When the Builder Still Controls the HOA Board

In an established neighbourhood, an association is run by owners who live there. In a brand-new one, the association exists before most of the owners do, and somebody has to run it in the meantime.

That somebody is generally the developer, through a board it appoints, until enough homes have sold for control to transition to the owners. This is a normal and necessary arrangement. A community with three occupied houses cannot elect a functioning board.

It is also a period a buyer should understand rather than discover. This article extends the new-construction guide and follows the article on new homes tying into an association.

I am a real estate professional, not an attorney. Governing documents are legal documents, and how California law applies to a specific association is a question for counsel with your documents in hand.

What the early period actually means

During developer control, the decisions that shape the community for decades get made: the budget, the assessment level, the reserve plan, the rules, the standards for what owners may and may not do, and the arrangements for maintaining common areas that may not all be built yet.

Those decisions are made by a board the buyers did not elect, at a time when the developer is still selling houses. There is nothing improper in that, and it is also a set of interests that will not always line up perfectly with a long-term owner's.

The buyer's protection is not suspicion. It is READING THE DOCUMENTS, which are provided precisely so this can be assessed.

The documents to ask for, and what to ask of them

Ask for the full package early, not on the day of signing, and give yourself time to read it.

The governing documents. The declaration of covenants, the articles, the bylaws and the rules. Together these say what you may do with your property and what the association may require of you.

The budget. What the assessment is, what it covers, and what it assumes. Look particularly at whether the budget contemplates common areas and amenities that are not yet built or not yet handed over.

The reserve study. This is the document that says whether the association is putting money aside for the things it will eventually have to replace. In a new community the components are new, which can make underfunding easy to overlook and expensive later.

The transition provisions. When and how control passes from the developer to the owners, and what triggers it. Ask this plainly and get the answer in writing.

Any assessment or special-district obligations. These have their own article in the HOA and Mello-Roos guide, and they are among the most commonly misunderstood costs in a new community.

Questions worth asking out loud

Ask them of the sales office for facts and of an attorney for interpretation.

How many homes are planned in total, and how many are sold. What is the current assessment, and what does the budget assume it becomes when the community is complete. What common areas and amenities are promised, when are they scheduled, and what document records that promise. Who maintains them until handover. When does control transition, and how will owners be notified. Is there a reserve study, and what does it conclude.

Ask also what happens if the project is built in phases and a later phase changes. That is a question about the documents rather than about anybody's intentions.

The assessment number deserves scrutiny

An assessment set while a community is small, partly built and partly maintained by the developer is not necessarily the assessment a completed community carries.

That is not an accusation, it is arithmetic: more common area, more landscape, more amenity and a full reserve obligation cost more to carry than a partial one. Ask the budget to show you its assumptions rather than only its total, and ask an attorney or a qualified association professional whether the reserve plan looks realistic.

Budget for the possibility that the number moves. A buyer whose finances only work at the introductory assessment is carrying a risk they may not have priced.

What transition looks like

When control passes, owners elect the board and inherit whatever position the association is in: its reserves, its contracts, its rules, its records and any outstanding questions about common-area construction.

The practical advice is unglamorous. Go to the meetings before you have to. Read the minutes. Introduce yourself to the neighbours who are paying attention. A community where a handful of owners are engaged before transition tends to have a smoother one than a community where nobody looked until the keys changed hands.

How this affects resale

A buyer purchasing from you will read exactly the documents you are reading now, and their lender may look at the association as well. An association with clear documents, a sensible budget and a completed transition is easier to sell into than one with unresolved questions.

That is worth knowing early, and it is one of several reasons the resale article is worth reading before you buy rather than after.

Where to go next

Go back to the hub above for the wider sequence, then read the contract-reading article, since the association documents are usually attached to the agreement you will sign.

If you are considering a new community in Claremont and want someone reading the package with you, get in touch. Anthony Grynchal has been licensed in California since November 2009.