Back out of buying rental in HOA?

[SimpleLife]

I have a short sale under contract in a HOA subdivision. The house is two story, only 6 years old and I stand to gain about 30K equity after some repairs once it closes.

I planned on renting this out eventually, but the recent bad taste my current HOA has left in my mouth, coupled with the fact it turns out if I go through with the purchase on the new house, I have to get the boards approval to rent it out, and they can put caps on rental duration, number of rentals and outright ban rentals. Sounds risky to me now and I now want to eventually sell my existing home in an HOA and never again buy in one.

It's hard for me to give up the 30K instant equity gain, and 30K appreciation per year, not to mention 8K a year in rental income, and depreciation benefits on such an expensive house. Should I back out or go through with it for now and cash out when the time is right? Seattle area real estate is getting really expensive due to high demand and low supply.

Otherwise I could at least ask my agent on how I would go about checking with the board about renting it out when I have not even become part of the community yet.

[saving-10-years]

@Simplelife. Perhaps if you work out what you will make/lose if they don't agree or do their worst (from your point of view) you will have an idea of the range of possibilities. Right now its sounding as though you feel that (grieving for) the $30K and income as though this is a certainty, but the way you have outlined it it is only one of several possible options.

[SimpleLife]

My agent is going to have the current owners ask the board if they can get approval to rent it out (though they are currently renting it out anyway, not sure if they have approval or not) and see if that approval can be transferred to me (doubt it, he just wants to hang onto the commission).

Before anyone says it: even if the current owner has been getting away with it, that doesn't mean I will. The neighbors might complain because they are getting tired of renters next door, etc. and the HOA will have me; I'll be forced to either pay the mortgage on an empty house, move into it, or sell and break even (transaction costs), etc.

At least I can rent my current house in an HOA. Plan on selling it once it is fat enough though, as I never want to own a property in an HOA ever again.

[KevinW]

These rental-limiting rules exist because a complex doesn't want to turn into a balkanized apartment complex, where each apartment unit is owned and managed by a different landlord. That scenario is kind of a schizophrenic mess administratively, and high turnover tenants demand more resources ($$$) than do low turnover resident owners. For this reason, complexes with a high percentage of rental units are ineligible for FHA and some bank mortgages, which makes the units less liquid and hence less valuable, which is contrary to the interests of the owners collectively.

I'm not condoning or excusing these policies, they bother me too, just explaining them.

[dalralmi]

As a member of my condo community HOA I would say don't do it. Rental caps are a big deal where I am because it is to keep FHA approval as well as keep the neighborhood seemingly nice with owners who care about longevity of the community.

In our community we have a 10% cap on rentals and every area in our neighborhood is over this cap because of military exemptions. This makes civilian wait list rentals impossible to come by. Other rules on rentals is from your approval of renting you have 30days to find a renter before bumping to the bottom of the list and can only rent for one year at a time before applying to be able to rent again. That is our current rules and they obviously could change at any time...

With HOA rules and many neighbors who have nothing better to do but report illegal renting I think it will be more hassle than it is worth in your equity. Every community is different and I'm in a high military area making militRy renting exemptions common, but with board turnover, different mortgage rules on rental capping and other extenuating circumstances I wouldn't trust it... The only other suggestion if you want to research further is to attend a board meeting and ask about these things before you purchase or read the HOA documents very carefully to determine how hard renting will be for you...

[dalralmi]

Also our board recently got a request from a potential buyer... Something you could do is basically say the sale of the home is pending their rental approval... I doubt they'd approve the request, but it is always worth a shot.

[SimpleLife]

Talked to the property manager for the housing development. She said it is not currently enforced as the board would prefer houses to be occupied even with renters instead of sitting empty for years due to peoples circumstances. Empty houses attract all kinds of other problems. She also noted that some owners have complained about the number of renters and the board is going to be meeting to decide whether to revamp the policy and what not but the board does not want to enforce any kind of rental cap or policy.

It could go either way I think.That said, she did mention that all she can say is that it is unenforced...I took that to mean that the board has no intention of actually enforcing any rental policy current or proposed. Now, that doesn't mean they can't be forced to by a class action law suit by a bunch of pissed off homeowners.

I myself have retained an attorney for review and possible legal action against my HOA. Have a call with him today in fact to find out what I can do about my dispute.

[JL13]

I'll be forced to either pay the mortgage on an empty house, move into it, or sell and break even (transaction costs), etc.

I consider equity to be what I'd get if I sold it the day after I bought it, which is basically FMV less 9%. It doesn't sound like there is actual equity in this property by my definition?

[SimpleLife]

I'll be forced to either pay the mortgage on an empty house, move into it, or sell and break even (transaction costs), etc.

I consider equity to be what I'd get if I sold it the day after I bought it, which is basically FMV less 9%. It doesn't sound like there is actual equity in this property by my definition?

Is that 9% the opportunity cost of another investment? If so, then I'm not sure your definition makes sense. What investmemt returns 9% daily? If you sell equities a day after you buy them, they are generally not going to gain much. Opportunity cost is usually calculated per year, not day.

Furthermore, the house is worth 30k more than I am paying for it, even after expenses. As noted, it is a short sale, so I am buying below market. Also note I said, if I have to sell it right away, I break even after transaction costs.

That means I get the money I put into it back, but nothing else. If I hold it a year, even after transaction costs I am netting 40% + on my money. You'd really have to calculate opportunity cost over.a year, not a day, to make it a valid argument.

[JL13]

No sorry I wasn't clear, I was not referring to opportunity cost. I was referring to typical transaction costs: agent commission (6%) plus closing costs (3%).

So if you sold it the day after you bought it, then you'd net zero? But if you held it for a year you'd net 40%? Is that all leverage + anticipated appreciation in FMV?