Lifestyles of the twenty-first century have radically changed from fifty years ago. The clamor for big lots and single-family houses has been replaced by a demand for condominiums and planned communities (generically called "homeowner associations" or HOAs).
The growth of HOAs has been nothing short of phenomenal in the last decade. In many urban areas, upwards of 75 percent of all new residential housing is in the form of a homeowner association. Mixed used HOAs combine residential and commercial together. For instance, retail and office units often occupy street level space while residential units occupy upper floors.
HOAs are essentially governmental corporations controlled by the members through an elected board of directors. The HOA has authority to make and enforce rules and regulations and to collect HOA fees from the members to support the HOA operation and maintenance responsibilities. Like the IRS, the HOA has significant power to enforce its will through liens and, in extreme cases, foreclosure.
When homeowner associations are properly conceived and constructed, they work very well. When they are haphazardly implemented, trouble and discontent follows. The success or failure of an HOA begins at the beginning ... with the developer.
Knowing the huge potential in HOA development, what should the savvy HOA developer do to maximize sales and profits? I will explain several steps to being a successful homeowner association developer.
- Choose the HOA's design and material carefully. Homeowner associations often have significant maintenance, repair and replacement responsibilities. This is particularly true of condominiums where the structures and grounds are the maintenance responsibility of the HOA. This responsibility falls on the shoulders of a volunteer board of directors which is usually composed of well meaning but inexperienced people. So, when it comes to designing the structure and grounds, ease of maintenance and cost of repairs are extremely important.
Steer clear of unproven designs and materials with little or no warranty. The odds are high that such an experiment will fail and problems come back to haunt the developer. The more complex and expensive it is for the HOA to maintain, the more likely it will not be done properly.
- Carefully craft the governing documents. Also called CC&Rs (Covenants, Conditions and Restrictions), rules, regulations, declaration and bylaws, these documents form what is the HOA governmental structure. State laws vary on the requirements so it's imperative that these documents be crafted by a knowledgeable and experienced attorney in the state where the development is going to be. There is no such thing as "boilerplate" governing documents. Each HOA is unique and state laws change frequently. Never try to save money on legal costs, because poorly written governing documents can make it next to impossible for the board to administer HOA business, enforce reasonable rules or raise the money needed to maintain the assets.
- Budget the HOA adequately. In an attempt to be competitive in selling their HOA units, some developers set the HOA fees unrealistically low. If the competition is charging, say, $300 a month, they might charge $250. That's a better deal right? Hardly. If it takes $300 per month per unit to support the HOA budget, it won't take long for the new board of directors to figure that out and then Mr. Developer receives a strongly worded letter from an attorney that has ugly words like misrepresentation and fraud sprinkled here and there. Whether the developer has intentionally or unintentionally underestimated the HOA budget, he will be held accountable. Moreover, if the HOA doesn't have enough money to maintain the assets, it will fail sooner and the developer usually gets blamed for construction defects.
It's best to use third-party consultants, including professional HOA managers, CPAs and management consultants that specialize in homeowner associations to determine the HOA's operating and reserve budgets. The developer should get as arm's length as possible from the budget numbers.
- Provide a reserve study. A reserve study forecasts the repair and replacement events that the HOA will encounter over the next thirty years. It identifies the common elements by component (roof, paint, siding, etc.), assigns a repair or replacement cost to each, a schedule for each (like roof, thirty years; paint, ten years.), and a funding plan that guides the board of directors on how much money to reserve each year for these future events.
Since these costs can easily add up into the millions of dollars, it's critical that they be included into the HOA budget from the beginning. Then, it's a relatively simple matter to collect the money each month from each owner, deposit it into a reserve account, and spend it on the indicated repairs and replacements as they happen. The HOAs that have and follow such a plan are well maintained, the owners enjoy high resale value and the community is livable and desirable.
- Provide a maintenance plan. While adequate budgets can pay for adequate maintenance, how the money is spent is very important. Remember, the board is made up of amateurs that often don't have the knowledge or experience to maintain the millions of dollars in assets with which they are entrusted. A maintenance plan written by the developer gets into the specifics of what should be done, who should do it, and when. The plan should be written in layman's terms because that's what the board members are. They need to understand what needs to be done but will not actually do it themselves. A maintenance plan that ties directly to the operating budget and reserve study will give the board the guidance it needs to spend the HOA's money properly.
- Honor warranty obligations. Developers generally have a statutory warranty period on HOA property sold. Handling warranty claims properly and quickly yields big dividends in the public relations department. It's best to have someone specifically assigned to this task since it takes a high degree of organization that average contractors don't have. Besides being the right thing to do, honoring warranty obligations produces goodwill that will be invaluable in the future dealings that may be confrontational. A happy history eases future fights.
- Stay in the mix. Just because the project is sold out and turned over to the homeowners doesn't mean the developer's job is over. Beyond warranty issues, there is always a potential that some legal claim may raise its ugly head.
To help fend off these dragons, the developer should retain the right in the governing documents to attend future board meetings and receive copies of board meeting minutes. Proactive developers take those rights seriously and attend all meetings for years. The result is that small problems are nipped in the bud before they become subjects of litigation.
Being an HOA developer can be highly rewarding and profitable when the plan includes these insider principles. Take this advice to heart and enjoy hearty results.