What to expect when living within a Community Association including this quote that hits home for me:
Keep in mind that if you believe the association is not being managed effectively based upon the response and the quality of information provided, please do not think that management will get better after you buy or that you can make a significant difference after your purchase. This may happen, but more likely than not, the culture of the association built up over the years may trump any changes you would like to bring to the association. (page 66)
More quotes from this 2016 book.
Letter to those charged with governance (management letter): this is a letter written to the board of directors by the certified public accountant recommending changes to the policies, procedures, and internal controls. (page 13)
Special assessment: an assessment over and above regular monthly assessments normally involves a financial surprise when the association discovers there are not sufficient funds to pay for needed expenses, repairs, or litigation. (page 14)
Turnover: this event transfers the control of the association from the declarant to a board of directors elected by the membership. This happens in accordance with the governing documents after 75 percent of the units are sold. (page 15)
Variance report: this statement lists the statement of revenue and expenses for a specific time period compared to the approved budget. The variance is the difference between the budget and the actual income or expense for each budget line item. This statement can be a valuable tool to ascertain if the association is collecting and spending money in accordance with the annual budget approved by the board of directors. (page 15)
Even if the seller is on the board of directors, the board may not be using best practices to understand potential issues. Do not place all of your faith in seller representations. (page 20)
Many states have statutes designed to protect buyers and current owners of condominium associations. These statutes, which vary from state to state, may include the requirement of reviewed or audited financial statements, prepared reserve studies, and laws that give members certain rights with respect to living within an association. However, very few states have the ability to monitor whether associations are complying with statutes, and very few have any fines relating to noncompliance. Even if your state has statutes designed to protect buyers and existing members, you still need to determine that the association is in compliance. In reality, this may not be an effective safeguard. (page 23)
State statutes take precedence over CC&Rs, and it should also be noted that federal laws take precedence over state statutes and CC&Rs. (page 53)
Minutes are taken not only during regular board meetings but also during committee meetings. (page 60)
If you are told there are no minutes of board meetings, this would be a red flag. (page 61)
However, certain associations have a habit of instigating litigation for a variety of reasons. Some reasons may be valid and beyond the control of the board. Other types of legal action may be at the whim of the board and unnecessary. Over the past decade, I have seen many associations sue the developer and subcontractors for construction defects and poor materials and workmanship. Early on, these lawsuits were settled out of court with insurance companies not wanting to incur court costs and legal fees. Over the past several years, insurance companies have tended to take associations to court on these lawsuits. As a result, the potential award (after attorney fees) has been diminished. In some cases, associations have been awarded very small amounts, which left the associations with attorney fees in excess of the cash awards. The fact that an association is involved with a lawsuit is not necessarily a red flag. However, it may be difficult to find out why the association is involved in a lawsuit and what the potential outcome is. (pages 69-70)
The involvement of attorneys and litigation can be very expensive. Associations generally do not budget adequately for litigation because it is normally not anticipated. This means that the cost of litigation, if not paid for by a party other than the association, can reduce funds in the operating budget, may force the association to borrow from reserves, and may require the asociation to raise dues or to special-assess. (page 70)
If the operating fund owes money to the replacement fund, this may indicate that the operating fund ran out of money and used reserve funds to pay for day-to-day expenses, robbing the reserve fund of needed cash to pay for future repairs and replacements. A special assessment may be needed in the future to fund a major repair or replacement. (page 84)
The preparation of a reserve study is not an exact science, and there is some disagreement in the reserve study community on how best to fund for future repairs and replacements. (page 97)
The developer may keep assessments artificially ow to help spur sales. This may mean that the developer is subsidizing operating assessments, and once the developer is gone, assessments may increase dramatically. The developer accomplishes this by making up the difference between assessments to members and actual costs incurred to run the association. Once the developer is gone, a new reserve study may indicate reserves are too low, requiring an increase in assessments. (page 110)
The developer may not keep finances separated from thew developer’s business and the association. This may lead to the developer owing the association money due to borrowing funds, not paying the developer’s share of assessments during the time of developer control, or using association personnel to work on developer duties, including sales and punch lists to new buyers. (Punch lists are work performed by the developer, generally on the inside of the units, such as fixing squeaky floors and cosmetic issues. Punch lists are not the responsibility of the association.) (page 111)
The Federal Housing Administration (/FHA) under the auspices of HUD requires associations to apply for certification in order for certification in order for buyers of condominiums within the association to use FHA-insured loans….In order to qualify for FH/A certification, associations must meet certain criteria, including minimum amounts contributed to reserves, minimum number of members who are delinquent on paying dues, and maximum number of rental properties. Because the threshold for meeting most of the criteria for certification is fairly low, it is a concern if the association is not certified. (page 121)