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The Next Property Rights Frontier

October 20, 2015

REALTOR® associations are working to keep up with a flood of new local regulations on home owners’ ability to rent part or all of their property. It has become a fight for home owners’ rights and property value on both sides, with many associations feeling caught in the middle.

The new rental norm

Home owners are flocking to sign up at websites such as Airbnb and Vacation Rentals By Owner, which match people seeking short-term accommodation with property owners. These sites make renting homes easier and more popular and home owners are finding out how lucrative a spare bedroom can be. There are an estimated 1.5 million properties listed on Airbnb worldwide, and more than 17 million people stayed in Airbnb accommodations in August alone.

The prospect of generating revenue from occasionally or regularly renting a furnished basement or an entire house or condo is increasingly attractive to home buyers. Real estate agents market the rental potential of homes with a guest house, a mother-in-law suite, or even a large backyard in which to build a rental cottage.

The skyrocketing popularity of short-term rentals is prompting local governments to regulate them in various ways across the country. Some communities are imposing bans on short-term rentals. Others are restricting how many rental permits are issued per neighborhood. Opponents to short-term rental say these regulations are an attempt to maintain an area’s residential quality of life. On the other hand, some home owners—including second-home owners—believe they should have a right to rent their own properties.

REALTOR® associations are busy advocating for common ground between property rights and home owners’ rights, yet the issues, which vary by location, and are often complex.

Right to rent

Trey Price, public policy representative at the Florida Association of REALTORS®, fought hard to get the state legislature to prohibit new local ordinances on short-term rentals. Yet a recent amendment now allows communities to regulate anything other than the frequency and duration of rentals.

“We’ve always used the property rights argument, and while there is a counterargument that full-time neighbors have property rights as well, we believe there are other ordinances (noise, trash pickup, parking) to protect them,” says Price.

Home owners concerned over the noise, crowds, and traffic that vacationers can bring to certain residential neighborhoods in Ocean City, Md., oppose short-term rentals, says Sarah Rayne, government and public affairs director for the Coastal Association of REALTORS®. Property owners there are facing new restrictions that would ban rentals of any time period less than a year.

“These limits are problematic for many of our members,” says Rayne, because vacation home owners could lose their livelihood and so could the REALTORS® who handle rentals and property management in the resort area.

In defeating a 2014 call for a rental ban, Coastal REALTORS® backed a compromise that included increased enforcement of local noise restrictions and education for property owners on how to help their guests be good neighbors.

Indeed, regulation is often the compromise between banning and allowing short-term rentals. Regulations are aimed at protecting the property owner’s right to rent, while giving assurances to surrounding communities that the rentals will pose no threat or disturbance.

GADs negotiate rental ban down to rental restriction

In Evanston, Ill., a proposed ban on short-term rentals pitted property owners against one another. Although the final ruling required property owners renting for 30 days or less to get a special license, Howard Handler, government affairs director for the North Shore–Barrington Association of REALTORS®, advocated for some key exemptions, including allowing short-term rentals due to disaster or renovation. Handler also won a provision that lets all owners rent out their property once a year without a license, and, most important, an exemption allowing rent-backs, which is when someone sells a home but is unable to move out by the closing date and needs to rent the home back from the new owners.

“We took the position that we were not there to advocate for those running quasi-hotels and remained neutral on the final ordinance, but we did want to ensure the average property owner maintains the right to rent their property on a short-term basis,” says Handler.

In Northwest Montana, instead of banning rentals outright one municipality adopted a set of standards that short-term rental properties must meet. These requirements include meeting fire safety codes, registering with the state as a commercial enterprise, and paying a small license fee.

“If they could meet the performance standards, they got permission from the city to operate,” says Erica Wirtala, government affairs director at the Northwest Montana Association of REALTORS®. “The important item was that there is now a contact name and phone number for the owner if things get out of hand with renters and a mechanism for revoking licenses.”

Some taxes may apply

Although some communities focused on regulating or restricting short-term rentals, others such as Portland, Ore., reversed a previous ban, in part, some speculate, to collect new tax revenue from short-term rentals.

Collecting taxes and licensing fees on short-term rentals is a huge new revenue stream for local governments. Chicago alone expects to collect $2.5 million a year in taxes from its new arrangement with Airbnb, which agreed to manage the collection and remittal of taxes on behalf of its property-owner customers in the city.

Often home owners are unaware that such hotel taxes, sales taxes, income taxes, rental permits, inspections, or business licenses are required.

Over the summer, several members of the Greater Lehigh Valley and Pocono Mountains Associations of REALTORS® in Pennsylvania received letters from their county treasurer stating that they owe a 3 percent hotel tax on the accommodations they have listed on Airbnb or similar sites. The county had hired a consultant to cull Airbnb listings for properties in the area and compare them with local tax rolls.

“Some members were not aware they would owe taxes,” says Matthew Marks, the associations’ government affairs director. “The law has been on the books for several years, but some members did not know it was being enforced with individual renters. Members think the 3 percent is too much and they are concerned that the tax will be retroactive.”

Pro or con? Preparing your response

How should your local association respond to home owners in favor and those opposed to short-term rentals?

The National Association of REALTORS® will provide a legal review of proposed local ordinances regulating short-term rentals at no cost to the association. “The short-term rental issue has been a growing trend for our review program, the Land Use Initiative program,” says Adriann E. Murawski, state and local government affairs representative at NAR. “We review about 56 proposed ordinances each year, and this year alone we’ve seen about eight requests just on short-term rental ordinances.”

NAR offers guidance to associations in a new white paper on the issue due out in October.

NAR takes no official stance on short-term rentals because it is a local, not a federal, issue. Yet the white paper analyzes the issues raised by various regulatory approaches, provides ways to address these issues, and outlines best practices for short-term rental housing that associations and REALTORS® can use in discussions with local government officials.