With increased property values, desirable amenities, and strong neighborhood pride, it’s easy to see why many homebuyers are attracted to the homeowners’ association (HOA) lifestyle. As with any new home-buying experience, however, one must first go through the process of finding, inspecting, and closing on a home, which can be lengthy and costly. While there are many fees when buying a home in any area, houses belonging to an HOA might come with a fee that’s exclusive to HOA living: the initiation fee. Read on to learn what the initiation fee is and what it’s all about.
What is an initiation fee?
An initiation fee is a one-time non-refundable capital contribution paid to the HOA upon the transfer of a property within the community. Typically paid at closing, an initiation fee can also be called a transfer fee, capital contribution, working capital contribution, new owner fee, or buy-in fee.
How is the initiation fee different from other HOA fees?
The initiation fee, or capital contribution, is paid only when there’s a transfer of property. It’s different from other fees, including:
- Regular assessments or dues. These fees are paid to the HOA on a regular basis—usually monthly, quarterly, or annually—and contribute to daily operational expenses and reserve funds.
- Special assessments. These occasional charges are needed to pay for an unexpected cost, like an increase in insurance or a surprise repair bill for a pool, when the community’s reserves can’t cover it.
- Fines. A homeowner is responsible for paying these costs when they violate their HOA’s rules and regulations.
Do all HOAs charge an initiation fee?
No, but those that do will have it outlined in the declaration of the governing documents. Some states also have provisions on these fees and limit how high they can go, how long they can be in place, and the types of HOAs that can charge them. Other states don’t have such limitations.
How much is the initiation fee?
The initiation fee amount varies by community, but charges are outlined in the HOA’s governing documents, which a buyer can access through their real estate agent, the community manager, or a board member. The typical amount is either two to three times the HOA’s regular assessments or a fixed price. However, it’s also possible that a community may charge as much as one year’s worth of assessments.
Who pays the initiation fee?
A legal fee that’s due at the time of closing, a buyer is often obligated to pay the initiation fee if the association charges it—state laws and the association’s governing documents will confirm payment responsibilities. Additionally, the first homebuyers in a new development can usually expect to pay this fee. Once the community has sold all its homes, working capital contributions may end. Some associations charge the working capital contribution for all resales, not just first-time sales. Continuing working capital contributions help to reduce other homeowner association fees.
What do these payments go towards?
The practical reason for the working capital is to help fund the association in the early stages of development when it incurs fixed costs regardless of size. Examples of initial fixed costs are insurance, registered agent fees, pool management, and clubhouse maintenance. The working capital collected from the first-time buyers helps defray the funds needed so the association can remain solvent.
In more established neighborhoods when these fees are charged for all resales, initiation fees may go towards funding the reserve account. An HOA reserve fund is money set aside by a community for additions to major components the association is obligated to maintain and future replacements and repairs that don't occur on an annual basis, such as roof replacement and road and sidewalk resurfacing.
How do you implement these fees in your HOA?
To implement initiation fees in your community, you’ll have to amend your governing documents. Usually, association members must approve an amendment to the association documents after it’s drafted by the community’s legal counsel. Because incoming homeowners pay this fee, not the current membership, it’s often an amendment that wins approval.
The Resale Lifecycle: What HOA Boards Should Know About the Buying & Selling Process
The buying and selling process can be confusing—even for an HOA’s board of directors. Read our article, “The Resale Lifecycle: What HOA Boards Should Know About the Buying & Selling Process,” to learn the documents necessary (those within a resale package), the start-to-finish lifecycle of a resale, and tips for when and how to welcome a new homebuyer to your community.