Vacation rentals: Before you invest, know the risks

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The vacation-rental boom spawned by Airbnb and similar services is undeniable, and there is seemingly no end in sight. If you are thinking of taking advantage by purchasing a summer cottage with the expectation of recovering the costs or even turning a profit, be careful.

For some buyers, this investment works out just fine, but for others, the venture will end in civil infractions, costly lawsuits and financial loss.

You would think that some pre-purchase due diligence could save these investors from trouble, but unfortunately, even savvy buyers are asking the wrong questions of the wrong people.

Short-term rental pitfalls

Most people think they can just ask their local zoning and planning department whether local ordinances allow the property to be rented short term and get an answer they can rely on. They will typically get an answer, but not one they should rely on, even when it is coming 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 neighbor can sue to enforce a different interpretation than the one given by the zoning administrator. If the courts agree short-term rentals are prohibited under that ordinance, it is game over. It will not matter what you were told before you purchased the property.

Another mistake would-be cottage owners make is thinking that if local ordinances do not expressly prohibit short-term rental of property, then it is allowed. Not true. With zoning ordinances, it works exactly the opposite.

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

On top of that, discerning whether the ordinance actually does allow short-term rentals can be tricky. Last year, the Michigan Supreme Court took up just that question for Spring Lake Township and concluded all four lower court judges who reviewed the case had misinterpreted the zoning ordinance.

Purchasers sometimes fail to realize that even if the local zoning ordinance clearly allows short-term rental of the property, that “right” may not be one they can purchase with the property. For example, deed restrictions may limit property rights by prohibiting anything but “residential” use, or the property may be subject to association rules that ban rentals.

As with local ordinances, it is not always readily apparent in reading those restrictions and rules that the terms mean short-term rentals are prohibited. Michigan courts sometimes give the words a meaning that is not obvious. 

How to avoid problems

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

First, share your intentions for the property with your real estate attorney. Not your realtor, not your friends — your real estate attorney, whose practice is focused on real property law. If you need to know the property can generate revenue before you purchase it, then you need the assurance of legal counsel that the law does not stand in the way.

Second, get a binding interpretation of the zoning law from the zoning board of appeals if there is any question. The local government will be legally required to abide by its decision.

For associations, there are ways to get greater assurance from the association board as to what the rules mean. An argument could be made that those assurances are binding in court, if they induced you to purchase the property.

The old adage that it is easier to seek forgiveness than permission does not apply to short-term rentals. The law is unforgiving: you either have permission or you do not. So above all else, find out whether or not short-term rentals are permitted before you make that purchase.

Gaëtan Gerville-Réache is a partner in the law firm Warner Norcross + Judd LLP who focuses his practice on appeals, real property litigation and environmental litigation. He regularly argues in the Michigan Supreme Court, including on short-term rental issues. He can be reached at greache@wnj.com.

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