By Kelly Wessel
Homeowners associations can be both a blessing and a curse. On the one hand, they give structure to a community and help set and monitor community standards to protect property values, as well as the safety and security of everyone. On the other hand, they can be overreaching in exercising authority like what color your shutters can be and even what flowers you can plant.
In a few situations, they can be defrauding homeowners. If you live in one of the 302 communities in Greenville with an HOA and/or a management company, knowledge and oversight are your best defenses against being victimized. Even in a completely above-board situation, being aware of what’s going on in your community helps the HOA operate more effectively.
Why that matters
A lot can go wrong in these largely unmonitored communities. There’s not much transparency and there is no state-level HOA watchdog. Homeowners are largely on their own even as management companies may have numerous HOAs under contract, access to and control of a large amount of money, with little or no oversight.
Management companies are not legally required to provide financial statements or supporting documents to the homeowners. Another problem is the HOA itself. It can be difficult to get residents to accept the responsibility and time demands of being on the board. Those who do often become entrenched, sometimes losing their objectivity in the process, becoming protective of the management company.
While examples of fraud are uncommon, with unmonitored organizations it pays to pay attention. After all it’s your money. It can be hard to know what to do, so here’s a primer on holding your HOA accountable. Some of the following steps are more applicable if you have reason to believe your HOA or management association is doing something wrong. But to some degree, knowledge of all these elements generally makes you a good member of the community.
By-laws, rules and covenants: Make sure you have a copy of the rules and covenants that govern your community. Under law, you are entitled to this. If you don’t have it, request a copy from your HOA or management company. Read them. Make sure that all updates and changes are incorporated in the version you have been provided. (HOAs can make changes to the rules and if you don’t attend your homeowner association meetings, you might not know about them). Ask for a copy of the HOA agreement with the management company.
Know your financials: The by-laws should require that the HOA board (or management company) provide the homeowners with financial statements annually. These statements should include a balance sheet, an income statement and a statement of cash flows. Most non-accountants don’t know how to interpret the information in these reports. But there is information in these statements that can either ease your mind or raise questions.
- Look at the revenue line on the income statement, starting with the dues. You know what you pay. Multiply that by the number of homes in your subdivision. There can be a number of legitimate reasons for differences in your calculation and what’s reported (varying payment dates, non-payment), but they should be pretty close. If they are significantly different, talk to a board member.
- Expenses are generally consistent: common-area maintenance; repairs and replacements; payments to the management company; utilities; property taxes; and the like. There should be a line-item total for each category. Do the expenses look reasonable? If they don’t, talk to a board member. If there are expenses you don’t understand, talk to a board member. There’s nothing wrong with educating yourself. And at least the board knows people are paying attention.
- The net Income is all the income less all of the expenses. It should be greater than zero. If it’s not, and the loss wasn’t explained in the annual meeting, talk to a board member.
Holding your HOA accountable:
- Get involved with your HOA, run for a board spot. If you’re a board member, step down at the end of your next term.
- If your HOA has had the same management company for more than five years, it may be time to make a change. But exercise due diligence here. Vet the new one. Look them up on the Better Business Bureau website and Yelp. Talk to some of their homeowners. If you don’t know what neighborhoods they manage, visit the South Carolina Secretary of State website and put the management company’s name in the registered-agent search bar. Management companies are frequently the registered agent for their HOAs.
- A more serious step would be requesting supporting records from your management company or calling for an independent audit. If your HOA is a registered non-profit, your management company is required by state law to provide records upon the request of any homeowner. Be wary of voluntary financial statement audits that lack the detail and the depth to identify fraud.
Unfortunately, the most unscrupulous management company is going to be the one that violates the law by not providing you with the records. That should tell you plenty.
Although it rarely happens, evidence of fraud should be reported to the police, as in the Simpsonville case. While your community may rid itself of a problem, another community may be victimized by the same company.
Most issues don’t go this far, but knowing that homeowners are paying attention, reviewing the financials and asking questions, will go a long way to keeping most HOA management in line.
Kelly Wessel is a forensic accountant and certified fraud examiner. She is president of Wessel Forensic Accounting.