HOA transitions

When an HOA is turned over from a declarant, developer or builder, and control is given to members who live in the development, this process is referred to as the transition. HOA transitions are critically important to the future health and stability of developments. The group responsible for taking over will almost certainly require professional assistance from a lawyer and financial expert. If the transition is not done right, the incoming board could be left to clean up a big (and potentially costly) mess.

Click here to download our HOA transition checklist template

The transition process requires close collaboration between the developer and the HOA members. A successful and productive transition is one in which the collective interests of the developer and the owners are served. It is often helpful to create a detailed checklist that documents what needs to be done before starting the transition. Both parties can review the list, and make edits or revisions before moving on to the next stage of the process.

When does the transition occur?

Transitions typically occur pursuant to the terms outlined in the governing documents of the HOA, or in accordance with statutory requirements, depending on the community. In some states, once the 75% threshold of home sales has been met, an election is scheduled 60 days later to assemble a board of directors, comprised exclusively of homeowners. Note that these statutes only set an upper limit for how long a declarant may govern a community; a developer is permitted to release control as soon as they see fit.

Not all states follow this rule though. Some may have a lower threshold, and others may allow more time for a board to be elected. Make sure to check your state rules, and the HOA’s governing documents.

How long does the process take?

The transition process is not a one-day event. The entire thing can take anywhere from 12 months to two years before the official developer turnover, so the sooner the process commences, the better. If you wait until or after the turnover has taken place, you may find it difficult to get a hold of important records or documents from the developer.

Who takes over?

When the HOA is being constructed, the developer will appoint people of their choosing to govern the new community through the HOA’s board of directors. While homeowners are limited in their authority while the community is under the developer’s control, they can still make an effort to be more involved. For example, volunteers can assemble and create a homeowner advisory committee. Owners can also attend any open meetings or annual meetings that are held in order to see how the association is being run, how the development is progressing, and what needs to be done to move forward.

The best thing an association can do to prepare for the transition is to identify individuals who are interested in running for the board once it is time to elect new leadership. These people will probably already be actively involved in the community, and will be prepared to make the transition process as smooth as possible.

The transition is usually accomplished at a special meeting, held to elect owners to serve on the board. Once the owners are in control, the developer is no longer responsible for managing the HOA’s operations.

Key elements of a successful transition

Good transitions occur because the owners and developer worked well together and fulfilled all duties they were responsible for. Moreover, both parties are aware of the financial status of the development, rules that the HOA must follow, and any potential issues that must be resolved in order for the HOA to be successful. To ensure they have all of the information they need before the transition, members will want to:

Conduct a thorough examination of all financial documentation
Complete a financial audit. Avoid unnecessary financial surprises
Conduct a reserve study to evaluate the health of the reserve fund
Ensure there is compliance with state laws and the HOA’s CC&Rs (because HOA legislation differs so much by jurisdiction, local counsel is essential to ensure the transfer takes place as the law requires)
Elect a board of directors. If you’re lucky, there will be a group of 4 or 5 members who want to take the lead in the HOA
Conduct training with the developer. Work together to understand how the HOA operates
Hire an engineer to inspect the property. Make sure there aren’t any little issues that could evolve into costly repairs

You can download our HOA Transition Checklist template to get more details.

Transition tips

The transition process can be an exciting event because it means the community is really coming together. To ensure owners are happy from the moment they move in, follow some of these transition tips.

Be proactive. Some owners may think that the transition is a one-day thing, and that they can’t do anything until that date. But the reality is that a transition can take more than a year to complete. Owners who move in early on should hire an attorney, and form an owners’ group to work with the developer. When developers see that kind of intent, they will generally be more willing to work through problems collaboratively.

Consider appointing a developer’s liaison committee so that when it comes time for the transition, the HOA already has a group of owners that understands how the association operates.

Be informed. Make sure to read the CC&Rs, and get clarity on anything that is murky or vague. It is these documents that detail the transition powers of your developer, and there’s often a specific date in them for the developer to step back and for the board to take over. If the CC&Rs failed to include a transition date, this needs to be resolved asap. Otherwise, no one knows exactly when the transition should take place.

Meet often. During the transition period, it is strongly recommended that board members meet at least every other week. The board will have the authority to make changes to the developer’s rules and regulations, so it is important for the members to review them and decide whether to make changes or additions. Developers can build a beautiful HOA, but they can’t be expected to write rules that will work for each unique association. The developer may have forgotten to add rules about parking or pets, but anyone who has lived in an HOA knows that these are common issues that need rules and regulations.

Gain a clear financial picture. Make sure you get accurate records from the developer. For this task, hire a CPA who can confidently perform a cursory review of the financial records and process the income statements. They will be able to make sure that the projected revenue will truly cover all of the expenses that the HOA will incur. Don’t forget about the reserve fund, either.

There have been cases where inaccurate accounting records created confusion about which owners had paid their assessments. For this reason, the board must get the HOA’s finances in pristine order.

Review current contracts. Read all of the contracts that the developer has entered into on behalf of the association to determine if they are necessary and reasonable. In some states, as long as they provide 90 days’ notice, boards can terminate developer-signed contracts that are “unconscionable” or “not bona fide.”

Wrap up loose ends. With so much going on, it’s easy to forget the small stuff. Work together with your community members and delegate tasks to ensure that everything is addressed in a timely manner. Don’t try to go it alone during the transition. Have a lawyer review the CC&Rs to make sure it is clear when things are supposed to happen, and to ensure those things happen properly. It’s better to have legal support and not need it than find yourself in a compromising position after the transition has taken place.

Conclusion

An HOA transition is the process where the developer steps back, and hands authority over to the members of the community. This is not a quick process, and there are many detailed steps involved.

Before the final transfer of power takes place, it is in both the developer’s and community’s best interests to sign a memorandum of understanding concerning the terms and conditions of the release of governance to owners. While this is not required by law, it does benefit all parties involved. This is one of the best means of avoiding potential litigation.

Owners purchased their home in an HOA for convenience, sense of community, and peace of mind. Diligence in the transfer process will pay off for everyone.