Ensuring a healthy financial transition from developer to homeowners.
Real estate is booming again, and new communities have been springing up all over the Atlanta area. As the final homes or condos are sold in each community, the developer turns the HOA or community association over to the owners. If your community is almost sold out, are you prepared to take financial control? Keep reading for some valuable tips.
Understanding the developer mindset
Community developers are business people. They want to develop the land, build and sell the homes, make their profit, and then move on to the next community. That’s perfectly fine, but as a homeowner, your interests (long-term ownership, use of amenities, etc.) aren’t necessarily aligned with your developer. You both want a quick turnover, but you need to verify that you’re taking over a financially healthy community. That takes some extra time and effort.
HOA Transition Planning
The best time to start your transition is about 4-6 months before the official developer turnover. If you wait until during (or after) the turnover process, you may find it more difficult to get access to important records. Now is also a good time to have your future HOA board treasurer identified – someone with financial experience who knows how to interpret the financial documents.
Here are five key things you should do as part of your transition process. I’ve included a number of links to more detailed information, and you can also download our white paper on effective HOA and community association financial management.
- Request and inspect the financials. This includes the budget, bank statements, tax returns, and vendor contracts. This will be your first indication of how well the community was financially operated to-date. You’ll want to confirm that capital contributions (also called initiation fees) are being deposited, contracts match contractor fees, and all budget variances are explained.
- Conduct an audit. If you’re not comfortable with the community’s financial health, consider hiring an experienced CPA to conduct an audit or similar financial procedure. An agreed-upon procedures engagement is less expensive than a full audit, and can focus on the most important items – budget, bank reconciliation, contracts, and reserves.
- Review the reserve fund and reserve study. The reserve fund is your long-term savings account for major repairs and replacements. The reserve study determines how much money is required to pay for those repairs and replacements. The most important thing to verify now is that the developer has created a reserve account, and is funding it with at least the capital contributions mentioned above.
- Decide on future property management needs. If there is currently a property manager or management company in place, is the individual or company independent, or financially linked to the developer? Remember, the property manager will be working for you (the board) after the turnover. You’ll also want to confirm membership in Community Associations Institute (CAI), the leading advocate for community associations and HOAs. While it’s possible for a smaller community to self-manage, I generally recommend that communities use a professional property management company.
- Understand your insurance coverage. Almost all communities have general liability insurance, but those policies don’t always cover all potential losses. Many communities purchase separate Directors & Officers (D&O) coverage for board members. It’s best to have an insurance expert review your policies, so you can have the right coverage in place by the time the new board takes over.
You’re not alone – help is available if you need it
I’m trying not to overwhelm you with information, but the developer turnover is a major event for any community. Why not get some help? Bring in a neutral third party to review the books, validate your community’s financial health, train the new treasurer, and even help resolve potential conflicts during the turnover. There are CPAs who have extensive experience (I’ve got 15+ years) working with community associations and HOAs, and who know how to help ensure a smooth financial transition from developer to homeowners.
Neal Bach, CPA