There's trouble a 'brewin' in HOA Developer City. Betwixt and between land acquisition, zoning issues, project cost estimating, construction financing, building permits, project scheduling, marketing and a myriad of other details is wedged the HOA. For the HOA, the developer is required to file certain information with the state to qualify the project as a homeowner association. While the required information varies from state to state, the governing documents, budgets and homeowner fee details are always required in the Public Offering Statement to prospective buyers.

Even for the most diligent and well meaning HOA developer, there is an inherent conflict of interest in the process. The developer's profit motive always conflicts with the long range interests of the homeowners association. Lenders have a nasty requirement of adding the homeowner fees (aka dues) to the proposed loan payment when qualifying borrowers. This same requirement is not made of single family home purchasers yet that requirement increases the loan payment 10-20% for HOA buyers and makes it more difficult for them to qualify. To counter this, some HOA developers are forced to lower prices to help qualify buyers. But there is another way. Lowering the homeowner fee can produce the same result without impacting the developer's profit margin.

One of the HOA developer's favorite ways of reducing costs to buyers is to reduce reserve funding. (Reserves deal with repairs and replacements like roofing, painting, paving, etc.) The money that should be set aside for reserves can be easily reduced by failing to include some or all of the components, using inaccurate measurements or false cost information. Since most states do not scrutinize the homeowner fee for adequacy, it's an easy deception for a developer to pull off.

Another way of reducing the homeowner fee is to reduce the Operating Budget by eliminating “unnecessary” expenses like management, bookkeeping and various repair services. Insurance is another easy area to cut costs by leaving out important coverages like Directors & Officers Liability, Employee Dishonesty, Guaranteed Replace Cost or having a higher than prudent deductible. Reducing the Operating or Reserve Budget to help buyers qualify for bigger loans will result in higher profits for the developer at the expense of the HOA's ability to fund operations.

Another developer conflict of interest involves time. The developer's plan is to sell the product as quickly as possible and maximize profit. The developer has a one year repair warranty which must be honored. But beyond that, the financial responsibility is limited unless a clever lawyer proves otherwise in court. But clever developers often protect themselves from court judgments by using a Limited Liability Corporation or bankruptcy.

Since an HOA developer's primary motive is profit, the long term welfare of the HOA is secondary. But developers that want to stay in business know they must provide for the future welfare of the HOA. To help overcome the natural conflicts of interest, the HOA Operating and Reserve Budgets should be outsourced to a HOA consultant that is knowledgeable in HOA operations and costs. Using an outside expert will produce the accurate costs and put the developer arms length from the numbers.

When preparing a Reserve Study, the developer's construction costs will be adjusted to reflect what the HOA will pay. For example, painting an occupied and landscaped building is at least 30% more expensive than painting the same building under construction. Projects like roofing, fences and decks need to include the cost of removal of the old installation which will often increase the total cost 20-40%. When the budgets are calculated with the HOA's interests in mind only increases the homeowner fee by 5-10%. This small change is unlikely to be a deal breaker and gives the developer an important hedge against lawsuits.

While having enough money to operate is very important, having a clear understanding how and when to spend the money is equally important. For this, a Maintenance Plan provides the details to direct the HOA. The Maintenance Plan should include all regular and cyclical tasks that need to be performed to keep the assets in top shape. Whether it's gutter cleaning, tree pruning or landscape maintenance, roof replacement or painting, a properly detailed Plan gives clear and timely direction to the Board.

Pop Quiz: When the HOA has neither a plan or money to maintain the assets, guess who gets blamed for the problems? (Okay. Time's up.) The developer that provides the proper means and mechanism for success will not have to worry about the answer to this quiz.

For more HOA developer strategies, see www.Regenesis.net.

Published: July 2, 2003

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Richard Thompson owns Regenesis, a management consulting company that specializes in condominium and homeowner associations. He is a nationally recognized expert on HOA management issues. Regenesis publishes The Regenesis Report, a monthly newsletter for HOA boards, developers and managers. To subscribe, go to Regenesis.net. He can be contacted by email at .