Seasonal rentals: before investing, know the risks

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The vacation rental boom spawned by Airbnb and similar services is undeniable, and there is apparently no end in sight. If you plan to take advantage of this by purchasing a summer cottage in the hopes of recouping costs or even making a profit, be careful.

For some buyers, this investment works very well, but for others, the business will end in civil offenses, costly lawsuits and financial loss.

You would think that some pre-purchase due diligence could get these investors out of trouble, but unfortunately even savvy buyers ask the wrong people the wrong questions.

The pitfalls of short-term rentals

Most people think they can just ask their local zoning and planning department if local ordinances allow short-term rental of the property and get an answer they can depend on. They will usually get an answer, but not an answer they should rely on, even if it comes from the Zoning Administrator. Their interpretation of the ordinance is not binding on the local government.

As soon as a neighbor complains, the local government or the neighbor can take legal action to enforce a different interpretation than that given by the zoning administrator. If the courts agree that short-term rentals are prohibited under this order, the game is over. It doesn’t matter what you were told before you bought the property.

Another mistake made by potential cottage owners is to think that if local ordinances do not expressly prohibit the short-term rental of property, then it is okay. Not true. With zoning ordinances, it works exactly the opposite.

If the zoning ordinance does not say that a particular use is permitted, then it is prohibited. Even some zoning administrators fail to fully grasp this concept, which is another reason why relying on staff interpretation can be a bad idea.

On top of that, it can be difficult to determine if the ordinance actually permits short-term rentals. Last year, the Michigan Supreme Court addressed this issue for the Township of Spring Lake and found that the four lower court justices who reviewed the case had misinterpreted the zoning order.

Buyers sometimes don’t realize that while the local zoning ordinance clearly allows short-term rental of the property, that “right” may not be the one they can buy with the property. For example, the deed restrictions may limit property rights by prohibiting any use other than “residential”, or the property may be subject to association rules prohibiting rentals.

As with local ordinances, it is not always clear from these restrictions and rules that the terms mean that short term rentals are prohibited. Michigan courts sometimes give words a meaning that is not obvious.

How to avoid problems

Do not despair. There are ways to avoid ending up with a doomed investment.

Start by sharing your intentions regarding the property with your real estate attorney. Not your real estate agent, not your friends – your real estate lawyer, whose practice focuses on real estate law. If you need to know that a property can generate income before you buy it, you need the assurance of legal counsel that the law is not standing in the way.

Second, get a binding interpretation of the zoning law from the zoning appeal board when in doubt. The local government will be legally bound to comply with its decision.

For associations, there are ways to get more assurance from the association board as to what the rules mean. It could be argued that these assurances are binding in court, if they induce you to buy the property.

The old adage that it’s easier to beg forgiveness than permission doesn’t apply to short-term rentals. The law is ruthless: either you have permission or you don’t. So first of all, check if short term rentals are allowed or not before making this purchase.

Gaëtan Gerville-Réache is a partner at the law firm Warner Norcross + Judd LLP which focuses its practice on appeals, real estate litigation and environmental litigation. He regularly appears before the Michigan Supreme Court, including on short-term rental issues. It can be reached at [email protected].



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