Real Estate

Real Estate Matters: Daily rentals in your neighborhood?

Are services like Airbnb and VRBO alive and well on the Midpeninsula?

Are residential neighborhoods prime to become mini-hotel locations? With advent of the "sharing" economy when individuals can sign up to rent their home or a portion of it on a nightly basis they risk that owners or their tenants will seize the opportunity to make easy money.

The pressure on residential neighborhoods from the commercial success of Google, Facebook, and many others comes from the high cost of office space (exceeding $7/sq.ft) and the cost of a hotel room exceeding $300 per night.

While garages in our area have spawned many successful entrepreneurial ventures, think HP or Google, they tended to be owner or tenant users where the primary use of the property was for residential purposes and other use was incidental to that primary purpose.

Zoning laws reserve the vast majority of neighborhoods in the Bay Area for single-family residential use and define "Family" as an individual or group of persons living together who constitute a bona fide single housekeeping unit in a dwelling unit. In addition, the law clarifies that, "Family" shall not be construed to include a fraternity, sorority, club, or other group of persons occupying a hotel, lodginghouse, or institution of any kind.

Historically, these ordinances have been interpreted so as to allow an owner to rent out their property to a group, meaning individuals who have come together to all sign a lease or rent the property as a group.

In addition, the law has allowed individual owners to rent out a portion of their home to a tenant who shares common area with the owner. In both of these circumstances the tenant(s) is not a short-term (daily or weekly) occupant but has a month-to-month or longer-term tenancy arrangement with the owner.

Some cities in the Bay Area have enacted further ordinances in the wake of these short-term rentals, most notably the City of San Francisco. These ordinances limit the owner to the number of days the unit can be a short-term rental during a calendar year and also requires the owner to register the property with the City and pay transient-occupancy taxes on any rent collected. There is an obvious negative financial impact to the hotel industry and on city coffers when transient occupancy occurs and no tax is collected.

In San Francisco, the subletting of property on a short-term basis is also seen as removing affordable housing for families who want to rent on a long-term basis and cannot find housing due to the use of residential property for short-term rental.

Most cities have sufficient clarity in their zoning ordinances to take action against illegal uses of single-family residential properties. However, they generally do not have the staff or the political will to get into what is always an awkward situation, when an owner is cited for a zoning violation.

The wheels of government enforcement tend to turn slowly. In the meantime, neighborhoods may be besieged with traffic and a revolving trail of strangers roaming around their once peaceful street.

There are legal risks to the owners who are engaging in this. Since I manage property, I have over the past few years had calls from prospective "tenants" who want to lease the property with the intent of setting up a hotel-like use and subleasing the property. The tenant never occupies the property, they just use the house as a vehicle for doing short-term rentals. If they can pack in enough people then they can make money off the difference between the rent contract and what they are subleasing the property for to daily renters.

There are other attendant risks for the owner. The standard homeowner's policy does not cover the owner for a transient rental activity, thus if one of the renters suffered a personal injury during their stay the owner may not have insurance coverage to pay the claim.

If you can find the insurance, my experience is that the cost will exceed any extra rental income you might generate. It would be mythical thinking to imagine that a service like Airbnb will pay for a claim made for personal injury on your property due to some defect. Your duty as a landlord/hotelier to a lodger is perhaps greater than to a typical tenant since you are often supplying your lodger with perks such as appliances and other furnishings that have the potential to be defective and injure the lodger.

There are other risks as well.

Most online short-term rental companies are not unregulated, unlike the real estate industry. A real estate broker has to put your funds in a trust account and has a fiduciary duty to both owner and tenant. Further, short-term rental facilitators may be violating real estate law if they advertise or facilitate rentals which are 30 days or more. Current real estate law was intended to exempt the short-term rental industry from licensing and regulation, but the entire definition of that industry has been changed by this new industry.

Clearly there are areas where such transient occupancy is seen as a community benefit. What would happen in Hawaii if the vacation renter could not find condos? Or in Lake Tahoe if families or groups wanted to go on a ski vacation? The owners who have purchased property in these areas do so with the expectation that there will be vacation or transient use and that such use benefits the community.

Owners who have purchased homes in the Bay Area did so with the expectation that they were moving into an area where they were joining a consistent neighborhood and where, heaven forbid, you might actually get to know your neighbor.

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