Condominium Owners Associations

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Introduction
      Real estate investors sometimes purchase rental property investments as condominiums or other properties that have associations.  However, many of these investors do not fully understand the ramifications of owning such properties.  With the following discussion, we hope to provide some insight into those ramifications.

Defining the Association
      We have titled this page Owner Associations in order to avoid any confusion with Rental Housing Associations formed by groups of like-minded rental property owners for the purpose of providing various services for owner-members and political leverage for rental property owners as a whole.  Services provided to members often include access to eviction databases, vacancy listing service, and education.  We provide substantial information and a number of services to associations throughout the United States and in several countries around the World.
      This page, however, relates to owner associations (hereinafter called "associations"), sometimes called property owner associations or homeowner associations.  The existence of these associations is established by state statute and many aspects of association operation are regulated by the state.
      Also, although the word "condominium" is most often used to refer to property ownership where common areas are involved, there are several variations of it that are also found in certain states.  Many states define the Planned Unit Development (PUD) (or similar name) in addition to the Condominium.  We will discuss some of the differences between types elsewhere in this discussion.
      The purpose of these associations is to operate and maintain common areas of real estate developments that have any real property that is owned collectively by the owners of the individual units.  These areas are usually referred to as common areas.  Among the responsibilities of associations is collection of fees and disbursement of those funds.
      The units can be residential or commercial units in buildings, spaces in a parking garage, slips in a marina, space in an aircraft hanger, or almost anything else you can image which involves real property.
      We must also define the type of association that this discussion will be concerned about.  Associations range from those concerned about keeping flowers in a small common area at the entrance to a subdivision to an association of a large condominium development having hundreds of units, several swimming pools, tennis courts, recreation hall, health club, lakes, and many other community amenities.
      Our discussion will apply to very large developments, such as described above, as well as to a 10-unit development with no community amenities worth mentioning.  However, although it will technically apply also to the association that is only responsible to for the entrance flowers, much of what we say will not have much practical meaning for this association.  In general, we will be talking about the most inclusive association, where the association is responsible for the legal, financial, and physical health of the development exclusive of the interior of units.
      Finally, most issues discussed herein apply equally to an owner who rents out a unit and an owner who resides in a unit.

Association Boards & Officers
      If you own a property that has an association of some type, you have probably been asked or you will eventually be asked to serve on the the Board of Directors or as an Officer.  The fact that you have never been asked, either personally, or by general request in the association's newsletter or at an annual or other meeting, would be quite unusual.
      The reason that it would be unusual is because  most associations usually have trouble getting enough volunteers to fill the required positions.  This is particularly true for developments that have a large percentage of tenants, since many owners of rental units care little about the operation of the association.
      There are certain facts that a Board member or Officer, or a potential one, should know about serving in those positions.  Those in the subject positions have certain duties and responsibilities, as well as potential liabilities.  We will covers these issues in detail later, but first we'll tell you why you might want to serve in spite of the work and the potential problems.
      Whether you live in a condo you own or rent out one that you own, the main reason to become involved is to protect your investment.  In general, homeowner associations have considerable control over the development in which your unit is located and, for that reason, influence a fair degree the future value of your unit.  This influence comes about because of several reasons.

• The association holds and wields the legal power related to the community.
• The association collects the fees and assessments and also disburses the funds.
• The association is responsible for physical maintenance of the development or the lack thereof.

      Although the above affects the association as a whole, that is all owners, in practice, it is the Board of Directors that is involved with day-to-day operations.  Accordingly, if you want to exert significant influence over the future of your investment, the best way to do so is to be actively involved in the association as a Board member or an Officer.
      You will have even more influence, greater than your title indicates, if you have particular expertise regarding some aspect of association operations.  Knowledge of the building trades, real estate brokerage experience, a bookkeeping background, and computer experience related to databases and/or accounting software are examples of expertise that can be valuable to an association.  Hands-on experience in management of other associations would be very valuable.
      As mentioned above, being a Board member or Officer comes with duties and responsibilities.  These duties and responsibilities are defined in the Articles of Incorporation and the By-Laws of the Association.
      As also mentioned, being a Board member or Officer can also bring liabilities.  The potential liabilities of the association are much the same as for any property owner.  That is, lawsuits due to personal injury and physical damage or other financial loss caused by negligence or intent of the property owner or his agents, or, in this case, the association.  To this must also be added violation of Fair Housing Laws or other actionable discrimination.
      As for any property owner, the potential for liability can be significantly reduced by following certain procedures.

• Knowledge:  Know and follow the association Articles of Incorporation and By-Laws.  Know and follow state and local laws that govern associations as well as the various laws and regulations  related to managing the community.  Building permits and employee-related laws are in the latter category.
• Documentation:  Keep minutes of Board and membership meetings.  Keep records of maintenance request and actions, particularly when related to a possible health and safety issue.  Have a proper accounting system in place.
• Insurance:  There are two different issues.  First, is being sure that adequate hazard and liability insurance coverage for the development is always maintained in force.  Second, is having in place adequate errors and omissions insurance protects Board members and Officers.

      Although proper maintenance of the development is an important responsibility of the Board, it is often difficult to get owners to vote for the increases in fees or for assessments that are necessary for carrying out that responsibility.  Accordingly, the Board, the Officers, and the Manager, if there is one, must do their utmost to provide convincing arguments for the necessary increases to the owners.
      Owners must be made to realize that preservation the property is of prime importance in maintaining and increasing the value of their units.  Good written documentation will go a long ways toward convincing owners that they must part with some money.   The following things may help convince them

•  Include verification of the need for major expenditure from multiple third parties.  For example, provide the owners with written opinions from two or more general or specialty contractors.
• Take lots of pictures and include copies to the owners.  By using a scanner or digital camera, it is very inexpensive and simple to put 4 to 6 photos on a sheet of paper that is attached to other documentation.
• For the meeting where owners will vote on approving expenditures (read have an assessment or raise the monthly fee or both) have an expert available to answer questions from the audience.  If more than one field of expertise is involved, have more than one expert.  Be sure the experts are up to calmly fielding hard questions from potentially hostile members.

Association Management
      Many Homeowner Associations prefer to employ outside management for the day-to-day business of the Association, including the supervision of maintenance and the performance of accounting, member correspondence,  and other record keeping functions.  There are a number of reasons for doing so.

• Even the basic legally required duties of Board Members and Officers can require considerable effort and time, particularly for large developments.
• Board Members and Officers are usually unpaid positions.
• The owners who serve as Board Members and Officers may not have the knowledge or experience necessary to properly supervise the various maintenance and management functions.
• When an outside manager is hired, he will be paid and the cost will be borne equally by all association members.
• Enforcement of the Association By-Laws and of rules and regulations by an outside manager will usually be fair and unbiased, resulting in less favoritism.
• A qualified outside manager can more efficiently operate the development and better protect the investments of the owners than can volunteer amateurs.  The savings of good management will usually offset the cost of a professional manager.

      There is a wide variety of duties that can be delegated to an outside property manager.  Different associations will choose different combinations of duties for performance by a manager.  Some possibilities are:

• Schedule, organize, and run Board meetings, annual meetings, and special meetings.  Generate notices, minutes, and related documents.
• Provide maintenance services, including hiring contractors and supervising work.
• Provide routine financial services including collection of fees and assessments, disbursement of funds, bookkeeping/accounting, and filing of governmental reports.  Generate financial statements.
• Prepare budgets
• Generate correspondence to owners and others.
• Publish newsletter
• Deal with delinquencies including collection of late charges and other penalties.  File liens against properties that are seriously delinquent.

      Selecting a qualified manager is often the hardest job of the association's board and/or officers.  In view of the fact that the Board and Officers might be held liable for acts of the association's agents, including its manager, it is important that care be taken in the selection of the manager.  See our Selecting an Association Manager page for detailed discussion regarding this subject.

MORE ISSUES
Internal & outside audits of books

What's Ahead For Associations?
      In recent years, some states have enacted new laws that are intended to benefit existing and/or future association members.  Some of this legislation has been in the following categories:

• Requiring that more detailed and comprehensive documentation be provided to purchasers of properties that have an association, including income & expense statements, balance sheets, budgets, By-Laws and Rules & Regulations, current and planned assessments, and pending or expected legal actions by or against the association.
• Requiring more accurate and realist annual budgets to avoid large assessments resulting from regular fees being insufficient to  build reserves for future needs.  For example, the state of Nevada now requires that all associations have their annual budgets audited by state certified auditors, with disclosure of the results to members.

      While these increases in regulation are for the benefit of current and future association members, they do add significantly to the costs of operation and/or purchasing a unit having an association.  As examples,

• In Arizona, the additional disclosure required since the mid-90s has increased the cost of transferring association membership from typically $50 in the mid-90s to several hundred dollars today.
• The budget analysis by a Nevada state certified auditor costs an association between $1,000 and $2,000 each year.  In addition, one or more Board members or Officers most spend the time to work with the auditors and this the resulting report must be mailed to members, discussed, and acted upon if necessary.

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