Homeowners associations are a love-hate relationship. They keep the grounds clean, neighbor’s lawns orderly, and security roaming, and all for a monthly fee. At least you thought.
Moving in or out of an HOA typically comes with extra fees, including the HOA capital contribution.
What’s the purpose of the HOA capital contribution, and how does it benefit you in the long run?
The HOA capital contribution fee funds the reserve account of your homeowners association for future significant repairs. Think of it as HOA working capital when the time comes for streets to be repaved, landscaping to be refreshed, and gates to be repaired.
This article breaks down the HOA capital contribution fee while detailing how the finances of a homeowners association work.
- What is the HOA capital contribution fee?
- Who pays the HOA capital contribution fee?
- Will I know what the HOA working capital is spent on?
- What if I don’t pay the HOA capital contribution fee?
- How much are capital contribution fees?
What is the HOA capital contribution fee?
The HOA capital contribution fee is a one-time payment due upon the sale of an HOA property. The capital contribution is added to the HOA’s reserve account to be utilized for future repairs.
For example, if the HOA needs to repair the security gate or repave the streets, the homeowners association will have enough funds saved in their reserve account.
Furthermore, the capital contribution helps the HOA avoid increasing monthly or quarterly assessments. For most HOA’s, the regular dues paid by each homeowner cover ordinary expenses with some funds saved in reserves.
Common HOA expenses are landscaping, insurance, utilities for common areas, roaming security guards, and management fees.
Who pays the HOA capital contribution fee?
The capital contribution is a negotiable fee. However, since the contribution is for future improvements or repairs within the community, it’s commonly regarded as a buyer’s fee.
Occasionally, sellers are willing to pay this fee as part of the sales price. This is often dependent on current market conditions, so always speak with your agent first for their expertise.
Will I know what the HOA working capital is spent on?
There are many regulations to keep a close check on a homeowner’s association’s finances. All HOA management companies must higher a reserve study specialist every five years to complete a detailed reserve study.
A reserve study details the useful and remaining life of everything the community is responsible for maintaining. Common items an HOA is responsible for maintaining include:
- Street asphalt
- Lighting
- Landscaping
- Irrigation
- Walls (including stucco and paint)
- Community pools
- Parks
- Fences and gates
- Sidewalks, curbs, and gutters
- Trash receptacles
- Benches
The reserve study then breaks down the replacement cost and how much money must be added to the reserve account annually so the HOA can repair or replace each item at the end of its useful life.
A reserve study and complete financials are included in all HOA resale packages when purchasing a home. The financials detail the cash in an HOA’s working capital account account, fees collected in the year, and all the expenses for the community.
What if I don’t pay the HOA capital contribution fee?
If you don’t pay the HOA capital contribution fee, the homeowners association can place a lien on your home. Additionally, the HOA can charge interest and late fees on the unpaid balance.
When the time comes to sell the home, you must pay the lien in full, including all interest and charges.
It’s essential to budget for the HOA capital contribution fee when buying a home in an HOA community. This way, you’re not caught off guard by the cost and can avoid any penalties from the homeowners association.
How much are capital contribution fees?
An HOA capital contribution fee will differ based on the community. On average, you can expect to pay between $350 to $500, with some HOA’s charging thousands.
If you’re concerned about how much an HOA charges in a community you’re purchasing in, call the management company and inquire.
While speaking with them, ask about the fees for transfer or initiation fee, ordering a resale package, the HOA demand statement, and verify the regular dues and assessments.
Final thoughts
Every state has its own set of laws regarding HOA’s. For example, some states don’t allow working capital contributions. For most, you have to accept that this is the cost of living in a homeowners association.
A home is a long term investment, take comfort knowing your homeowner’s association is well funded and prepared when streets are damaged, lights are broken, or the community pool stops working.
Plan ahead and be prepared for several hundred dollars in extra closing costs.
Happy home buying.
