By: Ilyce Glink and Samuel Tamkin
Q: I have a question about the ethics and any legal issues you see in a situations we have. We live in a small, seven home subdivision that was recently turned over by the builder to our new homeowner’s association.
During the turnover, the current management company (selected by the builder) advised us that we have a budget deficit that was funded by the developer. I am curious to know if this is ethical and legal. We, the feel that the builder made up this deficit in an attempt to keep the advertised association fees low and thus lure prospective buyers.
A: Most states have homeowner association laws that regulate the development and delivery of units to homeowners along with the turnover of the association. Some of these laws require a certain level of seller disclosure by developers to prospective buyers. If the home builder knew that the disclosures were false, the builder would have a problem.
However, if a home builder was truthful in its builder disclosure to buyers and costs somehow changed, the builder wouldn’t be at fault for that. Two situations with variable costs that come to mind is the cost to heat a building or manage snow removal. The developer could have certain estimates for these costs in the budget but when winter finally came around, the fees and costs were considerably higher. In that situation, the association would have a budget deficit that is beyond the fault of the developer.
There are situations where developers deliberately understate the costs of running an association in order to attract buyers. If that is the case with your subdivision, or you suspect a problem along these lines, you should talk to an attorney that deals with association turnovers and other matters to determine if your developer failed to give you adequate disclosures or misled buyers in their delivered disclosures. You actually need more information on this issue to decide whether the developer did anything bad.
The developer funded, or made up, the deficit but didn’t pass on that expense to the homeowners. From the way you describe it, it seems that the developer took a loss on those real estate expenses. You and the other owners can now decide how to spend your money.
You may decide that you don’t need a management company for a subdivision of just seven units and self-manage the building. If you self-manage, you might save a significant amount of money. You also can run your own books and handle a fair amount of the maintenance issues on the property on your own.
Depending on the level of services you want for your seven unit building, you and your neighbors could shave off quite a bit of money off the annual budget. If you shave off that money, you might find that living in the community is cheaper than what the developer originally estimated.
Now if you and your neighbors elect to have professionals handle all aspects of the common ownership issues at the subdivision, you will find that your assessments are going to go up. You can negotiate these fees and look for professionals to assist you for less, but ultimately you and your neighbors will get to decide what you spend and where you spend it.
You also need some knowledge of the condominium and homeowners’ association laws in your state to make a determination as to whether your developer behaved fairly and legally. For those answers, you’ll need to seek out legal advice where your home is located and have an attorney review your documentation and give you more information.