How HOAs Work in New Construction Neighborhoods

There are few things more hotly debated in real estate than Homeowners Associations (HOAs). These vital community resources sometimes get a bad rap as nitpicky or unreasonable. But here’s the bottom line - not all HOAs are the same. They are designed to evolve with the community over time. And when organized well, the services they provide are absolutely indispensable to everyone who calls their neighborhood home.

In this blog, we’ll talk about the role these associations serve in Minnesota's new construction neighborhoods. And we’ll summarize how an HOA changes from the beginning when homes are still going up, to years in the future when a neighborhood has fully matured.

The New Construction HOA Difference

When a new construction neighborhood breaks ground, the HOA is typically run by a professional, third-party entity, chosen by the builder. Later, these professional boards are converted into resident-run boards. Understanding these two distinct phases, and what will trigger the transition from one to the other, is key to understanding what an HOA will mean for you as a homeowner.

Phase 1: The "Developer Control" Period (The Declarant Phase)

When construction commences on a neighborhood, it is the developer (aka the Declarant) who is responsible for establishing the founding legal documents for the community. The declarant then appoints the initial board who will oversee the enforcement of community rules, covenants, and bylaws as the community is being built out.

During this phase, the declarant holds voting rights in the association because they own the majority of the lots. But at some point, the declarant’s control will end. According Minnesota statutes, this termination takes place when one of the following conditions is met:

• Five years have passed since the first home was sold to an owner other than the declarant in the case of a flexible common interest community.
• Three years have passed since the first home was sold to an owner other than the declarant in the case of any other common interest community.
• The declarant voluntarily surrenders control by giving written notice to the unit owners.
• 75 percent of the units have been sold to owners other than the declarant.

Phase 2: The Turnover Process (Transition to Homeowners)

Once one of the termination conditions has been met, a handover is automatically triggered from the declarant to the homeowners. This transition takes time and requires the completion of financial audits, amenity inspections, and the formal elections of a resident board. Depending on the community’s bylaws, the declarant may still have the option to appoint a director to the board. However, in most cases, the majority of the board must be appointed or elected by homeowners going forward.

Financial Mechanics: What Dues Pay For

A new neighborhood’s HOA has two main, interrelated responsibilities; collecting dues and maintaining shared amenities. Dues may be assessed on a monthly, quarterly, or yearly basis, depending on how the HOA is structured. Homeowners will also need to pay a one-time ‘capital contribution’ fee when they close on their new home, which is intended to help the HOA fund get off to a successful start.

Most of the money that’s collected goes to either the reserve fund or the operating budget. The reserve fund is a savings account used for less-frequent repairs like road resurfacing. The operating budget handles routine costs, including:

• Common area landscaping
• Entrance lighting maintenance
• Trail and alley maintenance

If the board is being run by a management company, a portion of the fees will also go towards compensating the company.

Essential Documents to Review Before Buying

Well run HOAs are important governing bodies whose work contributes directly to the neighborhood’s property values and residents’ quality of life. But to be absolutely sure a Minnesota HOA is a good fit for you, it’s always a good idea to read the fine print. Key documents you’ll want to review include:

• The Covenants, Conditions & Restrictions (CC&Rs)
• The community bylaws
• The Architectural Guidelines for fences, sheds, and other exterior changes.
• The Minnesota Common Interest Ownership Act (MCIOA)

Note that HOA dues will also impact your lender’s Debt-to-Income (DTI) calculations during mortgage approval. So be sure to leave some room in your monthly budget to account for the additional cost.

Minnesota-Specific HOA Considerations

The Minnesota Common Interest Ownership Act (MCIOA) has been in place since the 1990’s. It standardizes the legal framework for Minnesota’s HOAs, and includes a number of critical protections for both homebuyers and declarants. It’s worth a read prior to closing on any home with an HOA, to ensure you have a robust understanding of your rights and obligations.

Other factors specific to Minnesota HOAs are largely weather-related. HOA fees may be higher in Minnesota communities due to the additional management that needs to be done for stormwater, wetland protections, and winter road maintenance. Often, private plowing contractors are used to keep HOA managed roads clear, as opposed to municipal authorities.

HOAs in a Country Joe Homes Neighborhood

At Country Joe Homes, we structure our HOAs to protect the quality of the neighborhood and your home’s property value. To learn more, we encourage you to contact our neighborhood agents. They can provide you with specific guidelines for the neighborhoods you're interested in.