It’s not easy to undergo an HOA transition from developer control. A lot goes into the process, including director elections, handing over HOA documents and accounts, and training the new board for community governance. In this article, we review everything you need to know to make a smooth transition.
What is a Developer Transition?
Homeowners associations are often established by a developer who is in charge of constructing homes, facilities, and common areas to create a planned community. In the initial stages, the developer fully owns and manages the entire property. They take care of everything from creating the governing documents to preserving the homes and maintaining the common areas.
However, as more and more homes are sold to individual or corporate buyers, the community eventually needs to transition HOA from developer. A developer transition involves the transfer of ownership or control of the HOA to the property owners. The transfer of control usually happens through the following:
- HOA Election. The developer transition requires the election of new HOA board members, who should mostly consist of individual homeowners.
- Transfer of HOA Bank Accounts. The developer must transfer the HOA’s accounts to the new board and community members.
- Amenities and Common Areas. Any deeds or titles to community facilities are transferred to the homeowners association. Moreover, the newly elected board should now control and maintain the common areas.
It’s important to note that an HOA transition from developer can happen gradually. This gradual transition usually happens when a development phase is not yet complete. For example, the developer might still need to build several homes in one portion of the community.
How Long Can a Developer Control an HOA?
The transition from developer to homeowner control depends on state law and the governing documents. Both indicate when and how the developer should begin transitioning the community to property owners.
In some states, developers must begin transitioning when a certain percentage of the homes have been conveyed to homeowners. Meanwhile, other states require developers to transition control after a certain number of years, regardless of ownership percentage. In California, the Department of Real Estate typically requires developers to slowly give up control in specific areas like voting structure, director elections, and architectural committee management.
The governing documents may also have similar provisions regarding the transition process. It could hinge on a percentage of units sold or a specific number of years since development. Sometimes, the CC&Rs may even indicate a specific date. For many communities, this means gradually electing more homeowners as board members.
Regardless of the requirements, it’s best to begin the transition process much earlier than the deadline. Shifting control and ownership can take anywhere between 12 and 18 months. The new board members need time to adjust to their duties and take control of the HOA’s accounts.
HOA Transition from Developer Control: How to Do It
How do you transition developer control to the homeowners? Here is a guide that might help your community.
1. Form a Transition Team
Homeowners associations should assemble a transition team at least one year before turnover. A dedicated committee can set milestones, deadlines, and schedules to ensure a smooth transition. The team can also ensure the right people are employed throughout the process. Moreover, it can even serve as a liaison between the residents and the developer.
Sometimes, the developer will appoint board members to help with the transition. This temporary board remains in power until the homeowners can hold an election. However, while involving community members is essential, the HOA should include at least one industry professional with experience in association management and development.
2. Hire Professionals
Homeowners associations often hire vendors to complete maintenance work and community improvement projects. It’s no different when it comes to developer transitions. The entire process requires expertise from various individuals, including the following:
- HOA Manager. A certified HOA manager can support the board as they train themselves in community management. The manager can also facilitate communications between the developer and the community.
- Engineer. A licensed civil engineer can inspect the facilities and common areas to spot construction defects and issues. They can ensure these are hammered out before the developer fully transfers ownership.
- Accountant. An accountant can audit the HOA’s existing financial statements to check for fund mismanagement or misappropriation.
- Lawyer. An HOA attorney can check all the legal documents and requirements, such as the CC&Rs, vendor contracts, and warranties.
3. Set Periodic Meetings
Homeowners associations should set regular meetings to keep the residents informed. The committee should meet at least once a week to address issues, update the residents, and work on all the transition documents.
4. Audit Each Contract and HOA Document
The developer might execute vendor contracts in the HOA’s name during the development. It’s vital that the community audits these agreements before they complete the transition. Review all the contracts, insurance certificates, claims history, and maintenance records beforehand. The committee should have copies of these and understand their terms.
If the committee uncovers a contract with unreasonable terms, they should work with the vendor and developer to terminate the agreement. However, this usually requires advanced notice and may incur penalties. Therefore, it’s important to consult an HOA attorney before opting out.
The committee must also review all the HOA’s governing documents. They should examine each provision and its implications and decide whether or not to amend them. This process can be quite time-consuming and cumbersome. Working with an HOA manager is best so you don’t miss anything.
5. Consult an Engineer
A licensed civil engineer should inspect the community and examine all common areas. The engineer can conduct a transition study that outlines all the potential issues. This way, the developer can address these problem areas before the community is turned over.
6. Conduct a Reserve Study
Responsible financial management is foundational to an HOA’s success. Without it, the community can fall into debt and levy hefty assessments to cover the expenses. One of the most responsible things the newly elected board can do is conduct a reserve study immediately.
A reserve study is a tool that assesses the community’s assets, common areas, and finances to help the board anticipate major repairs and replacements. It can help them plan capital improvement projects and determine how much the community needs in the reserves to stay financially healthy. With it, the board can develop accurate HOA budgets in the coming years.
7. Transfer Paperwork
The HOA board members must have all the necessary documentation to operate. Typically, the developer has to pass on the following documents to complete the transition:
- HOA Governing Documents (Articles of Incorporation, CC&Rs, Bylaws, and Rules)
- Membership Lists and Contact Information
- All Recorded Meeting Minutes
- Financial Statements and Reports
- Insurance Policies
- Vendor Contracts
- Warranties
- Tax Returns
8. Train the Board
Electing the board is just half the battle when it comes to transitioning. The board also has to receive the right training to do its job well. Some organizations, like the Community Associations Institute, offer educational events and publications to help new board members learn the ropes.
Of course, nothing beats in-person training. If you want a more hands-on approach, hiring an HOA management company to help you get started is a good idea. HOA management companies often provide workshops and resources to help board members learn about governance, rule enforcement, relevant laws, and effective leadership.
9. Start With Maintenance
The newly elected board should gradually take over the developer’s responsibilities. Community maintenance is a good place to start. The board should start managing the work order requests and coordinate with vendors to schedule all maintenance activities. Over time, the developer can fully transition responsibility to the new board so they’re prepared to handle all the maintenance work.
10. Get Control of HOA Accounts
The new board of directors should completely control the HOA’s bank accounts. They should also check the developer’s accounting records, statements, and reports to ensure nothing is amiss and give them an idea of the HOA’s current financial status.
A Certified Public Accountant (CPA) can help if you’re having trouble understanding the reports. They can inspect the records for potential fraud, audit the financial statements, and ensure all the finances are properly handled.
11. Update Insurance Policies
HOAs are often insured by the developer during each construction phase. However, that could change once control has been passed on to the community residents. The board should ensure the community has the coverage necessary to remain financially healthy. Some communities may also need additional coverage as required by law or the governing documents.
The Best Way to Transition
An HOA transition from developer can be tricky. It takes a long time to get everything in order. Plus, there are many things to learn — especially for the newly elected board. The best way to transition is to ask the developer for support, take your time, and hire the right professionals to help you.
Need help with developer turnover? Personalized Property Management can help. We provide HOA management services to communities all across Southern California. Call us at 760-325-9500 or email us at info@ppminternet.com for more information!
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