The control of every development must eventually transfer from the developer to the members of the homeowners association. But, the HOA turnover process is not always easy and trouble-free.
What Is an HOA Turnover? And Why Is It Necessary?
An HOA turnover, also known as a community turnover, is exactly as it sounds. It is the process of turning over control of the homeowners association from the developer to the homeowners.
The HOA transition from developer to owner is important because it marks a change in the structure of the community. Once control transfers, owners will then be responsible for maintaining the community instead of the developer. Owners must then elect a set of HOA board members, who must then ensure the continuous operation of the community.
Both the developer and homeowners will, of course, want a fast and easy transition. But, you may run into minor hitches here and there when your interests as a homeowner do not line up with the developer’s interests. After all, developers are mainly interested in making a profit. They want to establish a community, sell houses, and then start on their next project.
Even though both parties want the quickest route to the end result, it is imperative to ensure that the HOA turnover process goes as smoothly as possible. That means going over everything — financials, plans, insurance policies, and the like.
Understanding the Developer Turnover Process
There are three stages to the process of developer turnover to HOA: Pre-transition or pre-turnover, the HOA turnover meeting, and post-transition or post-turnover. Learn more about each stage below.
1. Pre-Transition
When an HOA is still under the control of the developer, the HOA board usually consists of developer representatives. It might appoint a couple of homeowners to serve on the board as well, though this does not happen all the time. Typically, homeowners can express their concerns and oversee the turnover in the form of a transition committee. This transition committee should take the following actions:
-
Review the Financials
The only way to know that the association is in good financial standing is to review its financial records. This includes financial statements, bank statements, tax returns, budgets, and vendor contracts.
You want to make sure that everything checks out and that there are no suspicious transactions. If you spot anything questionable, ask the developer to clarify.
-
Perform an Audit
For a more comprehensive study of the HOA’s financials, it is a good idea to hire a Certified Public Accountant (CPA) to perform an audit or something similar. This will cost money, though it is necessary if the association’s financial condition is not up to par.
-
Inspect the Reserves
The HOA reserve fund consists of cash savings, contributed by homeowners, for the purpose of major replacements and repairs as well as emergencies. Make sure the developer has created a reserve fund account in the association’s name and that it meets the right reserve level. You may need to perform a reserve study to do this.
-
Stay on Top of Your Insurance
Insurance is paramount to any working organization, homeowners, and condo associations included. Make sure to secure the association’s insurance policies and that you have sufficient coverage. Consult with an insurance expert to determine what your HOA lacks.
-
Assess Your Need for HOA Management
HOA board members may not always have the time, skills, or resources to carry out their day-to-day tasks. An HOA management company can step in to shoulder some of the burdens. Evaluate your needs to see if you need an HOA manager. If you do, it is best to go with a credible and professional company.
2. HOA Turnover Meeting
The official transition of the HOA from the developer to the homeowners takes place during the turnover meeting. During this time, the developer will deliver all pertinent documents to the homeowners (see HOA transition checklist below) and the homeowners will elect its new board.
The laws surrounding turnovers can vary from state to state. Some state laws mandate that a turnover meeting must transpire within a certain timeframe. In Florida, for instance, developers must hand over control of the HOA to the owners 90 days after 90 percent of all units have been transferred to their buyers. This is the most common trigger for an HOA turnover.
Other triggers can include bankruptcy, the appointment of a state court receiver, developer receivership, or if 7 years have passed since a condo’s declaration was recorded. To know what can trigger an HOA turnover in your state, check your state laws.
3. Post-Turnover
After the official turnover takes place, the developer or its representative should still be present at HOA board meetings for the next 90 days. This will allow for a smoother and more efficient transition.
Following that, the elected HOA board members can then continue to run the community according to the governing documents.
HOA Turnover Checklist
During the HOA turnover meeting, the developer must hand over the following items to the association:
- A copy of the recorded governing documents as well as any amendments and supplements
- A copy of the articles of incorporation
- Association records such as meeting minutes
- All generated rules and regulations
- Director resignation letters as a result of the end of the developer’s control
- All association financial reports and statements:
- Balance Sheets
- Income Statements
- Balance of association funds
- Control over association funds, including bank accounts and signature cards
- All personal property of the association as well as inventory
If known or available, the developer must also deliver the following items to the association at the HOA transition meeting:
- List of owners, addresses, and telephone numbers
- As-built architectural, structural, engineering, mechanical, electrical, and plumbing plans
- Original specifications specifying all material changes
- Underground site services plans
- Site grading plans
- Drainage plans
- Landscaping plans
- Insurance policies
- Issued occupancy permits
- List of contractors included in the development and construction of common elements
- Lease agreements to which the association is a party
- Contracts (service, employment, etc.) to which the association is a party
- Any other information related to association property maintenance and repairs
Taking Action in a Developer Controlled HOA
During the pre-transition phase, the developer still holds control over the HOA. Good developers listen to their homeowners and take care of the community. But, if you happen to have a bad developer, problems can arise.
Although a developer-populated HOA board has the same duties and responsibilities to fulfill as any other HOA board, some developers fail to uphold them. The bad news is that, in most states, developers have power in the pre-transition phase. That does not mean you have no options, though. Here are some things you can do to force developers to change their ways:
- Assemble an Advisory Committee. Consider forming an advisory committee consisting of homeowners. This committee can collect feedback from all homeowners and pass it on to the developers. Of course, an advisory committee can only offer recommendations and has no real decision-making power.
- Take It Up With Management. If your association is already being managed by an HOA management company, try reasoning with them instead. The management company wants the best for the community (and they likely want you to retain their services once the HOA transitions). Therefore, they might be able to get the developer to listen.
- Use the Law to Force a Turnover. If your HOA already meets the requirements for a turnover according to state laws, you can force the developer to start the transition process. Some developers may feel reluctant to do so, but you can hire legal counsel to help you with this.
- Take Legal Action. An HOA lawsuit against the developer is probably not the most appealing choice, but it is sometimes necessary. Consider bringing an injunction pre-transition, though you may need to pay for this yourself. You can also file a suit post-transition on the grounds that the developer-controlled board failed to fulfill its duties.
Homeowner Participation Is a Must
An HOA turnover is a critical step that every homeowners or condo association must take. To ensure a smooth transition or, at least, come close to it, homeowners need to take an active role. That means paying attention to HOA business, including its financials and insurance, right from the get-go.
When homeowners receive control of the HOA, many find it hard to manage it without help. HOA management software is the perfect solution for self-managed communities and management companies alike. Schedule a free demo, call us at (800) 626-1267, or contact us online for more information.
RELATED ARTICLES:
- HOA Management Fee: Are They Charging You Right?
- 7 Reasons Why You Should Use A Property Management Accounting Software
- HOA Accrual Accounting: Why It’s The Best For HOAs
LIVE CHAT