Money, Money, Money - OR Fiduciary Responsibility

Introduction

A blog isn’t very interesting if it is never updated – so here’s an update.  I plan to make some contribution weekly. Please contribute your own questions, concerns, or ideas.  Remember, we’re all in this together.

I am also running all of these contributions by the current members of WATHA – the Woodbury Area Town Home Association. Those townhome board members have a lot more experience and wisdom than I. I am sure they can contribute some interesting things as well.

Fiduciary Responsibility

I think this is a timely topic. Townhome associations are generally sitting on a large pile of money. Our legal documents require that we reserve for replacing our physical plant, and now the state of MN also mandates that we reserve funds. This covers things like roofs, siding, retaining walls, driveways, etc.  For a modest sized association, we are talking millions of dollars here! 

I know some of our members are upset that we take their current funds for future expenses, but I tell them it is OUR savings account. When we have to replace the roofs, we will have those funds in hand. It may even affect the price we could get for our home in a sale. The next buyer, or their bank, will likely check out the status of our reserves. If the funds are not adequate, they should offer a lower price. In that case, the association will eventually have to replace those things with direct assessments – one time charges.

Checks and Balances

If there is one thing I have learned, trust no one with money – no one! There has to be a second pair of eyes, a second report, a way to check on where the money is and how it is spent. If no one is going to check on it, it will likely disappear. The teller in the bank handles a lot of cash, but it is all counted at the end of the day, and there had better be a set of receipts that tally to the cash difference, or they have a major problem.

In our townhome associations, we have millions of dollars at stake. How is your association protecting that?  

With a Management Company

If you have a management company running things, you already have one level of protection. But, make sure that the company has an adequate bond for malfeasance – enough to cover any possible loss. The bond limit might not be sufficient for even one association, and if they are representing more than one, a serious theft could leave you with no way to recover.

Also, do not just trust the paper reports that the management company sends you. They look good, but they are from their accounting department – there is no guarantee that they actually represent your funds. Ask for a second set of reports from your bank – and the bank should be separate from the management company. You want to see cash in, cash out, and reserve balances from both sources, and reconcile them monthly.

You would be amazed how much someone can steal over a long period of time, little by little.

And, another thing, look at the insurance policy that the company has for bonding with some care. On one occasion, we our policy excluded things like gross negligence. What’s with that? If someone really rips you off, the company will not pay. Make sure you understand the terms of the insurance coverage, and that it does not change when renewed each year. The agent that sells the policy will generally be very happy to review that with your board.

You also need your own insurance policy, just in case one of your board members does the unthinkable. Read the terms fo that one as well, and ask your agent to help with that.

No Management Company

If your association does not use the services of a management company, then you need to put in place your own second level of checks. Your accounts should require at least two signatures for any expense. In fact, the bank rarely looks at the actual signatures these days, but then it is their problem if they pay a forged check. And two different people should get independent reports from the bank on all items.

I would also ask the treasurer for a formal report of all expenses monthly to the whole board. If they are spending our money, we need to see what they are buying.

Receivables

Your accounting is normally done on an accrual basis. That means if someone owes the association some money, it is appears on your report as though it is actually in your account. That is fine for accounting rules, but it doesn’t work well if someone is not actually paying their monthly fee. Make sure you get a detailed report of the actual receipts, and what is not being paid. In our association, we get a monthly CASH report.

Our accounting firm keeps reminding us that they must do accrual accounting, not cash accounting, and I keep telling them they can count it any way they want to, but I need to see the CASH – show me the CASH! They finally relented and added an actual “cash on hand” line to the report. If it is declining month to month, you need to do something about that!

Collections

When your members are not paying, it is a major problem. At one point, more than 15% of our homes were not paying their fees. We ran out of operating cash. We borrowed from our reserves for a few years, but that is no longer legal in MN. We had to raise our fees, and find a more creative way of getting our fees paid.

We had a bunch of Owners who had bought homes just to sell them – and then could not sell when the market collapsed. They were stuck with them, they were not paying the bank, and not paying us. We could not cut off services, and we did not want to see the homes decline, so we were in a bind.

Our solution? We found a very creative collection agency to help solve our problem. Normally, with collections, you sell the whole debt to the firm for a steeply discounted price, and then they get whatever they can collect. You are completely out of the loop, but that is a very expensive option. You also have no control over what the collection agency actually does to get the funds. Another approach is to hire an attorney, and sue directly, and foreclose on the house if necessary.

That is also quite expensive. Attorneys charge hourly rates, foreclosures typically add thousands to the bill, and if you never do collect it because of a bankruptcy, or some other reason, you are basically pouring more money down a rat hole. I see association foreclosure notices in the paper weekly, and I wonder why they are doing that.

Foreclosures in the current financial climate are generally a bad idea. If a buyer financed 80% of the price, which is a very normal practice, and the house value falls by one third, the owner is probably under water. If you foreclose on a home, the bank still holds a mortgage on it, and you can never sell it subject to a mortgage that is higher than the market value of the home. In our association, some buyers financed more than the market price of the home. Hopefully, those days are gone!

Our collections firm uses a more creative approach, with less cost to us, and less negative impact on our neighbors. They bill us for actual filing costs for the paper work, but no hourly fee. They charge us a 15% collections fee on every dollar they get, and they charge the debtor another 15%. If they do collect something, we are both very happy. If not, or expense investment is very small. We also retain the ability to reach a settlement with the debtor if the home is foreclosed, or they can come up with a short sale agreement with the bank, etc.

Conclusion

Money is always a big deal. Associations typically have a lot of it lying about.  Pay some attention to that man behind the curtain!  And remember, I’m pulling for you, we’re all in this together.  Thank you, Red Green.