A real estate transaction is composed of many active participants. Of course, there are buyers and sellers and Realtors. There is also a title company, a home inspector, termite inspector, appraiser, a lender, and more. All of these play a somewhat active role at some stage in the process. And they all get paid. However, there is one party to the transaction that largely plays a passive but expensive role and that is of the Homeowners Association or HOA.
HOAs: The Least Involved Party to the Closing Process
It has been my experience that the HOA is the least involved party to a real estate transaction. There is not much at all that the HOA is involved in. They change the ownership of the home on their records to reflect the new buyer and they send the prospective buyer copies of the CC&Rs or rules for the community.
One would believe this to be very straightforward and the cost to do so for the homeseller (it’s the homeowner that usually pays the HOA to perform this role) would be minimal. But this is not the case at all.
How Do HOAs Earn Money?
HOAs often earn their money in two main areas. First, is the money that a community pays the HOA for its management services. This is an agreed upon fee between the HOA management company and the HOA Board which is made up of residents in the community. This is an obvious revenue stream for the HOA and the most direct to the services the HOA actually performs.
Second, HOAs make money on the sale of homes in the community. This involves switching the HOA information from an existing homeowner to a new buyer. For these services, HOAs charge money during the closing process which are typically referred to as “transfer fees.”
The term “transfer fee” may refer to a specific line item on the HUD1 or settlement statement (details all the costs and incoming monies for the buyer and seller). It may also refer to a series of charges that are all incurred in the ‘transfer’ of ownership from one person to another.
How the Upturn and Downturn in the Market Impacted HOAs
When the market was hyperactive during the 2004-6 timeframe, HOAs made money hand over fist in regards to transfer fees. This segment of earnings represented a bonanza for many HOAs. The market was experiencing record activity in terms of closed sales and for every one of those sales, the HOA was making money.
When the market turned down and the number of transactions cycled down, the HOAs saw this segment of their revenue stream diminish. It was cause for concern because it represented a significant decrease in the HOAs’ earnings.
As a result, the question became,
“How do we raise our revenues back up to what they were given the downturn in the market?”
The first answer was for HOAs to work to line up more communities under their management umbrellas. The second answer, was to raise the transfer fees substantially.
In my estimation, HOA fees have gone up anywhere between 30-100% based on the HOA company.
HOAs Don’t Innovate
HOAs don’t innovate. There is a limit to what HOAs offer their communities and they don’t innovate very well. I cite this because if anyone analyzed what additional services were provided as part of higher transfer fees, the answer in my opinion would be that no additional services or benefits were provided to either the homeseller or homebuyer.
HOA transfer fees were raised for the simple purpose to boost earnings back up.
In addition, in my experience, HOAs are often non-responsive during the closing process and late to deliver the services that homesellers and homebuyers require during a purchase transaction.
I have had HOAs that claimed they never received the request from title to provide documents in preparation for a sale. However, in many of these instances, it was clear that the HOA was slow to perform and using this excuse to buy time.
Where HOAs Can Improve the Communities They Serve
One idea that I believe would be good for a specific community is to develop a tool that shows the number of citations for the number of homes in a given community. This would detail out the various issues that are being experienced in the neighborhood. This information would also be provided in the HOA documents that are provided to a prospective home buyer.
Aggregating Information on Communities
Taking this one step forward would be to allow some level of comparison across communities. In the age of the internet, this can help to understand how a community does with respect to keeping up yards and other conditions that affect all homeowners in the neighborhood and how it compares to nearby communities.
In some sense, the internet is the aggregator of all information in the public arena. This is one more pocket of information that a prospective home buyer would find interesting. As well, this can help homeowners in the community know what some of the issues are that their neighborhood is experiencing and potentially take action to correct.
Perhaps homeowner surveys would also yield information on the community as to pride in the community. The one element lacking today for prospective home buyers to understand is…
“What real sense of community and pride do residents have in the neighborhood I am considering buying a home in?”
I can visualize this capability out there that really works to bring the right information together in such a way that benefits consumers.
Summary
Homeowners Associations need to work harder to change the perception that they collect a lot of money on the sale of homes but don’t do much for it. As well, they have to work harder to be more of a partner in the escrow process by being responsive and prompt in requests from title and homeowners.
As well, HOAs need to innovate to show how they can have a positive impact in providing information that is helpful for both the seller and buyer.
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I had a closing just this week be delayed due to HOA not performing on time. Their fees were quite expensive.