By Deborah Goonan, Independent American Communities
According to Census data, 3 out of 4 new homes in the U.S. are built in HOA-governed communities. Home buyers are not always aware that each new HOA community is controlled by a real estate developer, and that control often lasts for many years.
The HOA industry and home builder trade groups claim that developer control is necessary until most of the lots or units in a common interest community are sold to non-affiliated owners.
Sometimes, homeowners assume that the developer or sponsor of their community is compelled to keep them happy, in order to continue to sell homes.
But the truth is, real estate development is big business. And, all too often, a developer’s business decisions are out of synch with homeowner expectations. So, today’s post is another “buyer beware” message.
Here are four ways that developer-control of HOA-governed communities can increase risk and add to the cost of homeownership.
1. It’s extremely difficult to hold a developer accountable for poor quality construction of homes and infrastructure.
It’s no secret that mass production home and community builders have crowded out many small, custom home builders. And that’s mainly because developers have spent the last 40 of 50 years buying many acres of land, subdividing it, and creating entirely new neighborhoods.
That leaves very few buildable parcels of land suitable for a custom-built, stand alone home.
Most new home buyers today are limited to purchasing lot-home packages in HOA-governed planned communities, with a limited choice of approved home builders. Nearly all of these HOA-governed communities are controlled by a developer for many years during construction phases.
Much of the work of home building is subbed out to dozens of contractors. And in times of high demand, there’s more emphasis on churning out completed homes than attention to detail, good craftsmanship, and creating a high quality product.
Inevitably, corners get cut. And even though most builders offer a home warranty, homeowners sometimes report difficulty getting builders to stand behind their work. Plus, builder warranties offer limited coverage for home repairs of defective equipment or materials.
And home warranties don’t cover any property owned in common. So homeowners in developer-controlled HOA-governed communities, face daunting challenges when, for example, community roads are not properly completed, then torn up by construction vehicles.
Other common complaints from property owners in common interest communities: poor stormwater drainage causing damage to private property; unsightly or foul smelling retention ponds; inadequate telecommunications services; non-functioning or non-existent street lighting; poor water pressure or repeated sewage back ups, especially in multifamily housing.
In new home communities, developers and home builders are serving captive consumers. A homeowner’s only recourse, if warranty claims are denied or ignored, is to file a lawsuit against the developer, home builder, and contractors.
That can be awkward and uncomfortable when the developer still rules the community, with the potential to retaliate by way of selective enforcement of restrictions and rules.
Needless to say, especially in a developer-controlled community, it’s nearly impossible to force the responsible parties to make things right.
And even when homeowners prevail in court or finally settle a claim, they’re likely to fall short of the money they need to correct construction defects, after deducting legal fees, typically about one-third of the settlement.
2. Developers retain near absolute control on the purse strings.
Don’t believe the HOA industry trade group lie that homeowners freely elect the boards of their HOA-governed communities.
Homeowners should be aware that, as long as new homes are under construction, real estate developers appoint the governing boards of their communities.
Condominiums, housing cooperatives, and planned communities are all governed by private organizations (most of them non-profit corporations), under the complete control of a developer or “sponsor” for many years. Sometimes, developer control continues indefinitely.
Homeowners have no control over financial decisions of the HOA board. They cannot elect new board members, and they cannot vote on annual budget increases. The developer creates the HOA’s budget, sets and collects HOA fees, and decides where and how to spend the homeowners’ money.
Likewise, developers choose the board of supervisors of any development district formed at the time a common interest community is approved by local or state government. Although development districts are chartered as units of local government, their governing boards are not elected by voters during the developer control period.
A developer-appointed district board has the power to issue bonds, creating debt that homeowners are obligated to repay as part of their property tax bills over a period of 20-30 years. In short, homeowners have absolutely no control over the growth of fees in a development district during the years it is controlled by a developer-affiliated board.
3. A developer can — and often does — amend the CC&Rs multiple times, at will.
Some legal experts consider the Covenants, Conditions & Restrictions to be a legal contract among homeowners. Others say the CC&Rs are the neighborhood’s “constitution.”
Regardless of the prevailing legal point of view, during the Declarant-control period, a developer has sole authority to make changes to this “contract” or “constitution.”
Usually, these changes benefit the developer and affiliated home builders, at the expense of housing consumers.
For example, a developer can change the nature of the community with any of the following amendments:
- Increasing the developer’s voting power or future veto power on amendments to the CC&Rs or bylaws.
- Prematurely shifting common area maintenance responsibilities from the developer to the homeowners by way of the HOA.
- Creating new financial obligations for HOA members for maintenance, utility or telecommunications agreements.
- Adding, changing, or eliminating architectural standards on an ad hoc basis. This is common when the developer adopts a “sell at all costs” mentality, leading to inconsistent standards and disputes among neighbors.
The sad truth is that homeowners can do little to prevent a developer from changing the terms of the governing documents, at any time, during the period of developer control.
4. Developers reap profits from multiple revenue sources — while property owners subsidize their business expenses.
While marketing and selling new homes in the community, a developer often manages the community association, collecting HOA fees to cover the cost of those services.
Keep in mind that new home sales create new owner who are compelled to pay HOA fees. As more homes are sold, the developer’s financial share of HOA operating costs decreases, then disappears entirely.
Eventually, collection of HOA fees exceeds management and maintenance costs, creating a profitable revenue stream for the developer.
Especially in smaller subdivisions or resort communities, a developer may also retain ownership of several housing units or the common amenities. Sometimes a developer will try to be less obvious, and will transfer property to business affiliates or family members.
In mixed use communities, developers tend to hold onto commercial properties so they can profit from the rental income, or provide space for personal business ventures.
Thus, a developer may also benefit, directly or indirectly, from ongoing revenue streams of user fees or rent payments, while also collecting HOA fees from members of the association.
All of these examples display a clear pattern — through their mandatory HOA, condo and co-op fees, residential homeowners are essentially subsidizing the business ventures of the developer. ♦♦
Subcontracting: Three-Fourths of Construction Cost in the Typical Home
Special Studies, September 1, 2015
Paul Emrath, Ph.D.
Vice President of Survey and Housing Policy Research
NAHB Economics and Housing Policy Group
Report available to the public as a courtesy of HousingEconomics.com