Where does the money go?

WHAT ARE THEY DOING
WITH YOUR DUES?
by Karen Conlon,
President, CACM

You keep your patio neat, your radio down and your homeowners association dues paid on time. But how can you be sure those dues are being used for property repairs, maintenance, taxes and other association costs?

Approximately 98 percent of the time, your dues are being properly applied. However, there are those rare instances of embezzlement or mismanagement, from either a member of the homeowners association board of directors or an employee of the association management company that you, as a homeowner, need to guard against.

For example, in one instance an association board member who was a contractor by trade worked on the landscape committee and offered to purchase all the association's materials. He set-up an account at a local nursery, under the association's name, and began buying a wide variety of items.

After several months during which several thousands of dollars worth of goods had been purchased in this manner, an investigation of the nursery account revealed that: 1) all the items purchased on the association's account had been delivered directly to the board member for use in his own contracting firm, and 2) the board member had received financial kick-backs from the nursery for all the purchases.

Embarrassed by their oversight, the other board members reimbursed the association out of their own pockets and asked the contractor to resign from the board.

But other associations can't resolve the problem of fraud that easily. Since they have a monthly income flow, associations do not want to file for bankruptcy which leaves homeowners themselves to fill in the financial hole. As the number of homeowners associations grow, so does the possibility of these unexpected special assessments.

In Northern California there are approximately 10,400 common interest developments (CIDs) such as condominiums, condominium conversions, planned unit developments and cooperatives which require a homeowners association and an association management firm. This figure represents 1,100,000 individual units housing approximately 2.5 million people.

According to recent projections by the California Department of Real Estate, some 80 percent of all future residential communities in Northern California will be common interest developments. With that in mind, homebuyers are best advised to protect themselves and their investments by knowing the questions to ask before they buy, how to spot fraud or mismanagement, and what to do if they suspect problems.

Some of the most important questions homebuyers should ask prior to purchasing a common interest development home is whether or not the community requires any major repair work, and if there are pending lawsuits or a history of litigation. Buyers might speak with the board president regarding any other current community concerns, and to ascertain when the association holds open board meetings that homeowners are allowed to attend.

Secondly, homebuyers need to make sure that the association management firm and the homeowners association have the appropriate types and levels of insurance. In fact, it's a state statute that the seller of the home provide this information about the association.

Typically, the homeowners association board of directors hires the association management company. That company has a fiduciary responsibility to collect dues and pay bills. However, the board has the ultimate responsibility for the association with the association management firm following the board's policy.

Depending upon the number of units involved and the level of possible exposure, the management firm should have at least $1 million in professional liability insurance which covers breach of duty, errors and omissions. The management group also needs to carry fidelity insurance which covers employee theft of management company funds, as well as a general office package that includes such basics as workers compensation, general liability and fire.

The homeowners association should also carry fidelity insurance. And it's very important to have the management firm listed as an additional co-insured on this policy.

Several years ago, a large management firm was caught embezzling millions of dollars of homeowner associations' funds. Eventually, the company's owner went to jail and the company itself filed for bankruptcy. Unfortunately, the management company was not listed as a co-insured on the association's fidelity insurance policy and thousands of homeowners were faced with unexpected assessments to make up the lost funds.

Homeowners associations should also carry directors and officers liability insurance as well with the minimum standard amount of $1 million. In fact, many times the community's covenants, codes and restrictions (CCR's) and California statutes require minimum levels of insurance coverage.

Finally, buyers should ascertain whether or not the community association manager and/or the association management firm is certified by a recognized trade association such as the California Association of Community Managers which is the only state-specific organization for association managers in the country.

Once the buyer has moved in, how can he or she spot mismanagement or fraud before it's too late? Actually, it's a lot easier than one might think.

By law, the homeowners association must send out certain financial documents on an annual basis. Each owner should be sure to read them, checking for such things as: Is the management entity collecting at least 85 to 90 percent of the monthly association dues owed by homeonwers; are the funds being held in an interest-bearing account in the name of the association; and has a reserve account been set aside for long-term maintenance and repairs?

If the answer to any of these questions is no, the homeowners association may be on shaky financial ground. Owners can also be on the lookout for fraud by verifying that the endorsement stamp on the back of their monthly dues check is that of their association and by walking around their community from time to time to make sure it is being maintained in acceptable fashion.

If a homeowner has a complaint, what can he or she do about it?

First, owners should call the association management company and ask for answers to their questions. If necessary, a complaint documenting concerns should be filed. If it takes more than 30 or 45 days to get a response, the problem may well be with the management firm itself.

If owners don't get a response, or receive one that's unsatisfactory, their concerns should be presented at the next board meeting. It's up to the board to resolve the issue and if the board doesn't do so, owners can actively pursue the election of a new board.

It all boils down to owners, the board association and the management company doing their homework and communicating their concerns. When each member of the team works in concert and respects the rights and duties of everyone else, it's a win-win situation for all concerned.