know that the mindset of many people who find themselves on the board of their HOA is less than magnanimous. Here are some of the various statements I hear from boards that are in trouble or heading for it:
I just wanted do the minimum. I didn't want to be the one to ask for more money. Things could wait. No one else is stepping up. I've got a real job anyway, and don't really want to do this. I am thinking of resigning.... or
What's the bid deal, I could do this in my sleep. We decided to volunteer for the Board because they meet over coffee and that seems easy enough. There's not much to it. It doesn't take a Rocket Scientist.
Right. It doesn't take a Rocket Scientist. But it does take someone who cares about their investment, and who is responsible enough to try and do a good job at whatever they sign on to do. It takes someone willing to listen, learn, show up, participate, and lead. It doesn't take someone who wants to make more friends. This is business. Your decisions affect not only your own asset, but the investment of everyone else who lives in the HOA and all those who buy in the future. It does not have to be a daunting task, but it takes guts and commitment, and a strong backbone. You can't be everyone's friend all the time. You can't make everyone happy with every decision. But you can be a good leader.
When you see what happens when "friends" don't want to manage "friends", or the "leadership" of the HOA has little understanding of (or ignores) what needs to be done, or you think "keeping the dues artificially low", or not funding the reserves is a good idea, think again. Because this newsletter will open your eyes to how this kind of carelessness in an HOA can spiral out of control.
What's Wrong with Trying to Be Everyone's Friend?
One of the HOA examples in this newsletter consists of many long-time residents, most of whom know each other, good neighbors. This is the good news. They have become a closely knit community that welcomes new owners. From the outside looking in, and especially if you know someone who lives there, this HOA looks inviting, a warm, fuzzy place to live. However, if you are looking at things other than the "low dues" and the "nice people" who live there, you might see a chink in the armor.
In one condo association, several years ago, there was an unanticipated problem that required a large special assessment. After that everyone became gun-shy. No one wanted to increase the assessments. No one wanted to serve on the board. A couple of people stepped up but on the platform of not raising assessments.
In another condo association, no one wanted to be on the board. Directors were recruited on the basis that a manager would be hired so there wouldn't be any work involved. A manager was hired, and immediately put severe restrictions - no big dues increases. No special assessments. The manager would put suggestions out there such as recommending the buildings be inspected, paint was needed, you need a reserve study. The board vetoed anything that they considered "costly" so management became gun-shy. The manager wanted to keep her job. So she went along.
In condo association 3, 3 "little old ladies", "coffee clatch" friends, stepped up to serve on the board. They were likable people who were more interested in shooting the breeze than getting serious about managing the association.
In all of these associations, the assessments have remained low for 15 - 20 years. They have not experienced any grumbling about money and the delinquency rate is nil. However, now they are all facing big problems. The reserves in each of these are insufficient to do any major work, in fact, less than 5% of what it has recently been discovered is needed for important maintenance and repairs to the buildings. No painting, roofing, dry rot or termite work, or extensive work of any kind has been done for more than 15-20 years. Being that this is a condo, the HOA is responsible for maintaining the buildings. But none of the directors bothered to find out what was needed, and in the case of the managed association, did not listen to the manager's recommendations.
What they should have been doing was saving for reserves, and in the case of the self-managed associations, should have considered hiring someone who did know what they were doing to help with management or accounting, record keeping and the lot. The manager who sat by and watched the board breach its duty did the association no favors. In these associations, at times there was talk about needing painting or roof work, but owners balked and said they would not pay. So the directors dropped it. In one association, these people were all "friends". No one wanted to push.In the others, apparently no one really cared.
In the two "unmanaged" associations, the directors thought they were doing work that deserved compensation. In one they simply stopped paying assessments, In another, they actually paid themselves. Both equated to about $200 per month per director. Should people get paid, or assessments waived, when the people are not educated, trained, experienced, even cognizant that a fiduciary duty exists?
Instead of paying 3 directors upwards of $600 a month by deferring assessments, isn't it better to pay that money to a responsible manager or accountant to at the least prepare good financials, collect assessments, and help establish an annual budget that covers costs and collects reserves and/or for a good reserve study?
These directors all needed a reality check and guess what - they got it.
Fast Forward 15 Years: The same people have served on the board forever because no one else wanted the job. In the three situations they either (1) commissioned a reserve study because someone told them it was required by law, or (2) found out there was a major issue with a building because of some event - in one, a rain storm where the roof leaks were staggering, and in the other, when an inspection was done related to a sale, substantial dry rot was discovered, and it was widespread. In each, they found the HOA costs will be $300,000 to $450,000 because of serious deferred maintenance. When the reserve study was done, the cost was logged as a deficit in their books. Yikes! In all cases, when the boards tried to discuss this up at open meetings they ended up going into hiding, because they found that otherwise the owners just shouted back: "We're not going to pay for this!"
Because of this secrecy, and the lack of records establishing this problem, some units sell and buyers move in who are completely unaware of what they are buying into. For that matter, the current owners are either in the dark or in denial and so they have not made proper disclosures, nor has the board, in response to escrow demands. And the manager is getting nervous because the board is looking for someone to blame.
Let's look at what happens next:
Let's Convert to Planned Development, Shall We? Or get owners approval to amend the CC&Rs to shift all of the heavy lifting maintenance to individual Owners. What is wrong with this picture?
In one association, the board was encouraged to eliminate the "deficit" by converting to a planned development (PD). The intent was to shift all responsibility for the maintenance of the homes to the owners and become "self-sufficient".
Recognizing that the difference between a condo and PD involves who maintains what and who is responsible for the structure itself, it might work. Except that when the burden for maintenance and repair for attached homes shifts from the association to the owner, there are many things that are lost including economy of scale for the work, ease in arranging work for attached homes, forced savings for the big jobs, equal sharing of the burden of maintenance and repairs, and clout. Who really thinks that in an association where owners are unwilling to talk realistically about saving up for the big jobs those same owners will be willing to pay to fix up their individual properties?
Sure, the deficit showing on the books may be resolved if the conversion goes through, but what about home inspections when people try to sell? Roof leaks or water intrusion due to the building skins being deteriorated? Questions about these show up when one tries to get insurance. What about the way it will look when some people fix up their homes and others do not.Ę What happens when one owner in a building wants to paint, roof, or upgrade and the others owners in the same building prefer to use a handyman to patch things up? The serious deferred maintenance will cause problems.
And what about the cost of the "conversion process"? My understanding is that even for a small association, it is probably in the range what these associations had in their reserve accounts.
And the process is involved. IT IS A VERY BIG DEAL to convert from a condo to a PD. All deeds, mortgages, maps and documents are affected. They all must be redrawn, and in the right way. The cost is high and so is the approval rate. It could be as much as 100% of owners and 100% of lenders. Yes, lenders do have a stake here. They have different lending parameters for lending for condos and PDs. So the association could use up all of its meager reserves trying to convert, and find out it didn't work.
What if the Board simply decides to try and amend the governing documents (which also requires owner approval) to shift the maintenance responsibility for paint and roofs to the owner, which doesn't require the extensive changes that the conversion process does. With either choice, there are other considerations that cannot be ignored.
Should The Board Put a Halt to Maintenance or Repairs During the Conversion or Amendment Process? The conversion process takes a very long time. The reserves were insufficient to do much maintenance anyway. Should the Board avoid doing maintenance on the buildings altogether awaiting either process? It is a damned if it does, and damned if it doesn't. If it's an El Nino year in California, as predicted, the roofs or siding may start leaking, problems may escalate. More damage may occur due to failure of the "protective coverings" of the roof, paint, or siding on the buildings. If the Board arranges maintenance on some homes, but not all, then what happens if the PD comes into being or the document amendments pass? Do those people have to pay the association back? What if a "one building" $10,000 roof job turns into a $30,000 job because of dry rot or termite damage under the roof (because of the long term deferred maintenance). Having spent all the reserves on the conversion process, does the Board impose a special assessment on everyone to cover shortfalls? And thereafter make everyone else to pay individually to make the same repairs to their own homes without seeking recompense from those lucky owners who got work done? (After all, historically, asking for money from owners has not been the Board's strong suit.)
One tried the conversion process, and in the other 2 associations the board just proposed a special assessment to get the work done. People cried, screamed, grumbled and some could not pay and their homes went into foreclosure. In one, the special assessment did not pass so the board tried to impose an "emergency assessment" which does not require owner approval but does have stringent requirements.
The proposed conversion process, the special assessment, and the emergency assessment all sent owners running to attorneys. Letters flew. The associations had to spend money on legal fees (money they really did not have to spare). And in all the associations there were threats of lawsuits for various things (termed by the lawyers as breach of fiduciary duty), things like failure to collect sufficient reserves for years, failure to prepare proper disclosures to owners, failure to hold open meetings, failure to fulfill escrow demand packages, and the like. Buyers were looking at making claims against the sellers for nondisclosure.
Are you getting the picture, this is a crazy scary scenario!
Recap: Without a doubt, everyone's investment is in jeopardy. Why?
1. Due to lax management, there are inadequate records of meetings or financial reports, inadequate disclosure packages available, and no good history of maintenance. (Probably because there was little other than a resident handyman doing anything.)
2. Everyone may like their neighbors, maybe no one wants to sue anyone, yet some of the owners are going to go to lawyers in desperation, trying to figure out what they can do and who they can they blame.
3. If there are a lot of elderly owners, or young families or investors without equity, leaving the maintenance and repair to owners created an unequal distribution of the burdens and risks. Elderly folks may not have the money, or may decide to heck with it, I will leave this problem to my heirs. Those without equity may not have the money, or may be on the brink of not caring if they lose their place for nonpayment of the assessments.
4. If the association is sued, everyone will experience repercussions, whether it comes through assessments paying for HOA costs of litigation, inability to sell or refinance, etc.
5. Potential and recent buyers will ask a lot of questions which can uncover a real can of worms for those who have been in denial or in the dark. Sellers may be at risk if they sell and later get dinged forĘ not disclosing the problems as worthy of material threats to the value.
6. The directors that have compensated themselves by not paying assessments for years are not only in violation of the bylaws that say board members are not to be compensated, but they may also have inadvertently robbed themselves of some critical protections from laws that protect those persons who serve in a voluntary capacity - meaning not compensated.
7. The properties may become unmarketable because of the current state of affairs and/or because of a limbo position between condo and PD.
What Could Have Been Done To Avoid These Problems? The Boards should have reached out for help in the early years instead of accepting a paycheck or a waiver of assessments when they weren't qualified to manage. Owners should have been educated about the importance of putting away money (reserves) for the purpose of maintaining the infrastructure. The Board should have prepared and owners should have received the legally required disclosures which include a worksheet identifying deficiencies and possible special assessments. Buyers should be getting this information. The Board should have paid for valuable services. Conversion should have been considered in the early years if it was to be considered at all - well before the buildings deteriorated into poor condition and way back when owners had time to begin putting money away for the big jobs, if they were to become the responsible parties. Shoulda, woulda, coulda. ...
In hindsight, one can see that better planning, better administration, more responsible leadership and better management should have been done. Of course, we all know that hindsight is a better compass than foresight. But for all of you out there reading this newsletter, THIS IS YOUR FORESIGHT!! You can learn by the mistakes of others. Do not let yourselves end up in a dilemma like these associations.
All of this could have been averted, or diluted, by having a board in place that did not shirk basic responsibilities. Granted, it does not seem easy for boards to get educated because information has not always been available in one place. However, over the course of 30 years, I have created a very informative website and provided ongoing help through newsletters, blogs, articles, FAQs, and publications. The list is long. I've done and continue to do my part. IĘ have *written over 100 articles for various publications, most of which are available just for the reading on my website. I wrote two books on HOA and condo living - one self-published (FINDING THE KEY TO YOUR CASTLE, 1998) and the other published by Sourcebooks, Inc. (THE CONDO OWNERS ANSWER BOOK, 2010).
*started a newsletter in 1988, the year I graduated from law school (I had been a paralegal in this field for 4 years during school). It was called THE CALIFORNIA HOMEOWNERS ASSOCIATION LEGAL DIGEST. From that, I gathered a loyal following. With improvements in technology, that has evolved into this E-newsletter - WHAT'S NEW IN HOA LAND? From this evolved two blogs - condolawguru.com and California HOA & Condo law blog (both accessible from the main page of the website).
*created THE DAVIS STIRLING ACT IN PLAIN ENGLISH about 25 years ago and update that book every year to reflect changes in the law. I include explanations about what the legalese in the statutes means and what legislators were trying to accomplish.
*created 28 single subject Primers and Forms Manuals about 15 years ago to help folks that wanted more concentrated information on things like enforcement, neighbor to neighbor problems, parking and towing, rule setting, recordkeeping, reserves, assessments, architectural control, dealing with difficult people, and HOA elections. I wrote two Primers called Board Basics I and Board Basics II and an operations primer and operations forms Primer.
*first offered a Guide to Recall about 10 years ago to educate boards and owners on the process. how it works, and what a toll it takes on the HOA.
And, this year, I just recently finished the Small HOA Survival Guide. It is a basic guide with basic information about running an HOA, with contributors who are at the top of their game in HOA management, accounting, insurance and tax and regulatory requirements.
It does not stop here. Beginning in January I will be offering Webinars twice a month to provide a different means of educating people on what is needed and how to accomplish it. The exact schedule and subject matter will be provided in December for January, January for February, and so on.
I am not saying all problems can be avoided simply by making the resources available, because you can lead a horse to water, but you cannot make it drink. [Are my Midwestern roots showing?] But if the horse is thirsty enough, ....
What I am saying and I hope you are hearing is that a lack of knowledge about what it takes to run an association and serve on a board or failing to get help from the right source in doing so can set up a domino effect that can seriously undermine the investment and peace of mind of everyone in the HOA once the first tile falls.
There has been a lot of buzz about my newest guidebook called "The Small HOA Survival Guide." The more people it reaches, the more people will be helped, whether there are 4 owners or 400.
But you have to read this or some of the other publications for them to be of value. Could this Guidebook have helped these HOAs that are the subject of this newsletter? I sure think so - if the board members would have been able to read it 15 years ago!
All of the items mentioned above as well as the 2016 Davis-
Stirling Act in Plain English are available in the Guru Webstore. All but the DAVIS STIRLING ACT book are in PDF only. You can order that book in snail mail format.
Just go webstore and navigate to the store directly, or check out the articles, E-news archives and blogs first to see if you can find what you need. When ready, go to the store and see that there are tabs for the Books, Primers, Forms and Guides (and this is where to find the new SMALL HOA SURVIVAL GUIDE).
This is where you can get help without paying a lawyer $300 an hour to hold your hand.
Mark your calendars for January 6th and the 20th for the first round of webinars. Announcement of topic and exact time to come later this month and in December. We can have lunch together!
Be sure also to visit the website and sign up for the next free E-News now! It's never too late. And watch the blogs for the hottest topics! If you want to unsubscribe, please do so when you get the newsletter. Sending an email doesn't always work because I don't keep the list, Constant Contact does.
I am an attorney who serves homeowner associations and homeowners alike (not inthe same association of course). I am a frequent contributor to the Echo Journal
and other similar publications in the State of California and also contribute articles
on a national level. There are several publications written in plain English onmy website written specifically to help people who need information about California
law as it relates to homeowner associations. There is a wealth of information here on
the website. I like to do service and have been lucky enough to be named Author of the Year
by CAI after my first book, and was named 2011 Volunteer of the Year by the Executive
Council of Homeowners.
Check out the Main and Resource Pages at www.californiacondoguru.com
Check out the popular book called "THE CONDO OWNER'S ANSWER BOOK" and both blogs developed, one for everyone and one especially for homeowner questions: www.Condolawguru.com
Check out the webstore for helpful and affordable publications on various topics, including 3 books, 28 primers and 2 guides. Most popular subjects are THE DAVIS STIRLING ACT IN PLAIN ENGLISH (book), ENFORCEMENT, BOARD BASICS, ARCHITECTURAL AND LEASE LIMITATIONS series (primers) and the RECALL and INSPECTORS OF ELECTION guides.
I have a private law practice in Pleasant Hill, but serve homeowners association and homeowners throughout the State of California. My practice is in large part now web based and telephone consultations are available. I have clients all over the state and am a real "road warrior".
Copyright © Beth A. Grimm, All Rights Reserved
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