In some homeowner associations, the number of owners who rent their units is extraordinarily high, sometimes even outnumbering resident owners. With absentee owners and just a few irresponsible renters, there may be a move by the board to limit or eliminate rentals altogether. What things should be considered?

When it comes to sorting out rental restrictions, there is a hierarchy of “legal authority.”

1. The highest legal authority is the state’s corporation, condominium and homeowner association statutes. Statutes vary from state to state.

2. The second highest legal authority is the association Declaration which is recorded in the county where the association is located. This document “declares” that there is a homeowner association and outlines the framework and a legal description of the property. The Declaration defines the three components of HOA property ownership: common elements (property owned and used by all owners), limited common elements (property owned by all but used by one owner) and individual homes (owned and used by one owner).

3. The third legal authority is the association Bylaws. The bylaws spell out the operating guidelines of the association.

4. Resolutions are the fourth level of authority. Resolutions generally deal with multifaceted issues like parking and architectural control that require clear definition and enforcement provisions.

5. Rules and Regulations are the fifth legal authority. They may be written in the Bylaws or enacted by the board. They are more of the “thou shalt not …” directives and may or may not elaborate on what that means or what the consequences for violating it are.

The board cannot enact a Resolution, Rule or Regulation that conflicts with one of the higher legal authorities. If the Bylaws permit rentals, the board cannot reduce or eliminate them. The change requires an amendment to the bylaws by whatever vote indicated in the governing documents which may be a “super majority” vote of the owners (67 to 100%).

The mortgage loan market may impose restrictions on the number of rental units in a homeowner association. If rentals exceed those limits, purchasers or owners who want to refinance their units may find it difficult to get financing at normal rates, if at all. Fannie Mae, Freddie Mac, FHA and VA all have restrictions on the percent of units which can be rented.

Homeowner associations may try to balance the right to rent versus restrictions imposed by lenders. The three most common ways are:

Prohibition on Renting. To ensure that such a bylaw amendment would pass, existing landlords would insist on their units being “grandfathered” (exempted from the prohibition). Such a concession would be unfair to some owners since these owners will have greater rights than other owners. The amendment should allow renting in hardship cases like job transfer or job loss.

Limit Number of Rentals. Adopting this kind of rental control requires that the board to actively monitor the number of renters and establish a “waiting list” so that all owners have access to the rental right.

Sunseting Rentals. This is a variation of the “prohibition with grandfather” provision. By setting a deadline of, say, one year away, current landlords can continue to rent for a reasonable time and have time to market the property to an owner occupant. At the end of a year, all homes are expected to be owner occupied which levels the rental restriction playing field.

When owners purchase into a homeowner association, they are bound by the existing governing documents and all validly enacted amendments. However, the board should keep in mind when amending and resolving that judges often side with property owners and their rights. If challenged, the HOA must defend a “greater good” theory such as: If the level of rentals is too great, mortgage loan options will be limited and negatively impact market values. If all owners buy into it, your job is easy. If not, you’ll need to convince the judge.

R. Thompson

Federal Reserve chairman Ben Bernanke put out a forecast last week that included some important observations on housing, but it got nowhere near the attention it deserves.

Speaking to the Economic Club of New York, Bernanke described some of the well-known problems standing in the way of economic growth — especially double digit unemployment and consumer confidence that’s shaky week by week at best.

But buried away in his speech he said: Housing in the coming year is going to be a relative bright spot – a helpful driver of national economic growth, rather than the wet blanket it’s been for the past couple of years.

Think about that: Home sales and new home construction, at least according to the Fed, are likely to stimulate the economy in 2010 — enough to generate jobs and help avoid a double-dip recession.

That forecast just happens to track nicely with another that came out last week: Fannie Mae issued its projections for the coming year — and predicted that housing sales will jump by 11 percent — even in the face of a slow recovery for the economy as a whole.

Meanwhile, scattered reports from hard-hit local real estate markets suggest that there may be some reasons for guarded optimism.

For example, research firm MDA DataQuick’s latest report on sales and prices in southern California, including the counties of Los Angeles, Riverside, San Diego, Ventura, San Bernadino and Orange, found that October sales were up nearly three percent over September, and that prices are rebounding as well.

October sales in San Bernadino were 11 percent higher than September. In Ventura they were up nearly 10 percent. Median prices for the six counties were up almost two percent for the month, but were still 6.7 percent below where they had been in October of 2008.

Now, as is almost always the case, not all the news is on the up side. New home starts dropped by a surprisingly large, seasonally-adjusted 10.6 percent, according to the U.S. Commerce Department.

A lot of the decline came in multifamily housing apartment starts — a volatile month by month index — which plummeted by 35 percent. But there’s no sugar coating here: starts of single family homes dropped by 6.8 percent – which was enough of a negative to spook Wall Street .

Finally into the mix this week, mortgage rates continue to be the magic potion for home buyers, dropping again further into the upper four percent range. According to the Mortgage Bankers Association, fixed rate 30-year loans averaged just 4.8 percent, and 15 year loans are going for just 4.3 percent on average.

K. Harney

Short-sale sellers and their agents have plenty to think about, and it is understandable if they are annoyed by the reams of paperwork that may come their way. Nonetheless, it really is important not only to pay attention to what is in the paperwork but also to be sure to retain it for possible future use. This is because of bad consequences that the seller may experience sometime after the sale has taken place.

Bad enough that a short sale involves the loss of one’s home with no equity to show for it, and a credit negative that may last for years; it also has the potential to produce two very bad after-effects. One is that the lender, or the lender’s assignee, may continue to pursue the beleaguered seller for the remainder of the debt. The other is that the I.R.S. may come knocking on the seller’s door, seeking tax on the amount of debt that was unpaid.

The first possibility is often contained in the paperwork that goes along with the seller’s ok of the short sale. The borrower may be required to sign a promissory note for the difference between the debt owed and the short sale proceeds received by the lender. Or, a lender may require the borrower to sign a paper acknowledging that the lender reserves its right to pursue the borrower for this amount.

The second possibility resides in the fact that, if a debt is forgiven, the borrower may be taxed on the amount he didn’t have to pay back. (see I.R.S. publication 4681). To be sure, there may be short sales where the debt that is unpaid is not taxable. For those exemptions, see a tax accountant.

The point here is that the short-sale seller may suffer one of those unpleasant consequences; but he ought not to suffer both.

The point is raised because here is what can happen: In allowing the short sale, the bank requires the borrower to sign a note for the difference, or to acknowledge that the bank has the right to take action to collect that amount. Also, probably sometime later, the bank sends out a 1099-C, informing the I.R.S. that a certain amount of debt had been cancelled.

NO ONE who has dealt with a short sale would raise the question: “How could this happen? The two actions contradict each other!” That is because anyone who has been through the process knows that it is common for the right hand of the bank not to know what the left hand is doing. Indeed, it is not uncommon for the right hand not to know what the right hand is doing.

This is why it is important for the seller to be sure to keep his paperwork. If he signed a document to the effect that the bank was going to pursue its unpaid interest, he should hang on to that. Then, if he receives a 1099-C saying that the debt was forgiven (and, therefore, taxable), he will have support for the claim that the 1099-C is incorrect.

Conversely, suppose that there was no specific release of the debt and that the paperwork contained no reference to it. Then, if the seller receives a 1099-C, saying the debt was cancelled, he should keep that, just in case the bank, or its assignee, comes calling a year or so later, trying to collect the debt.

None of what has been said here should be construed as tax or legal advice. I am not certified to do that sort of thing. But I hope this little piece will encourage short-sale sellers to consult with their appropriate advisors about these matters.

B. Hunt

“Ignorance is bliss” was never said about real estate purchases for 7 good reasons:

1. “Knowledge is bliss” may not make it as a buyer’s slogan either, because you don’t have to know it all—just what’s relevant to success as you define it. Different sets of knowledge are important in different buying situations, so the “bliss” generalization may not be specific enough to be useful. “If it is to be, it’s up to me” could be an excellent mantra since determination will drive buyers, both to discover what they don’t know and then, to fill that knowledge gap. This combined effort will assure a buyer is well equipped to make confident buying decisions.

2. Generalizations are self-defeating when evaluating properties since it is how each is unique that addresses specific value to a specific buyer—if you’ll excuse the generalization. All first-time buyers should not seek the same type of real estate solution just because they have never owned real estate before. Each of these buyers, whether they purchase alone, as a couple or with several friends or family members, has a different set of needs, weaknesses and advantages. When generalities are stressed, real estate solutions often concentrate on weaknesses like low down payments. Customized solutions, based on real estate knowledge, should focus on strengths which would counterbalance apparent weaknesses. For instance, first-time buyers may have more creative determination, which can allow them to tolerate living with boarders or tenants. These contributors to mortgage payments create a number of financial benefits and can turn an otherwise financially-out-of-reach property into a great investment solution. (See Pur-Plexing for more on this topic.)

3. Assumptions cost money and waste time. Assume nothing, including that you know what you don’t know. Experienced real estate professionals have a wealth of practical knowledge available to fill your knowledge gaps, but you have to be receptive to gain the full benefit. For instance, do you ask questions and listen to the answers? Find out what you’re assuming when you view properties, evaluate value and prepare an offer to purchase. The conscious effort and deliberate intent of this clarification means money in your pocket. Determination will enable you to put your advantages into action and use the real estate professional’s knowledge to overcome weaknesses. Remember the parsing of “assume” ( make an “ass-[out of]-u-[and]-me” ) if you find yourself thinking or saying, “But I assumed…” and get back in control.

4. Fear has driven too many buyers to act in haste and repent in “if only I’d…” whining that can go on for years. Fear of missing out in a down market or in an up market, or in a variety of other “losing out” scenarios, can cause buyers to dive into a buying or not buying decision which may not be in their best interest. That’s why working with a buyer agent, who places your interests first, can be a great strategy for ensuring you have all the knowledge necessary to protect yourself and gain financial advantage at the same time.

5. The impossible may just take a little longer in real estate, but the impossible can happen. Your dream property can be within reach wherever you start financially, but you’ll need a solid set of strategies to get you there, not just dreams. Serious about owning your own horse ranch or waterfront castle? Talk to an experienced real estate professional who works in your ideal location to chart a reverse-engineered, long-term course toward that goal. With each property you buy along this clear path, you’ll move closer to your high-value goal. It may take two or more real estate purchases and some clever investing, but if will be an interesting progression. If you’re determined and build the right team—real estate professional, lawyer, mortgage broker, home inspector…—what’s impossible?

6. The unexpected must be expected when buying a home, cottage or investment property. Worst case scenarios, contingency strategies and “Plan B” alternatives are creative tools in preparing to achieve financial gains and desired priorities. These approaches help you react favourably to the unexpected, but hopefully not unanticipated, and take advantage of the opportunities that lie there. Experienced professionals can predict the types of expected and unexpected happenings relevant to your situation. It could be taking advantage of the timing for new listings or the types of lenders beyond banks that hold financing choices for you. Negotiations are all about the unexpected. Most buyers are so focused on purchase price they forget that closing date, number of conditions, what’s included in the purchase and other factors can weigh in to reduce the final sale price—that’s where professional negotiators come in.

7. Cashflow is king. Beyond the purchase price, cash is necessary to pay for lawyer fees, title insurance or a survey, reimbursing sellers who paid the whole year’s property taxes, and on the list of closing costs goes. The professionals involved will provide you with details on possible expenses. While you may have enough cash to close, do you have enough cashflow for owning? Over the first year, unexpected expenses can crop up, so create a projected ownership budget at the same time you go over purchasing costs. This foresight should keep you out of the “house rich—cash poor” category.

With real estate, the best goal is not “buying,” but “owning and enjoying” for a lot of great reasons.

PJ Wade

The recent drop in interest rates has prompted millions of households to refinance their mortgages. Borrowers who refinance need to familiarize themselves with tricky tax rules on what is or is not deductible for interest payments. Here are some reminders on how the rules work.

Question: I own a personal residence. It is worth more than the remaining principal balance on the mortgage. My lender is willing to allow me to refinance for more than the balance of the existing mortgage. I know that the tax rules allow me to deduct interest payments on a refinancing loan as long as it is for the same amount as the existing balance. But am I also entitled to deduct interest payments for the part of the refinancing that exceeds the existing balance? And does it matter that I plan to use most of the excess refinancing proceeds to pay off credit card debts?

Answer: Whether borrowers are entitled to deduct interest on the excess amount depends upon how they use the proceeds from the refinancing and the amount of the proceeds. When borrowers use the amount in excess of the existing mortgage to buy, build or substantially improve principal residences, meaning year-round dwellings, or second homes such as vacation retreats their interest payments come under the rules for home acquisition loans. Those rules allow them to deduct the entire interest as long as the excess plus all other home acquisition loans do not exceed $1,000,000, dropping to $500,000 for married couples filing separate returns.

When borrowers use the excess for any other purposes, another set of rules prohibits deductions for payments of interest on “consumer loans.” This wide-ranging category includes credit card bills, auto loans, medical expenses and other personal debts such as overdue federal and state income taxes. There is, though, a limited exception for interest on student loans, one of those “above-the-line” subtractions to arrive at adjusted gross income, the amount on the last line of the first page of the 1040 form.

But most borrowers are able to sidestep these restrictions on deductions for consumer interest, thanks to the rules for home equity loans. Those rules allow them to deduct the entire interest as long as the amount in excess of the existing mortgage plus all other home equity loans do not exceed $100,000, dropping to $50,000 for married couples filing separate returns. It makes no difference how borrowers use the proceeds.

When their refinanced loans are partly home acquisition loans and partly home equity loans, there is an overall limit of $1,100,000 to $1,000,000 home acquisition debt and $100,000 home equity debt, dropping to $550,000 for married couples filing separately.

When the loans exceed the ceiling of $1,000,000 for home acquisition loans and $100,000 for home equity loans, the excess generally is categorized as nondeductible personal interest. The general disallowance is subject to exceptions for loan proceeds used for business or investment purposes.

Yet another restriction applies to the steadily growing number of borrowers burdened by the AMT (alternative minimum tax). The AMT allows deductions for interest payments on home acquisition loans of up to $1,000,000. But AMT rules deny any deductions for interest on home equity loans for first or second homes, unless the loan proceeds are used to buy, build, or substantially improve the dwellings — one reason why advertisements for home equity loans frequently finesse the troublesome question of tax deductibility.

J. Block