When Money Goes Missing from Your HOA
When homeowners in our HOA discovered our landscape contractor had not been paid for six months and our six pools and three spas were not safe to bathe in, our residents frankly went a little crazy with anger. Most of them had been faithfully paying their monthly dues and some had even paid a year in advance. So why had the HOA board neglected to pay the service providers? Even worse, why didn't the HOA board know about our impending financial disaster?
HOA Board Members had Delegated their Responsibilities to a Management Company
There was a general sense among HOA board members that things were not financially on track. Some board members were fully aware there was not enough money in the operating budget to pay current expenses, but not one board member could actually tell anyone why.
The HOA treasurer was quibbling with the management company over small amounts of money and had refused to pay invoices presented. Yet, no board member had fully examined the monthly financial statements or annual budget. A financial audit had not been performed in several years.
Although the HOA board had fired and hired other management companies, there was a common misguided belief among board members and homeowners that the management company held all power and responsibility to make the all decisions in the best interest of the Home Owners Association.
There was an erroneous belief that because board members are volunteers donating their time they have no obligation to work hard or diligently manage every contractor, including the management company. There was a total lack of responsibility to know and understand the multiple functions of the HOA community. They held a strong opinion that the management company would somehow automatically solve all community problems, review contract jobs and oversee community finances. The board had systematically and enthusiastically delegated all their responsibilities to management company.
Although each board member had signed a State Form 602 swearing they had read and understood all the association governing documents and State laws regarding common interest communities (CIC / HOA), most board members had not done so. They refused to inform themselves or spend the time necessary to learn their individual obligation to manage and protect their community.
I have to admit, it was not entirely the board's fault. They had little information and no tools that could alert them to the community's dire situation.
The Community Had Already Been Hit Hard
The community had already sacrificed and followed the misguided advice of a prior board president to borrow $200,000 to pay for repaving worn out streets full of pot holes. This decision merely passed the expense of replenishing reserve funds on to present and future homeowners.
To avoid angry homeowners, the board had simply postponed the pain and hid amortized loan payments in homeowner monthly fees for years to come.
Was Borrowing a Wise or Prudent Decision?
The decision to borrow money did kick the proverbial can down the road and provided for immediate street repairs. It also avoided the executive board from having to impose a special assessment on homeowners and face the displeasure of homeowners.
Hottest Topic Among HOA Homeowners
Possibly the hottest topic in any homeowners association is the monthly fee amount. Virtually any community homeowner you ask will tell you they want lower monthly fees –even when it means neglecting common area repairs or abandoning community amenities. Professional communication tools can help with this process.
Most HOA boards will erroneously go to great lengths to avoid raising monthly fees. Those who dare to raise HOA fees risk being recalled or losing their position in the next election. Sadly some board members try to deflect homeowner disappointment by blaming the management company.
Management companies too often take advantage of these situations to take control of HOA communities and manipulate boards and homeowners into electing board members that delegate board responsibilities to them. When this happens management companies can herd HOA client communites into their cookie cutter business plan. This makes the management company job easier saving them time and adding dollars to their bottom line. Management company control grantees a complacent HOA board and ill informed community.
Please don’t take my statements to mean management companies are all evil or unnecessary. Just like the HOA landscaper, pool service or pest control contractors, legal counsel, debt collection and insurance agent, management companies can be great team members and must be managed by proactive boards.
Short of Cash; Destined for State Receivership
Fortunately for our community elections were already scheduled. Almost no homeowners wanted to run for office. All the usual reasons for not participating in an HOA elections plus the financial crisis facing the community had dampened the usual sing-along mood for volunteer service.
When homeowners discovered the empty bank account and unpaid bills, their nearly unanimous reaction was “the management company must be stealing our money”.
It was tough persuading neighbors and friends to withhold judgment. The possibility of immediately doubling HOA dues caused anger and disappointment. Homeowners who had not been to an HOA meeting in many years were suddenly involved and up in arms.
There was good and bad. It was good to see so many homeowners taking an interest in their community. It was sad that they had not been more involved earlier. The community critically needed an easy way to communicate with each other, with their board, the board with vendors, committees. The needed an automated record keeping system to help them manage all aspects of their community.
As new board members began to peel back the layers of neglect and short-falls, it was a huge eye-opener for homeowners and board members alike. Board members for the first time became very proactive. They immediately took their rightful position making all management company decisions and homeowner requests subject to executive board review and approval.
There was a complete review of all the bank accounts, vendor accounts, reserve analysis, service providers, association budgets and individual homeowner accounts. All existing service contracts were re-bid and required competing bids from at least three licensed and ensured contractors.
During the total review process, the board discovered several major flaws.
The operating account did not match the expected monthly income paid by homeowners.
Some homeowners were not only behind in paying their dues, but had not paid for more than two years.
Homeowner accounts set up for automatic payment were not being collected.
Although the management company had not provided sufficient accounting oversight, and, frankly, neither had the HOA board, the management company did not have the missing funds.
Following the money, the new board discovered the error seemed to lead to the bank. After meeting with bank officials several times and investigating the money trail, the bank admitted the HOA lock box had been set up improperly and therefor funds to the tune of $140,000 had not been credited to the HOA account.
Continued: How’d the HOA get itself out of this mess and avoid state receivership...