What Is The HOA Initiation Fee? Do Homeowners Need To Pay It?

There are several closing costs associated with buying a home. When you buy into a homeowners association, though, you might come across a unique cost called the HOA initiation fee. But, what is this fee and why does it exist?

What Is An HOA Initiation Fee?

An HOA initiation fee, otherwise known as a buy-in fee, HOA capital contribution fee, or HOA cap fee, is a fee that you have to pay when you buy a home in an HOA development. Buyers will typically find this included in the closing costs of a home sale. However, it is worth noting that not all homeowners associations charge an initiation fee.

If an association does require an initiation fee from new members, though, it must be expressly stated in its governing documents. Without such a stipulation, it can be argued that the HOA has no authority to charge this fee.

As for how much initiation fees are, it depends on each community. Communities located in wealthier neighborhoods usually charge a higher initiation fee compared to their counterparts. The governing documents may also outline how much these fees can be. That being said, initiation fees can range anywhere from $100 to an entire year’s worth of regular dues.

Are Initiation Fees Legal?

HOA initiation fees are legal and quite common in planned communities. However, they must be expressly authorized within the governing documents. Moreover, some states impose caps on how much the HOA initiation fee can be.

HOA Initiation Fees vs Regular Fees

An initiation fee is usually something that new homeowners or members have to pay to the association. In other words, it can be considered an entrance fee. In contrast, regular dues are ongoing fees that all members must pay. Regular dues or fees fund the expenses of the community — expenses needed to keep the association running.

Initiation fees either take the form of a fixed dollar amount or an amount that follows a uniform formula. Regular fees, on the other hand, are computed on an annual basis. Typically, the HOA board comes up with a budget for the year that includes all of the association’s anticipated expenses as well as expected reserve contributions. From there, the board will determine how much to charge each homeowner to meet the projected budget.

HOA Initiation Fee vs Special Assessments and Fines

Homeowners associations will charge special assessments occasionally. Communities often use these funds to pay for unexpected expenses such as the cost of major repairs after a natural disaster. Some also impose special assessments to cover the cost of increased insurance premiums and fund the reserves.

While developers may charge HOA initiation fees to fund reserves, they are typically a one-time payment. Homeowners associations do not charge them regularly or when there’s an unexpected payment. That’s what special assessments are for. Instead, they’re only charged when there’s a change of ownership.

Meanwhile, fines are an entirely different payment homeowners need to make. Simply put, fines are monetary penalties that homeowners pay when they violate the community’s rules. They are not imposed otherwise.

HOA Initiation Fee vs HOA Move In Fee

People often confuse the HOA initiation fee for the HOA move in fee, but they are different. HOA move in fees, also called transfer fees, are those imposed by the HOA during a transfer of ownership. The HOA requires these fees and the buyer or seller cannot negotiate their price.

Unlike HOA initiation fees, transfer fees cover the cost of transferring ownership records. The HOA also uses them to prepare and distribute documents, change security codes, swap amenity passes, and update databases. These fees are paid usually at the time of closing.

Moreover, unlike initiation fees, the seller is often responsible for paying the HOA transfer fees. However, this is not set in stone. Some contracts pass the burden to the buyer, relieving the seller’s burden to pay them.

The Purpose of HOA Initiation Fees

If homeowners associations already charge regular dues, then what are initiation fees for?

Developers usually charge this fee so that they can save money on the cost of the lots. Other times, developers use the money to pay for the general operations of the community. The idea is to get the community going with enough funds until they can transfer control of the HOA to the residents.

Some developers also use the initiation fee to fund the reserves of the association. Keep in mind that a few states do require HOAs to maintain a reserve fund. For instance, Oregon law mandates that HOAs should create a reserve account to fund major maintenance, repair, or replacement of all items of common property.

Established associations charge initiation fees for the same reasons. The extra cash flow usually goes straight into the association’s reserve fund or is used as working capital.

How Often Do You Need to Pay Initiation Fees?

Most of the time, the initiation fee is a one-time fee that only the first owner of the property has to pay. But, it is becoming increasingly common for HOAs to charge this fee every time a property transfers ownership, provided the association’s governing documents expressly permit it.

In the second scenario, every new homeowner in the community will need to pay the initiation fee. However, after paying this fee upon the purchase of the home, existing owners won’t have to pay the same initiation fee again.

Who Pays HOA Capital Contribution Fees?

In some cases, only the initial owner of the property shoulders the cost of the initiation fee. This first owner pays the fee to the association, which is often still under the control of the developer.

However, in other cases, homeowners associations charge an initiation or buy-in fee every time the property changes hands. As such, every new homeowner will have to pay the fee. In this way, initiation fees act as an entrance fee for new members. Buyers will normally find the initiation fee included in the closing costs. Therefore, the buyer usually pays for the fee.

If the buyer doesn’t want to pay the fee, they can try to negotiate with the seller and have them shoulder the fee instead. But, this does not always work since the seller isn’t the one gaining new membership to the HOA. Besides, the seller would have probably already paid that fee when they first purchase the house.

Sometimes, though, sellers will throw in that fee as a way to sweeten the deal. This is especially true when it’s a buyer’s market. To avoid any surprise costs, buyers should always do ample research on the house they plan to purchase.

When Are HOA Initiation Fees Paid?

It depends on what’s stated in the governing documents. Often, new homeowners need to pay the initiation fees at closing. However, some associations have it due 30, 60, or 90 days after closing.

Can You Lower HOA Initiation Fee?

In theory, it is possible to lower the initiation fee. But, this is not something that’s within the power of the homeowner or buyer. Lowering the initiation fee would require the association to amend its CC&Rs. And, such amendments normally require a majority vote of approval from the membership.

While buyers can certainly try to negotiate with the HOA for a smaller fee, this does not usually pan out. It would be unfair for an association to lower the initiation fee for a single person when everybody else in the community had to pay the same amount. The best thing a potential buyer can do is to either ask the seller to pay for the fee or just pay for the fee themselves. After all, it does go toward the betterment of the community.

Do All HOAs Charge Initiation Fees?

Not all homeowners associations charge an HOA initiation fee. This is because only those who have it written in their governing documents can charge it. Moreover, some states limit which types of HOA can charge an HOA initiation fee.

If an HOA does not have authorization within the governing documents, they can only charge this fee through an amendment. However, association members often need to approve the amendment before it can take effect. Nonetheless, homeowners often approve the amendment as it affects only new owners, not current ones.

Can Homeowners Refuse to Pay?

An HOA initiation fee is a financial burden to new homeowners so it’s understandable that they do not want to pay. However, there’s often no other way to get around them. If the governing documents and state laws allow, the initiation fee is required. Homeowners are obligated to pay it.

On the other hand, they can try to ask the seller to cover the cost upon closing. However, some sellers will refuse to pay the fee. This leaves the new homeowner with no other option but to oblige.

What Is An Initiation Fee? Answered!

Buyers don’t want to pay more money than they have to, and that’s completely understandable. But, buyers should also know that an HOA initiation fee is legal and serves an important purpose in the community. As such, if you plan to purchase a home in an HOA development, you must be prepared for the costs that come with it.

Is your HOA board having a hard time keeping track of fees and collections? An HOA management company can help. Start browsing our online directory to look for the best one in your area!

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