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Behind the Scenes of Disrupting the Invasion of Institutional Investors

By Christine L. Khano, Esq.

Community Associations Institute – Georgia Chapter

Third Quarter Magazine 2022

For a few years now, the United States has witnessed large institutional investors dominate the home-buying market, thereby generating a market shortage of available homes, and driving housing prices up. Georgia, in particular, has seen an increase of over 4% in institutional buyers from 2020 to 2021 with institutional buyers occupying 19% of its market share.[1] But beyond depriving traditional, individual homebuyers of an opportunity to create a place called “home,” the trend of cash-rich, institutional homebuyers has raised great concern for the local community associations into which these investors are buying. Who is maintaining the lot or unit? Who should the board of directors contact when there is an issue with a tenant?

The invasion of institutional investors has led to practical problems for communities outside of the expected compliance issues. For example, who will run for director positions for the board association or assume committee positions without homeowner volunteers? Will the annual meetings reach quorum? Overall, how does the surge of renters impact the character of the community? These associations struggle to preserve the owner-occupied character of a residential community without neighbors who intend to plant roots, foster a sense of community, and stay.

The response? Many community associations with outdated covenants are aggressively adopting leasing restriction amendments behind the scenes to discourage institutional investors from looking twice at purchasing within their communities. One of the fundamental provisions is to establish a cap on the number of lots or units that may lease at a given time. Another critical provision is to limit the duration a leasing permit is valid. A sunset provision that clearly addresses the expiration and revocation of leasing permits can heavily dissuade institutional investors from buying within the community. The provision requires owners to resubmit for another leasing permit and be placed on the waiting list upon the expiration or revocation of the prior permit.

The institutional investors must then weigh the risk of either owning property that may sit vacant if they cannot guarantee themselves a leasing permit or the risk of being continually fined for leasing in violation of the community’s covenants. In either scenario, these investors would take a monetary loss.

Communities with existing leasing provisions are not sitting idle either. They are closing the loopholes in their leasing provisions to specifically address institutional investors. Particularly, many are implementing occupancy requirements to even quality for a leasing permit. For instance, the leasing provision may require an owner to occupy the lot or unit as his/her/their principal and primary residence for three consecutive years before being eligible for a leasing permit. This would not pose an issue for most traditional owners who intend to rent but does for institutional investors that would never take residence at a property. Accordingly, this provision creates a tailored obstacle for the institutional investors to overcome.

To discourage institutional investors further, community associations are offsetting the administrative burdens and costs of leasing by adopting leasing fees and enacting effective enforcement powers to uphold the leasing provisions. Such enforcement provisions include associations’ authority to fine when a leasing violation occurs, or the ability to displace the current occupant or tenant.

While Georgia cannot stop the trend of today’s homebuying market, its community associations can take actions to help disrupt the invasion of institution investors. The first step is to review the covenants for strong leasing restrictions. The second step is to close existing loopholes. The third step is to enact effective enforcement powers to uphold the leasing restrictions. With a concerted effort from the community and well-crafted leasing restrictions, Georgia may be able to stave off the invasion of the institutional investors.

Get more information by checking out our previous leasing articles here and here. Also, head over to the L&J YouTube channel to watch our educational videos about this topic and others.

[1] “Impact of Institutional Buyers on Home Sales and Single-Family Rentals,” National Association of Realtors, Research Group, May 2022.