Condo Boards Enforcing No Renters Rules

Everyone knows that mortgage money is hard to come by, there is a dearth of buyers these days and everyone who is stuck with a piece or property who is not in default would love to rent it out. But, as many of my readers may know, quite a few condominium and homeowners associations have amended their governing documents to prohibit leasing. Some unscrupulous sellers may try and contravene condo association policy and rent out their unit on the pretext that it is not a lease, it's a "contract sale." What to do, what to do?

How does a board of directors know that Articles of Agreement for Deed is not really hiding a lease under an assumed name? There are a number of tips an alert condo board can use to smoke out the frauds while not outright banning contract sales. With a difficult real estate market, a board must be open-minded to help sellers in order to keep up property values, while at the same time enforcing association policy.

Here are a few tips on how to protect your association from the "sham" deal:

First, an association needs to have rules and regulations and one of the areas that needs to be addressed is how to deal with contract sales. Just as a board will adopt a rule in conjunction with it's property manager on the protocol for closings, so too must they also address contract sales if the board is concerned that an owner is trying to skirt the rules. The rules should spell out in detail the time frames for submittals of all requested documents, fees involved, etc.

Second, rules need to be developed to address the issue of contract sales; from validation to voting rights. For example, Section 18, (b), 11 of the Illinois Condominium Property Act codifies the fact the purchaser under an installment contract shall have the voting rights, unless the seller reserves that right in the contract.

Note that this could be a red flag for a possible bad faith transaction, because if someone has an installment contract as an alternate form of financing a purchase, why wouldn't the purchaser (who does have the equitable title to the property, under a very complex legal theory) have the right to vote? This should be a clue to any diligent board that they should look into this transaction further, if they have a policy that restricts or prohibits leasing.

Third, certain safeguards can be implemented to give the board of directors a comfort level that someone is not trying to get around the rules, yet not compel the board to feel that they must outright ban installment contracts altogether.

• The seller should produce a recorded copy of the articles of agreement, title policy, closing statement, loan amortization schedule, and a copy of the deed of conveyance to be held in escrow.
• A statement signed by both parties indicating who has the obligation to pay the real estate taxes, assessments, insurance, etc.

Lastly, the policy should state the penalties and remedies available to the board, such as fines, legal action, eviction, assessment of attorneys fees and costs, etc., should the seller prove to be lying about the true nature of the transaction.

If a board adopts a thorough clear-cut policy, it should be able to limit the violations to a small number, if at all. If the board of directors is adamant about not permitting contract sales, then, in my opinion they must amend the governing documents. It is the elimination of a vested property right and should be included in an amendment to the declaration. (For more detail on this topic you can read my article entitled "No-Lease Restrictions on Condominiums" published in the February 2006 issue of the Illinois State Bar Journal; also available at ksnlaw.com).

One other comment on a related topic and that is FHA financing. For the uninitiated, this currently is a very large part of the home mortgage market. FHA loans have not been that popular in recent years because of a "false" reputation regarding low-cost housing, but current limits are well above the cost of an average house.

FHA guidelines have historically prohibited loans to finance the purchase of condominiums where the declaration contained a first right of refusal. I have received many panicked calls over the years from closings where a Realtor or owner wanted the association to delete this from the declaration, instantly, so the deal could close.

Not quite! However, what the savvy veteran Realtor and real estate attorney will tell you is that a form produced by the FHA whereby the association does a pre-closing waiver of the right of first refusal, will allow the deal to move forward for a qualified buyer without getting into a panic. Many declarations that contain a pre-emptive right are pre-1980 and most of them have 100 percent amendment requirements to eliminate the right of first refusal, so it is virtually impossible. Also, many associations actually use this right to screen potential problem buyers, or to purchase units being dumped on the market way below their value, and are not so willing to give it up just to accommodate one sale. The best answer is to do your homework, work with qualified professionals and there should be no problem obtaining and closing on these types of loans