HOA Transfer Fees
The subject of "transfer fees" can be rather confusing because the same term is used to describe very different transactions. On the mainland there can be scandalous Private Transfer Fees (also known as Reconveyance Fees, Capital Recovery Fees, Residential Transfer Fees, and Transfer Fee Covenants) charged by US developers and paid by homeowners every time a property changes hands. The fees are filed in the public record, run anywhere from 20 years to perpetuity, and require up to a 1% fee to be paid at the closing of a property each time the property sells, by either the buyer or the seller. That would be like A&B getting paid $9000+ every time a house changed hands. Eighteen states, including Hawaii, have passed laws restricting this type of developer transfer fee. This is NOT what we are talking about here; I define these fees because the only Hawaii law that addresses HOA transfer fees simply states that they do not fall under the prohibition against developer transfer fees. I think clearer guidelines are needed because this lack of legal structure has resulted in abuse by unscrupulous individuals who cannot be prosecuted because of this gray area of the law.
Fortunately, Hawaii law HRS §502-112(a) prohibits these developer transfer fees. The (b) section of §502-112 states that this prohibition "shall not apply to the following fees or charges...: (2) Any fee, charge, assessment, or fine payable to... a planned community association as defined... in chapter 421J ...including a fee or charge to change the association or corporation's records as to the owner of the real property..."
I have asked at least ten different escrow officers about transfer fees over the years and each has given me essentially the same answer as Markay Saling in the email below...
An HOA transfer fee is a one-time fee charged by the managing agent and paid by the buyer during escrow when the property title changes from one owner to another. HOA transfer fees are authorized under federal, state, and local real estate laws. Governing documents have no jurisdiction over them; therefore, they will not be found in the DCCRs or Bylaws. This article from First American Title illustrates that these fees are standard escrow closing costs throughout the United States. During this period, the escrow/title officer acts as a neutral third party who has the responsibility to transfer the title of a home from seller to buyer once both parties have done everything they agreed to in the purchase agreement. Escrow officers do not question anything; they just do what they are told by whoever answers the demand letters.
In my opinion, there is insufficient legal oversight of what fees are charged during escrow. The critical factors are: (1) who is charging the fees and (2) who gets the money. Virtually every time a covenanted property changes hands, a transfer fee is charged as well as document fees. This has been "common practice" for probably 50+ years. The alarming fact (which I first discovered in 2001 and confirmed to still be the case as of Jan 8, 2016) is that there is no oversight over who gets the money. Because it is paid by the buyer to the title company (a middle-man) as one of the many escrow fees, the payment does not go through the Association's books and does not show up in any HOA financial reports; therefore, many HOA Boards still have no idea what a transfer fee is or that their new owners are paying this fee. Often management companies take advantage of the Board's ignorance and list handling the escrow demand letters in their management contract without mentioning that they will make these fees payable to themselves. Escrow agents simply do what they are told in the demand letter; their job is solely to collect the fees and distribute the payments without questioning anything. I suspect the escrow companies do not even 1099 the management companies, so this income may go unreported to the IRS. This is certainly what Lyn Erickson, the KB Bookkeeper, was doing in 2002-2003.
According to a professional property manager, Association transfer fees are "common practice" and the amount of the fee is supposed to be determined by the Association. But what more often happens is that the Board members (usually untrained homeowners) immediately delegate all Board responsibilities to a management company, CPA, or bookkeeper. These "delegates" are more than happy to take control of the money management, especially the escrows. Because what they do is unseen by the Board, they can charge whatever they want for the transfer fees and the governing documents. This additional income can be quite a substantial embellishment to their salary. For example, Valley Isle Management charged the buyer $325 for the transfer fee and charged the seller well over $300 for our governing documents. That's $625.00 for each house sold in addition to their $629 per month salary. The 2011 Board had no idea this was happening. As a fraud examiner, I found this situation precarious and unacceptable. Our new owners were being fleeced and the HOA received $0. Valley Isle was charging the fees in our name but they were keeping all the money.
Why we feel our transfer/membership fee is more than fair:
First and foremost, because it is paid to the Association rather than to some 3rd party. When Luba Reeves became President in 2012, we fired Valley Isle Property Management (VIM), who were doing a terrible job. Kuau Bayview has been self-managed ever since. The Kuau Bayview annual dues dropped from $300 to $100. Previous Boards had been collecting $18,400 per year more than we are collecting now yet they were still operating at a loss. Unbeknownst to the 2011 Board, new owners were paying to VIM more than $625.00 in transfer & document fees and also paying $300 in annual dues. Neither the new owner nor the HOA received one iota of benefit from that $625+ payment. Now new owners pay a one-time $600 transfer/membership fee to the HOA, $0 for documents (as they are available free online), and only $100 in annual dues. For only $600 new owners get the benefit of the $84,000 in savings we have accumulated from all the original owners paying $300 per year for most of the past 20 years. The $600 contribution from new owners helps enable us to keep fees at $100. This $600 is recouped in 3 years due to the reduced fees. New owners get a very cheap buy-in to our healthy reserves while their transfer fee benefits all owners including them. The transfer fees figure into the budget and appear on all the financial reports. Without them we would have to raise fees. We feel this arrangement is a win-win and more than fair to the new owners who are getting a much better deal than we got. As of Jan 2016, original owners have each contributed $5,472.00 in dues to the "pot" in order to have built up the healthy bank account. Back when we bought our houses, there was $0.00 in the bank and we all had to pay a "special assessment" just to cover the cost of the mailboxes. Just as in a poker game, it is only fair that the latecomers who want to join the game have to pay a "buy-in" to get the benefit of what we have saved up in the bank over the past 20 years. Original owners have each paid 6.5% for their share of the HOA assets. New owners are currently asked to pay only 0.7% to get just as big a share as those who paid 6.5%. Does that seem fair? When the Retention Basin fence needs to be replaced, why should it be paid only with the savings of the original owners without new owners contributing a cent?
Why New Laws Are Needed:
Here is an excerpt from Valley Isle Property Management's contract (which the 2011 Board never read) in which they gladly offer to handle the escrows and make it sound as if they are doing us a favor by providing us a service for which we won't have to pay because it will be charged to the new owner. What 99% of Boards don't realize is that the management company has just given themselves a huge raise by embellishing their income on the backs of new owners, unbeknownst to the Board and without the HOA or the new owner deriving any benefit whatsoever. They also sell the HOA documents (which they get from the HOA) for exorbitant prices and keep the money for themselves! I think this is a scam that should be stopped, but there is still no legislation or governing body that oversees these escrow transactions. I feel the transfer fees should always be paid to the HOA, NOT the management company or anyone else. If an HOA hires a management company, in my opinion, the escrow tasks should be included as part of their job description and it should be illegal for escrow companies to make transfer or document fees payable to anyone but the Association.
Escrow Demand Letters:
I have spoken with several escrow agents and they were all very quick to answer that they do exactly what they are told to do in the demand letter. It is not their job to question anything. This is exactly where I think the problem lies. Whoever can manage to get control of the demand letters can literally write their own ticket. I have yet to find out who granted these demand letters absolute power. When a property is sold in any Association, the escrow/title company sends a demand letter to whoever is managing the Association. This is usually a property management company or someone who has that role. That person answers a few questions about dues then sends the letter back to the escrow agent with instructions. Here is an actual demand letter filled out by the Kuau Bayview bookkeeper, Lyn Erickson, in Dec 2002. Notice how she instructs them to make the check payable to herself (!). She could make it payable to anyone and the escrow agent would do her bidding without question and with no notification to the Association...