Real Estate Matters | Self-managing HOA may save money

July 9, 2013

We live in a small, seven-home subdivision that was recently turned over by the builder to our new homeowner’s association.

During the turnover, the current management company (selected by the builder) advised us that we have a budget deficit that was funded by the developer. I am curious to know if this is ethical and legal. We feel that the builder made up this deficit in an attempt to keep the advertised association fees low and thus lure prospective buyers.

Most states have homeowner association laws that regulate the development and delivery of units to homeowners along with the turnover of the association. Some of these laws require a certain level of disclosure by developers to prospective buyers. If the developer knew that the disclosures were false, the developer would have a problem.

However, if a developer was truthful in its disclosure to buyers and costs somehow changed, the developer wouldn’t be at fault for that. Two situations with variable costs that come to mind are the cost to heat a building and to manage snow removal. The developer could have had certain estimates for these costs in the budget, but when winter finally came around, the fees and costs were considerably higher. In that situation, the association would have a deficit in its operating budget that is beyond the fault of the developer.

There are situations in which developers deliberately understate the costs of running an association in order to attract buyers. If that is the case with your subdivision, or you suspect a problem along these lines, you should talk to an attorney that deals with association turnovers and other matters to determine if your developer failed to give you adequate disclosures or misled buyers in their delivered disclosures. You actually need more information on this issue to decide whether the developer did anything wrong.

The developer funded, or made up, the deficit but didn’t pass on that expense to the homeowners. From the way you describe it, it seems that the developer took a loss on those expenses. You and the other owners can now decide how to spend your money.

You may decide that you don’t need a management company for a subdivision of just seven units and self-manage the subdivision. If you self-manage, you might save a significant amount of money. You also can run your own books and handle a fair amount of the maintenance issues on the property on your own.

Depending on the level of services you want for your association, you and your neighbors could shave quite a bit of money off the annual budget. If you shave off that money, you might find that living in the community is cheaper than what the developer originally estimated.

Now, if you and your neighbors elect to have professionals handle all aspects of the common ownership issues at the subdivision, you will find that your assessments are going to go up. You can negotiate these fees and look for professionals to assist you for less, but ultimately you and your neighbors will get to decide what you spend and where you spend it.

You also need some knowledge of the condominium and homeowners’ association laws in your state to make a determination as to whether your developer behaved fairly and legally. For those answers, you’ll need to seek out legal advice where your home is located and have an attorney review your documentation and give you more information.

Ilyce R. Glink is the author of many books on real estate and host of “Real Estate Minute” on her YouTube.com/expertrealestatetips channel. Samuel J. Tamkin is a Chicago-based real estate attorney. If you have questions, you can call her radio show toll-free (800-972-8255) any Sunday, from 11a.m. to 1 p.m. EST. Contact Ilyce through her Web site, www.thinkglink.com.

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