Ready to hand over control of your development to a homeowners association? Be smart--cover your assets. By Laura Ziff
One of the biggest liabilities for a developer or home builder is the business of managing the homeowners association for a new community. And in this day and age of rampant construction defect lawsuits, builders must do everything possible from the day they buy dirt to ensure a smooth transition to homeowner control. While there are no guarantees that a construction defect attorney won't show up at your door, here are 10 precautions you can take to minimize the likelihood:
1. Don't treat your association like an "orphan." While it's true your main business is land development and home construction, you are in the business of controlling associations during the build-out period.
2. Visit your management company. Someone from your company must visit the offices of the managing agent at least once. Just as walking a piece of land tells you much more than reading the appraisal, an on-site visit to your management company will provide significant information about the company you are trusting to process hundreds of thousands of dollars in homeowner assessments.
Illustration: David Clark
3. Be clear about your expectations for the community. If a management fee sounds too good to be true, it probably is. Remember, the association is probably the biggest factor in representing your marketing efforts. If you have hired the least expensive landscape and management companies, don't be surprised when your salespeople are complaining that the covenants, conditions, and restrictions (CCRs) are not enforced, and there are weeds in the common areas.
4. Enforce the covenants during the build-out period. Although no one wants to be the bad guy, your company has entered into a contract with buyers when you record covenants on the property. It isn't reasonable to ask the first homeowner-controlled board of directors to clean up the items that you didn't want to address.
5. "Pay now or pay later" must be the assessment philosophy. If you have a preconceived notion regarding what the assessment for your community must be, you are headed for disaster. And completing a market study of the other neighborhood communities to establish your assessment won't necessarily help because they may have different open space requirements, amenities, and number of lots over which to spread the costs. An increase of a few dollars in the assessment can make a big difference in the budget and help reduce your subsidy faster as the community builds out. Those same few dollars will probably not stop a home buyer from buying.
6. Contract for a reserve study. Use a reputable company. It is reasonable to ask if the firm has ever been in court, what other companies it has represented, what the outcomes were, and so forth. Have your development department review and approve the quantities and measurements to ensure the study is accurate. Depending on the size of the amenity package for the community, the study should be revised annually.
7. Create a plan for funding the reserves. Some builders fund at the end of the project, some annually, and some monthly. Whichever you do, make sure it is documented in the corporate records in case of staff changes.
8. Have a plan in place from the beginning of the budget. If the plant and tree count changes, be able to document that the decision was approved or acceptable within the original plan for the community. Be prepared to provide your homeowner-controlled board of directors a set of blueprints and as-builts that accurately reflect what exists at the time of turnover.
9. Train your salespeople about homeowners associations. Salespeople can be your biggest asset in regard to associations--or your biggest liability. Salespeople need to know that it is OK to say "Let's try to submit that change before you sign the contract to make sure it will be approved." It is not OK for a salesperson to say "Sure, move in with the 30-foot recreational vehicle, park it in the backyard, and we'll get it screened." How do you screen an 8-foot-high, 30-foot-long vehicle to the satisfaction of the neighbors? You don't. And the neighbors (also your clients) bought into the neighborhood because they liked the way it looked and was maintained.
10. Identify someone to interface with your management companies on behalf of the associations. Make sure this person has the time to return telephone calls to the management companies, prepare public reports, and provide customer service. Give that person reasonable authority to make decisions. If that person is unable to make decisions, there is more opportunity for things to fall through the cracks while decision-makers are consulted. The internal association management position is just as important as anything else in the company, given the inherent liability.
It's true that establishing and managing homeowners associations can be one of the necessary challenges of development. But the process doesn't have to be unpleasant. By following the steps listed above, the community association concept can work well, preserve property values, and allow developers and home builders to focus on the positive aspects of community living.