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In many urban areas, governments are struggling to curb urban sprawl while simultaneously trying to keep up with growing pressures on the housing market. As a result, housing developments increasingly take place within the existing housing stock through soft densification in the form of subdivisions. Municipalities aim to regulate this type of densification because of growing pressure on existing infrastructure, neighborhood cohesion, and (rental) prices. This contribution looks at the city of Utrecht in the Netherlands as a case study, where small-scale private investors increasingly bought up owner-occupied homes to subdivide into rental homes. As a result, the executive council of the municipality introduced new subdivision regulations in 2016. It explores how the interests of the investors influenced the negotiations that took place during the policy formulation and implementation phases. Using a neo-institutionalist approach, we found that policy negotiations gave rise to an increased number of flexible rules on subdivisions, allowing municipal authorities to make decisions on a case-by-case basis. While official subdivisions have reduced drastically as a result of the new policy, investors have moved towards other less regulated opportunities or even illegal subdivisions. These findings highlight that while flexible implementation may provide more steering capacity for municipalities, it may also lead to non-compliance as an unexpected byproduct. • Soft densification adds housing stock, but also burdens existing infrastructure. • Municipalities balance these interests through flexible subdivision regulations. • In response, investors can comply, find new opportunities, or subdivide illegally. • At times, non-compliance is expected, known, and legitimized by local authorities. [ABSTRACT FROM AUTHOR]