Living in a homeowners association comes with financial obligations. For new homeowners, one of these financial obligations comes in the form of HOA initiation fees. These fees differ from regular fees that homeowners pay monthly or annually. They serve a different purpose. And while all HOA communities collect regular fees, not all of them collect initiation fees.
What is an HOA Initiation Fee?
An HOA initiation fee is a fee that homeowners associations collect upon transferring property within the community. It is typically a one-time fee, which means new owners will only need to pay it once and be done with it. It is also non-refundable.
Normally, new owners will pay the initiation fee at closing. Other names for this fee include transfer fee, initial fee, buy-in fee, capital contribution fee, working capital contribution, or working capital fee.
HOA Initiation Fee vs Regular Fees vs Special Assessments vs Fines
Initiation fees differ from other fees that an HOA charges.
Regular fees or dues are ongoing fees that homeowners pay to the HOA, which uses these fees to fund operating expenses. Special assessments are occasional fees that an HOA collects to cover an unanticipated cost or emergency expense. Finally, HOA fines are monetary penalties that associations charge when homeowners break the rules.
What is the Purpose of the Initiation Fee?
Some homeowners may feel put off by the fees that homeowners associations charge. Regular fees come with the territory, but not many know about initiation fees. However, initiation fees do play an important role.
The initiation fee’s practical purpose is to provide financial support for the association during its early development when it has to cover fixed costs regardless of size. These initial fixed costs include amenities maintenance, insurance premiums, professional fees, and management expenses. The working capital collected from first-time buyers helps cover these costs, ensuring the association stays financially stable.
In established and existing HOA communities, these fees are also charged during property resales and may contribute to the reserve account. An HOA reserve fund covers the cost of major repairs and replacements in the future, as determined by the reserve study. These include roof replacements, sidewalk resurfacing, pool retiling, and more.
Are HOA Initiation Fees Legal?
Whether an HOA has the authority to charge these fees depends on state laws. In North Carolina, for instance, HOAs created after July 1, 2010, can only charge a one-time transfer fee at the developer’s initial sale of the property. According to Section 39A-3 of the North Carolina General Statutes, HOAs can’t charge a transfer fee each time a property changes hands.
Additionally, such fees should be explicitly covered in the HOA’s governing documents. If the HOA’s CC&Rs or bylaws don’t permit the association to collect an initiation fee, homeowners may contest it.
It is worth noting that some states also have laws that cap the maximum initiation fee. Other limitations include the duration of initiation fees and the types of communities that may collect them. Many other states, though, don’t have such laws in place.
Do All HOAs Collect Initiation Fees?
Not all homeowners associations charge initiation fees. Homeowners and potential buyers can determine whether an HOA collects such a fee by reviewing state laws and the HOA’s governing documents. Even if state laws are silent, that does not mean HOAs automatically have the authority to charge a transfer fee. The HOA’s governing documents must cover it.
If an HOA wishes to charge an initiation fee, it must amend its governing documents to include it. Amendments usually require a membership vote, though. As such, if the HOA wants to start charging this fee, it must get a majority of the homeowners to agree.
How Much Are HOA Initiation Fees?
There is no universal standard for HOA initiation fees, and the amount can vary greatly from one association to another. However, the HOA’s governing documents should cover this topic.
Potential buyers can review the HOA’s governing documents by requesting them from their real estate agent. Homeowners can also order these documents from their HOA board or community manager. Some HOAs make these documents easily accessible through a resident portal.
In general, initiation or transfer fees are usually two or three times as large as an HOA’s regular fees. Some associations, though, charge a fixed dollar amount for the fee, updating it periodically according to the association’s needs. Other associations charge as high as a year’s worth of regular dues.
Do All Homeowners Pay the Initiation Fee?
Some communities charge HOA initiation fees every time a property transfers ownership, while others only charge transfer fees at the initial sale of a property. As previously explained, some states have laws that limit an HOA’s ability to collect initiation or transfer fees.
State laws and governing documents permitting, an HOA can legally charge transfer fees, and new owners must pay them. The fee is usually due at closing, with the buyer shouldering the cost.
Who Pays the Initiation Fee at Closing?
Normally, the new owner will pay the initiation fee as part of the closing costs. However, buyers may negotiate with sellers to pay the fee in exchange for other fees or a change in the house price. State laws and the HOA’s governing documents may also dictate who pays the fee.
Can Homeowners Refuse to Pay HOA Initiation Fees?
Potential buyers typically bear the responsibility of paying transfer or initiation fees. However, that does not mean they don’t have any room to negotiate. They can ask the seller to cover the cost of the fee at the time of closing.
This does not always work out in favor of the buyer, though, as sellers are often unwilling to pay the amount. After all, sellers are leaving the HOA, and the buyer is the one who will benefit from the HOA’s resources and amenities.
What is a Capital Contribution Fee? Explained!
Prospective homeowners may be surprised to find HOA initiation fees as part of their closing costs. While these fees may seem like a burden, they serve an important purpose for the association and its residents. Living in an HOA community comes at a price, and by buying into one, homeowners agree to fulfill the financial obligations attached to it.
Cedar Management Group provides expert HOA management services to homeowners associations and condo associations. Call us today at (877) 252-3327 or contact us online to request a free proposal!
RELATED ARTICLES:
- 9 Ways To Increase HOA Cashflow Without Raising The Fees
- HOA Capital Improvements: Is Funding Them Necessary?
- Is Including Landscape Items In Reserve Study A Wise Decision?
