HOA Governance: Making the Management Decision

Community association management oftentimes can save money and headaches.  The number one reason many homeowner associations choose to self manage is to save money. Although an association may save money in management fees, the long-term benefits provided by a professional management company outweigh the short-term savings.

All too often, self-managed companies run into a consistent pattern of problems:

1. Financial/bookkeeping/reserves
2. Maintenance/Administrative
3. Governance/Legal

Financial/bookkeeping/reserves:
Financial recording and reporting is a large responsibility for any association, and not as simple as collecting dues and paying bills.

Association funds should be segregated.  Persons charged with the custody of funds may not commingle them with funds that do not belong to the association.  For example, many states require that monies set aside as reserve funds must be kept in a separate account.  It is easy for the board to find itself in a situation where it is not following local, state and federal law and, as a result, may expose the association to litigation or prosecution.

Managing, and sometimes building, the reserve fund is another area where self-managed boards might struggle. The reserve fund is designated for future major repair or replacement of common elements.  It is easy to fall into the trap of thinking that putting money away each month for reserves raises the maintenance fee to an unreasonable level.  In fact, some boards feel that future owners should pay for a component when it needs to be replaced, rather than creating a reserve fund to ensure that funds are available when it’s time to replace a common element component. In reality, the easiest way to make sure that no bank loan or special assessment will be necessary when an association’s physical asset requires replacement is regularly to set aside a specific amount of money every month from maintenance fee revenue. Consider allocating funds to reserves a form of user fees in which owners pay for the component as it depreciates.

An alternative is to consider having a professional reserve study performed by an independent expert, and then explaining to the owners the importance of funding reserves on an ongoing basis according to the reserve study recommendations.  By demonstrating sound fiscal management to the owners, a board can reduce claims of financial mismanagement because the directors sought out the advice of independent reserve study experts.  Another positive is that homeowners will have a high comfort level with the board, confident that the investment in their property is being managed properly.

Maintenance/Administrative:
Many self-managed properties fail to consider a maintenance plan for operating maintenance or future replacement programs.  This deficiency often leads to deferred maintenance, and deferred maintenance often leads to more expensive maintenance over time.
Some common examples include:

• extending recommended maintenance cycles, such as painting buildings every12 years versus the recommended seven years,
• failing to use a top coat on decks, which would waterproof and protect the wood, and
• failing to seal asphalt on a regular cycle.

Another consideration is the quality and experience of contractors.  I have seen flat roofs fail after five years because the work was done so poorly.  If the board had sought outside help to put together the specifications and monitor the work, the overall cost to the owners would be far less than dealing with leaky roofs, interior repairs and eventually replacing the roofs again far sooner than expected. Self-managed associations typically do not have an extensive vendor list for competent, honest and competitive contractors.

Not all problems relate to maintenance and money.  Self-managed communities require a few key individuals to step forward to deal with the day-to-day administrative business. Who do the owners call to report a problem, who handles emergencies during the day and in the middle of the night, who fills out lender forms and responds to escrow payoff figures?  Does the board outsource the bookkeeping or keep it in house?  Board members typically are the same people who usually end up enforcing the house rules and get ugly stares and cold shoulders from the violators.  What happens if these community leaders move or stop volunteering? Who steps up to do it?

Governance/Legal:
This section covers potential legal pitfalls and the following sentence should keep the reader’s attention:  an association board or individual board member may be held legally liable for failure to follow local, state and federal law or to act in good faith based on reasonableness and good judgment.  Self-managed community association board members often do not have the resources, background, training or experience to recognize potential legal hazards, but they are still required to comply with all mandates.

An example of self-managed association pitfalls includes:

• imposing improper limitations on satellite TV dishes (in violation of the Federal Telecommunications Act);
• denying certain rental applications (in violation of the Fair Housing Act); and
• failing to respond properly to homeowner disputes (in violation of ordinary and reasonable care.

Another serious consideration for self-managed association boards is the need to keep current on all new laws, statutes and ordinances. Joining the Community Associations Institute www.caionline.org is a way to ensure that board members receive timely updates on new laws and regulations, and the best way to ensure compliance.

In closing:
In order to avoid unnecessary risks, an association board may wish to explore hiring an experienced association management company to help guide them through the sometimes precarious, yet always eventful, experience of community association governance and management.
Linda A. Bartel, PCAM®, AMS®, LSM®
Senior Vice President
Principal Management Group of Houston
Houston, TX

Via www.hoamanagement.com