Initiation Fees

Our Developer has spent all of our initiation fees. He also told us that the transition had taken place - now he has changed his mind about that and decided that he wants to annex some land into our subdivision, make it a private, gated subdivision, even tho it is no where near our subdivision. The point is he told us that we were the Board and now he is telling us he is the Board - and in the mean time - the management company (who was hired by him) told us that he spent all of the initian fee money, and had the right to do so!

Is anyone out there knowledgeable about initiation fees in general? I thought these fees were to be left in something like an escrow account to be used by the community after the Developer was long gone (like we thought he was...).

The Transition supposedly happened in January. The Developer told the appointed president at the time that he (the Developer) had filed the papers. Two months later, we now know nothing was filed. We checked with the County. Only the original Declaration of Covenants is filed - which says he can continue to be the Declarant until all houses are sold (he is building 7 more in the private, gated community, of which we will have no access, but we will have to pay for the road upkeep!) - if he gets his way and annexes thoses homes and that private neighborhood into this community, which our covenants say he can. The whole point is that he already said he gave the community to us. He actually told our president that he "filed" the transition documents.

I know it was only verbal - but none of us knew it had to be anything other than verbal. Sure - it makes sense now that something official needed to be filed - now that we have gone through this surreal craziness - but at the time - it was simply his management company standing at an annual meeting talking to all of us, telling us that the Transition occurred and that a three year contract had been signed with that management company. That, my friends, was all that was said about it. After that, the people appointed to the Board took over until we began to ask some very serious questions about the finances - like where are the initiation fees, where are the capital contributions he said he put into the account, why are we paying a sewage amount on pool water - it evaporates, it doesn't go to the sewage faciltiy plant??? etc, etc, etc. When we began to ask the management company these type of questions, then the developer decided that the transition didn't take place, and he blamed it on his attorney.

We really don't know what to do - because we don't have control of the money either, of course. We can't even hire an attorney. But this sounds like something fishy to me...Help!!! Any attorneys out there want to come tou our aid? Does anyone know anything that could be of help to this new and struggling community?

Initiation fees are typically charged by developers/builders in an effort to cover expenses of the HOA/common areas while under development. Many times, covenants allow for the builder to collect such fees but no one later being required to pay them. Check your covenants on this. Our developer charged the very first home owner a $100 fee and no one else ever had to pay it. The developer doesn't care what the financial status is of the HOA when they pull out. They want low dues to attract buyers, what happens after that is up to the homeowners.

Regarding the 3-year contract with the management company. Check your covenants on this as ours only allows for 1-year contracts. Typcially, contracts can be broken if a 30-day notice is given. Check the contract with the management company on this.

Since you are using a management company, I would check to see if this includes an attorney on retainer for the HOA. If the developer is still present, the management company is probably representing the developer but I would talk to them about the turn-over and documents. If the developer is shady, I would think the management company would not want to be in business with them. Couldn't hurt to talk to the management company about all of this. They will probably want to maintain a good working relationship with you in an effort to keep the HOA's business.

Brad, I've never been able to justify initiation fees in my mind. I've tried because it's something that I would like to get our board to discuss, but I still can't understand how it can be justified. Since I don't understand why it's ok to have the fee, I don't feel I should bring up the subject yet.

I know that some also use the money for their reserve fund.

The way my thinking goes is that the seller of the home has paid his dues all along, which has gone toward operating funds and/or the reserve fund. The new owner is picking up where the seller left off, and is beginning to pay her dues.

If the new owner is required to pay an initian fee, that is an amount over and above what everyone else has paid. Why should the new owner have to pay that exta $100 fee? What is the benefit to her? Is it in the Bylaws?

Our MC charges a transfer fee for the work they have to do to transfer ownership, and I assume every HOA or their MC does the same because that is to cover a justifiable expense.

Since many HOA's are charging initiation fees, and it seemingly is a good way to get extra income, perhaps you can help me to understand why it's ok to charge an initiation fee.

Thanks

William:

Actually the intiation fee is not over and above what everyone else has paid because every one who owns a house here has paid that. For those who charge it as a one time deal to the very first homeowner, they are not assessing equally because subsequent buyers don't have to pay it. For us we are assessing equally because each buyer pays it.

It is actually written in our CC&R's and is referred to as a transfer of legal title fee. Realistically we don't spend any money when a lot transfers, but you do spend time with the title company and you do spend time changing and updating your records for the new owner. Granted it isn't a lot of time, but to me this is also a way to raise some additional funding while keeping dues low. What is an extra $100 in closing costs when you are already dropping over $2,000 to purchase $150k plus home. I can see in your situation where it might be a little harder to incorporate since you haven't had one, but for us it has been here since our inception.

Jan:

I wish you would have posted why you think it is a ripoff.

I disagree, the easy way to raise money is to raise dues. However, I think that can be a detriment to home sales. When I shop for a home I look at the monthly figure of what I have to pay and dues factors into that. I take our example, without the initiation fee there is almost $20,000 that would have had to come from somewhere, most likely in increased dues.

Another way to look at it is view it is a special assessment that is charged one time to every home buyer, because honestly that is what it is. I have been here almost three years, so in my 36 months that has equated to about $2.78 a month, far less money than I would have spent on increased dues. It rewards homeowners that stay and invest in their home rather than move every 2-3 years. If I here 5 years that is less than $1.67 per month I would pay, but increasing dues would cause me to probably pay at least five times that.

For us this fee has basically been our reserve fund, we don't have a lot of common area so we don't need a huge reserve, but this is what fuels it. I can see both sides of the arguement, but as a homeowner and in my opinion it is a lot easier to drop $100 when I am already financing 150k home and 2k plus in closing costs and roll that into my mortgage than come up with the money at a later date.

Like I said for us it is in our docs, you can see if before you purchase and every single person who has bought a home here has been assessed. So I don't think it is unfair or a ripoff, rather I see it as a creative way to do business.

William usually in my area NEW developments charge first time buyers in the development an extra fee to buy into the development; these fees are used to fund the HOA. In my condo association first time buyers were required to pay three months assessments (about $360 in 1992) this money the developer used to pay the monthly bills of the association and start the reserve fund. At transition we were given an accounting of how the money was spent and actually had the start of a decent reserve fund.

Everyone pays some sort of an initiation fee in new developments whether it is called that or not. The developer may simply raise the price of the home to cover what money they are putting into the Association. Usually somewhere in the documents it will state how much the developer will pay the HOA for every home it sells, you don't think they actually pay it out of their own pocket do you?