Transfer Fees and other add-on costs in management contracts

When I began managing condos back in the mid-’70’s, the management contract contained only a few add-on costs above and beyond the basic per-door management fee.  Copies and postage were the main two and I can’t even remember if their were any others.  We absorbed all other costs in the basic contract.  This worked fine for a short period of time – but times change.  In the early and mid-’70’s, most sales were first time, re-sales were rare, and managers were just beginning to understand the actual costs of managing an association.  In addition, just about anyone could hang out a shingle and claim to be a condo manager, so fees were kept artificially low as new people entered the field.  As the decade ended, a major recession set in, which meant money was tight, contract increases were rare and small, and a lot of real estate and apartment/commercial management companies, decided to expand into the community association field to help with cash flow.   As a result of all this (and after implementing just about every cost reduction they could), community association management companies began to seriously look at ways to generate additional revenue.  Add-on items, which had been few and far between became the method of choice, and has remained as a revenue stream ever since.

When I left management, in 1980, the average condominium management fee in my market $8.00/unit/month.  Using just inflation, that fee today would be $32.00.  Nobody in this market is getting anywhere near that and I would bet that it has been comparable in other markets.  So how are they coping?  Continuing cost reductions through technology has been a major factor, but the other major development has been the growth of add-on fees, from a few to… (the last time I looked over a number of management contracts) over 80 items.  In many cases, this additional revenue can be as much as 50% of a management companies gross income, especially in markets where basic management fees have remained artificially low.

When you look at them individually, they make some sense.  Most have to do with costs created by individual owners, or actions that cannot be foretold with any certainty.  An example of the latter would be a natural disaster, which requires major reconstruction supervision, insurance negotiations, administrative oversight, etc.  that would not normally have occurred during the course of a normal contract year.  In other words, if you can’t count on it happening and know what the costs will be, you can’t budget for it, therefore, it becomes an add-on item, instead of being included in the basic fee.

Transfer fees, the cost of providing information to a seller, who in turn provides this to the buyer or their lendor, real estate agent, title company or whatever, are one of these add-on cost items that has recently begun to the attention of state legislators.   This is one of the fees that are the result of the actions of an individual owner, in this case the sale of their unit/home, and not a common cost.  Any number of items may included in the package that is provided to the seller and paid for by them:

• A statement regarding the assessment status of the unit/home, including fines or other amounts that may be owed
• A statement regarding any violations of the documents or rules that have not been corrected
• Documents required by the buyer for their lendor, FHA, VA, insurance agent, title company or anyone else who wants to know something
• Association insurance information
• A complete set of documents, including rules and regulations
• and whatever else is needed to close the sale

Besides providing the documentation, the management firm is at risk if the information is incorrect and impairs or screws up the sale, so there is a liability cost (insurance) also.  Granted, much of this is automated, but someone usually reviews it (see liability) and the technology has a cost.  In other words, you can’t put a set of transfer documents together for a few dollars

Opponents want to see the transfer fee disappear, or at minimum, be capped at some low figure.  They cite the high costs, but provide no documentation to support it.  The fact that one company may charge a ridiculously high fee does not make it the “norm”, and in every instance that I’ve ever seen, add-on costs are incorporated into the management contract, visible to the boards approving them.  If they are successful the management fees paid by everyone will go up, to cover the costs created by individual owners.  The simplest solution would be to standardize the information that needs to be placed in a Transfer/disclosure document and then set a reasonable fee to cover it.  Information beyond what is required would be extra, based on time and material.  Please don’t forget that management companies are for-profit, and need to make more than cost to survive.