Do Renters Bring Down Property Values in Today’s Housing Market?

For Rent SignI attended my Home Owners Association annual meeting last night and the hot topic was passing an amendment to our bi-laws to increase the “rental cap” for the neighborhood. The Rental Cap is a rule that the home owners voted in that only a certain percentage of homes would be allowed to be leased at any one given time. These are very common in condominium complexes where owners do not want their building turning into an apartment complex full of renters, but until the mid 2000’s, rental caps in single family residence communities like mine were rather uncommon. In fact, as an agent who is listing and selling homes every day in this market, its rare that I see a rental cap in a community of homes that was not built in the mid 2000’s.

Anyway, an effort has been made by one of the homeowners to amend our bi-laws to increase the rental cap from 10% of homes being allowed to be rented out, to 25% being allowed. This of course sparked the debate between those for allowing people to rent and those against allowing owners to rent their homes.

Read about how these rental policies came to be in the mid 2000’s

Each side could debate the issue on many points, but the reason for the amendment was around property values. The side for the amendment claims that allowing more people to rent their homes out and move somewhere else, may result in fewer foreclosures and short sales which have been depressing the home values in our neighborhood.

How Distressed properties bring down home values

The side against claims the age old “Renters Bring Down Property Values”. They think renters don’t take as good of care of the houses as owners do and this results in potential buyers of other homes in the neighborhood being turned off because someone’s yard looks shabby, there are too many cars in the drive way of the neighbors house, etc.

As hard as I try, I have not been able to find any hard data that supports the hypothesis that renters bring down property values. In reality, when it comes to property values, the only thing that truly lowers property values is low comparable sales in the neighborhood…period.

A main cause of lower sales in many Atlanta neighborhoods these days is because many of comparable sales that a buyer, a buyer’s agent, or an appraiser look at to determine the value of a home in that neighborhood are foreclosure sales and short sales (we call these “Distressed Sales”). If those are really the only recent sales there are in the neighborhood (as is the case in my neighborhood right now, and many other neighborhoods built in early and mid 2000’s) the appraiser and/or a buyer will not and cannot disregard those sales when considering the value of the house.

In fact, the biggest deal breaker in the Atlanta Market right now is not the inspection (which usually ranks number 1), but the appraisal. A buyer may agree to pay a certain price but, unless they are paying cash, their lender requires an appraisal. If the appraisal comes in at a lower value than what the buyer agreed to pay, the buyer won’t get the loan anyway, which means the deal is dead unless the seller agrees to lower the price or the buyer agrees to bring more cash to the table.

In short I think that in a certain market, perhaps having a bunch of shabbily cared for houses that tenants occupy could be a turn-off to buyers, but the only way it will affect property values is by lowering demand for that neighborhood and thus bringing lower offers and lower sales prices. However, In today’s market, I don’t think this argument holds any water when basing it on property values. The problem that neighborhoods like mine have in regards to falling home prices is that most of the comparable sales are bank owned (foreclosures) or short sales and these properties sell for lower and lower prices. Every sold home in the neighborhood creates a data point for an appraiser or buyer to measure the value of the home, so if you want to improve property values, the first thing you need to do is take measures to prevent foreclosures or short sales. Creating a more lenient rental policy, where owners are able to lease their homes out without applying for a hardship or begging a board of their neighbors to let them, gives home owners more options. This means they can act before they are in danger of missing mortgage payments and in jeopardy of being foreclosed on.

Appraisers for conventional loans and FHA/VA loans are only looking for comparable sales that date back 6 months, so having no sales for 6 months in a neighborhood (as opposed to a few distressed sales) will force the appraiser to look outside the neighborhood (within 1 mile) for recent comparables which very likely could help home values to rise, if not stabilize (assuming that there is a ready willing and able buyer that agrees to pay the price). Having a strict rental policy is certainly not helping neighborhoods like mine, so in my personal and professional opinion…why wouldn’t you try another approach?

If you’d like to read my letter to my neighbors regarding the vote on our amendment, I’ve posted it here.

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