For most community associations around the country, monthly assessments make up the bulk of an HOA’s income sources. Homeowners need to collectively contribute enough each year to cover the operating costs of the community, contribute to reserves, and fund any capital improvements that will improve life in the community.
But, if your HOA is in Utah, you have an additional revenue source available to you that may help cover the costs of the community and keep assessments lower than in other states. That option is the Utah HOA Reinvestment Fee.
What is the Utah HOA Reinvestment Fee?
Utah law allows community associations to charge an extra closing fee of up to 0.5% of the sale price on the property. (Unless your community is more than 500 units or 500 acres.)
You may recognize this ‘closing cost’ from the fee structure for real estate agents, brokers and title insurance. Like these other closing costs, HOA reinvestment fees can be paid upfront by the buyer or rolled into the loan through seller concessions.
Who Benefits from the HOA Reinvestment Fee?
HOA reinvestment fees are earmarked funds that cannot be passed on to another entity or used for outside projects. That means none of the money collected goes to the management company, the developer, or any other party.
Reinvestment fees must be used by the community association to reinvest into the community. This includes maintenance, upkeep and improvement of the common areas that benefit association members.
When Does a Reinvestment Fee Apply?
A reinvestment fee is only available to the community association when a home is sold. It does not apply in all title transfers. So if the homeowner dies and the home is passed to their heirs, the home is transferred to a close family member, or a court orders a transfer, or some other involuntary transfer occurs, the reinvestment fee does not apply.
What are the Advantages of the HOA Reinvestment Fee?
One of the most important benefits of the reinvestment fee is the ability to keep monthly assessments low. A home that sells for $400k in an HOA with a .5% reinvestment fee will net $2,000 for the association. For a community with a 12% annual turnover, it can add up pretty fast. That money can be reinvested into the community, instead of needing to draw the same funds from assessment income, helping to keep assessments lower for everyone.
The homeowner (both buyer and seller) benefit from the overall suppression of assessments. Considering the average length of time a Utah homeowner stays in their home is around 12 years, the reinvestment fee is repaid several times over in the course of their time owning the home.
For the community as an organization, the reinvestment fee allows the diversification of revenue sources. The association isn’t reliant on the monthly assessments as a sole source of income. This can be helpful when events come that affect the community as a whole, such as a global pandemic or once-in-a-lifetime polar vortex, or some other (completely fictional) life-altering event.
What are the Disadvantages of the HOA Reinvestment Fee?
Nobody likes to be blindsided by additional fees they need to pay, particularly at such an incredibly stressful time as when closing on a new home. The biggest objection to the use of the HOA reinvestment fee is the fact that the home buyer was unprepared to pay the fee at closing.
Utah lawmakers recognized this potential roadblock when they enacted the law, and that’s why every community association that adopts a reinvestment fee policy is required by law to post a public notice of the reinvestment fee. If HOA Strategies manages your community, we will also post your reinvestment fee notice on your community’s page on your behalf.
Communication is Critical
As with all financial matters, transparent and open communication is the key to success. In the same way potential buyers should be made aware of monthly assessments before they buy so they can work those fees into their budget, they need to be forewarned about reinvestment fees. If your HOA chooses to adopt a reinvestment fee policy, make sure that real estate agents, sellers, and potential buyers are aware of the costs and prepared for them before closing day.
The decision to adopt a reinvestment fee policy is one that every Utah HOA board of directors should carefully consider to determine what is right for your community. Whichever you choose, HOA Strategies is here to advise you on the best strategies to manage your community. Contact us for a free strategic evaluation today.