, it makes the best sense to rent out units, since there is so much demand for rentals and far less demand from people wanting to buy condos.

Changing Places

Legally speaking, what’s involved in changing a community from condo to rental or to partial rental is based upon the community’s governing documents. Depending upon the wording of the condo association’s covenants, such a change in the community might require a vote of the homeowners, with two-thirds of them approving the change of the organizational structure to rental. In other communities, the bar for such a transition is much, much higher.

Whatever the requisite vote is, moving forward with a new community makeup requires some careful planning.

Protecting the developer and/or owner’s investment in the building is primary. And partly because the way such residential changes take place varies from community to community, engendering understanding among the residents also is crucial for success. Such understanding begins with everyone knowing about the change. For communities that are transitioning to partial rental, board members might want to consider a publicity campaign to inform residents of what is going on and what the change means to them. The campaign could include a letter sent to all residents about the change, a notice posted on community bulletin boards or in the community’s newsletter, and organizing events meant to bring tenants and owners together to mingle.

“In a pre-construction scenario it is much easier for the developer to simply return deposits and switch gears from condominium to rentals,” says Kennelly. “Given the demand for rentals many development groups made such a switch. It is more challenging to switch over to a rental strategy if the building is constructed. The construction of units initially designed for sale tend to have greater value square footage and more upgrades than rental units. However, we have seen a number of properties come online that were designed from the start for the rental market that have nicer finishes and a number of great amenities.”

In many cases, the rights of renters are comparable to those of owners in a community. Usually, a renter enjoys the same rights to use a community’s laundry rooms, gyms and other facilities as an owner.

“You can’t create two classes of ownership for amenities that are only limited to owners,” says Cermak. “As long as the owner has passed on that right to the renter they have the same rights as owners. I do have a couple of communities where we ask the owners to sign off on those rights. For instance, they will write a letter saying so and so has the right to use the pool instead of me. That way we don’t have owners trying to use the amenities as well as the renter. It has to be one or the other, but we don’t stop them just because they are a renter.”

But if the renter is leasing from a unit owner who is behind in his or her HOA payments, the renter could suffer the consequences of not being allowed to use the facilities, based upon the owner’s delinquency.

Generally speaking, renters have no voting rights in a community, and sometimes don’t even have the right to attend association board meetings. An individual unit owner can confer his or her right to vote to the renter but usually a renter has no say-so in the community’s governance.

The day-to-day concerns of the rental tenants in a co-op or condo building can be handled by a variety of entities. If the association is renting the unit, the property manager will handle the renter’s concerns. If an individual unit owner is renting out the unit, that owner would take care of issues with the unit.

Acting Neighborly

Because of the varying lifestyles in the state, sometimes the members of some associations have an “us versus them” mentality.

Whether or not the perception is true, it doesn’t need to hamper inter-residential relations, since most differences among neighbors come and go.

The most common problems and complaints arising with rental tenants in co-op and condo buildings are minor annoyances. Usually, complaints from other residents regarding renters are about excessive noise, or about the renter not keeping his or her unit clean. Sometimes people have problems with noise from a renter’s dog, or with more people staying in the condo than are permitted.

“I don’t find the problems associated with renters or rentals to be that different from problems associated with owners,” says Cermak. “The owners are held responsible for the renters. I find that I have just as many issues that I do with renters as I do with owners. I don’t treat them any differently than I would an owner. They are required to do the same things. As a matter of fact, if they are ever in a serious violation of rules and regulations it actually is easier to get them in compliance. You can certainly threaten a lawsuit that would get them evicted from the home, whereas with an owner they own that home and it can be very difficult if you are having problems with them.”

Board members and property managers can work towards harmony in the community by keeping the lines of communication between residents and management open. They also can organize get-togethers for everyone in the community, such as cocktail hours and barbecues or pool parties. Experts encourage some kind of board involvement and community events, so there’s a sense of community whether you’re an owner or renter.

Renters and unit owners alike can help themselves in building a better community by attending association board meetings, which many communities allow renters to attend. In some cases, renters are allowed to speak at such meetings. Residents also can inform themselves about their new mixed community by availing themselves of the opportunities to learn more about community government through such organizations as the Community Associations Institute (CAI), of which there is a local chapter in Roselle. In many newspapers, attorneys write advice columns about condo and association laws. And as always, there’s a plethora of information on the subject available online.

Jonathan Barnes is a freelance writer and frequent contributor to The Chicagoland Cooperator. Staff Writer Christy Smith-Sloman contributed to this article.

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