What Homebuyers Need to Know: Transfer Fees

What is a one-time entrance or buy-in fee? What’s the best policy for boards to follow regarding such fees? What do boards use them for and how much are the fees? Are they mandatory? Do you have a reserve fund designation for this fee or is it used as needed for operating cash?

A one-time entrance or buy-in fee, commonly known as “transfer fee” or “capital contribution fee,” is a financial charge imposed by an association when the ownership of a unit changes. These fees are typically collected to contribute to the association’s reserve fund, which serves as a savings account intended to cover future capital improvement projects. These fees are typically paid by the buyer but the buyer and seller can negotiate as to who will pay the fee. One rationale behind these fees is to assist the funding of the reserve account.

The amount of the fee can vary significantly depending on the association’s policies and the governing documents. It might be a fixed amount (such as $500.00), a percentage of the property’s sale price (such as 1%), or an amount equal to two or three months of common fees. This flexibility allows associations to tailor the fee structure to their specific financial needs and the economic needs of the community.

While these fees are not mandated by law, they can be required by the association’s governing documents, such as the Declaration or Bylaws.  Therefore, it is important for potential buyers and current owners to review these documents carefully to understand their financial obligations.

The implementation of transfer fees should be handled with transparency and fairness. Boards are advised to clearly communicate the purpose and use of these fees to all members.  Boards should also adopt policies to ensure (with limited exceptions) that they are used for their intended purpose—offsetting future capital improvement projects.

It is also essential for boards to consult with a local attorney to confirm the legality of these fees in their specific jurisdiction. State laws may have provisions regarding the authorization, limitations, and procedures related to transfer fees.

In summary, transfer fees serve as a financial tool for associations to prepare for future capital expenditures, but their implementation must be carefully considered, legally compliant, and transparent.