Call it cooking the books, fudging the numbers, whatever you like. Your association board is looking at a potential case of fraud. One or more of your board members may be skimming funds and manipulating the accounts in order to do so.

But if you suspect another board member, should you go to the board with the evidence? Not before you notify the authorities. In cases of suspected fraudulent activity, the actions you take (or fail to take) speak volumes in a court case should your residents sue the board collective over the issue. If you show proper due diligence, you could spare your board a costly lawsuit.

All associations should have a process in place with which to handle fraud investigations. The following six items are basic guidelines. For more detailed advice and assistance, you need to contact an attorney.

- When fraud is suspected, board members should inform the board attorney and local fraud division authorities.

- Remove the records in question to a designated third party, typically the board attorney or an outside accounting firm. Seek your counsel’s advice on whom should be in possession of the suspect records.

- Hire a forensic accountant to conduct a thorough audit and investigation.

- Document the incident and case progression in association minutes. Maintain comprehensive files documenting the process from the first day.

- At your attorney’s prompting, notify the board of the suspicions and investigation. Make sure to coordinate this with your attorney’s permission so as not to hamper the investigation.

- Also, seek your attorney’s advice on how to handle the person or people in question. Ensure that you’re not violating anyone’s civil rights in an attempt to protect your board’s financials.

Walking into a potential fraud situation can be very intimidating.  If you follow these basic steps, and contact your association’s attorney, you can protect both your integrity and that of the association.  Associations are fraught with mistrust and handling the situation correctly will do a lot to ensure the fundamentals tenants of most associations.

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That’s because associations are often required if not expected to keep an arm’s-length distance between their personal businesses and that of the association. If the bylaws state that the association will entertain bids for the various services, it is in their best interests to prohibit board members from submitting bids themselves. It smacks of nepotism and can set your board up for an unsightly lawsuit, one that could be waged against the association board as a whole, as well as individual members. If you’re not insured for directors and officers risks, a lawsuit could drain both association coffers and your own bank account. 

Even unrelated business dealings should be avoided. For example, if your board member owns a home inspection company, imagine the commissions to be had from residents! For that reason, the board member should not do business with residents in communities in which he or she holds a board position.

Likewise, using your connection as a board member to obtain resident lists in order to solicit business is also bad form. The reasons are many, primary being that boards could find themselves named in lawsuits waged by unhappy clients of the board member in question. Insurance coverage will not extend to individual board members’ outside business dealings.

Talk with your association insurance broker to understand the limits of your current coverage. And review your bylaws and state laws to ensure your board members are operating within the law.

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Likely not. Your agreement is not with the person renting the apartment or condo. Your written agreement was signed by the resident in question. The renter has no idea usually that the resident isn’t paying his bills, nor does the renter have control over the resident’s actions. Also, renters pay maintenance fees as part of their rent payment to the owner. It’s the owner’s responsibility to forward those payments to the association, not the renter’s. Neither the association’s agreement with the owner nor the agreement between the renter and owner is set up to force a renter to pay an owner’s expenses, nor should they.

What is the recourse for the association? Can you as an association evict a paying tenant from an apartment or condo you don’t own because the owner isn’t paying the bills?

While your association’s legal counsel will be able to advise you in detail, I don’t think forcing a renter out of a unit by bypassing the resident is possible. However, you as an association may be able to begin foreclosure or delinquency/lien action against your resident, which could allow your association to recoup some of the delinquent association fees.

Unfortunately, associations have little recourse with renters when unit owners won’t pay their bills. Short of forcing a foreclosure and taking over the property itself, the association has to follow the same procedures as with any other unit owner who is delinquent in paying dues.

If your association has attempted to seek payment from renters, that could result in an errors & omissions claim against your association. Make sure to conduct association business in accordance with all bylaws and regulations governing association practices.

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Too often associations have claims denied because the coverage they once had was dropped due to budget concerns. Also, many association boards failed to understand critical elements of their policies, leaving them with unnecessary or unknown gaps in coverage. The most common areas that cause trouble for associations include:

• Misrepresentation of facts on insurance applications: if you’re unsure, don’t fill out the application until you are sure. Many a policy claim has been denied and coverage cancelled due to inadvertent or intentional misrepresentation on applications.

• Policy exclusions: Don’t assume that all claims filed will be covered. If you’re unsure, read the exclusions section of your current policy. If you’re still unsure, talk to an insurance specialist. Don’t leave to chance any gap in coverage.

• Co-insurance penalties: When determining the value of your covered property, make sure it’s the most accurate representation of the entire value of the property. If not, you could see claims paid on just that portion of the value you have insured. For instance, if you insure your property for $500,000 and it’s worth $1,000,000, your insurer will pay your claims based on that $500,000 amount, leaving you to pick up a huge coverage gap.

• Deductibles: If your deductible has been increased within the last few years, now is the time to re-examine that decision based on your association’s current reserves and claims history. Often the cost savings you think you’re getting is negated by claims.

If it’s been a while since you last reviewed your insurance coverage, contact me for an evaluation of your policy and recommendations based on your current business structure. As businesses change, so should coverage. Keeping your policies current and in line with property values is an easy way to alleviate unexpected claims issues.

Flickr photo credit:  bulent_yusuf

Once again, the government is ramping up efforts to tally the country’s population. With the 2010 census about to get underway, the US Census Bureau is asking apartment and condo associations to help them reach as many residents as possible. Since participation in the census is a federal requirement, associations need to determine how census workers will gain access, especially in secured facilities.

And make no mistake – census workers are given carte blanche when it comes to gaining access and possibly gaining repeated access in order to fully complete their responsibilities. Associations cannot deny access to any census taker who has shown proper identification.

In order to comply with federal regulations, make sure your property managers or any security staff understand that access must be granted to census workers. That includes allowing them access to secured buildings and any apartments they request. They are allowed to knock on doors, ring doorbells, use call boxes, etc. Also, there may be times when the census workers must return to the building to attempt resident contact again. If census workers cannot locate occupants, they are within their rights to ask property managers and associations for occupancy information. While you’re not expected to supply the information immediately, you should provide the requested information within a reasonable amount of time.

But how do you know if the census worker is legitimate? All census workers will be issued a census badge, which property managers may ask to see. When in doubt, contact the nearest Regional Census Center to verify a census taker’s status.

Associations should expect to see census takers after the April 1st deadline, in which all residents are required to return their mailed questionnaires. Expected in-person visits are slated from May through August of this year.

Flickr photo credit: bob the lomond

The idea for the Federal Housing Administration’s new rules and enforcement was to allow for more buyers to qualify for FHA loans, thus increasing business for condo and apartment associations. But how good is it?

In fact, realtor associations and builders groups are opposed to the new rules, stating that the FHA has just made it that much harder for new building projects to be delivered and for existing apartment and condo complexes to qualify for the federal lending program. Apartment and condo associations agree. One section of the new FHA rules limits how many buyers of condo and apartment units can get an FHA loan. And the rules limit the number of FHA-backed loans to half of the existing units in a building.

 Among some of the new requirements is the stipulation that loans will be approved only for units in buildings where the association boards have deposited a minimum of 10 percent of its annual budget in a maintenance and repair reserve account. If your association property has a small number of units, the requirement puts FHA loans out of reach for your unit buyers.

Worse is if your association is over a month late in assessments, your buildings are excluded from FHA qualification. Likewise, if more than 10 percent of all units are owned by more than one investor, the property will not qualify.

The new FHA rules and enforcement are designed to safeguard the financial health of the organization, which is holding either delinquent or foreclosed status on 18 percent of its insured loans. Its own financial reserves are now below federal minimum standards.

If your association’s property is already above the federal loan threshold, there’s not much you can do to bring your property within compliance. Talk with an experienced association insurance broker to understand how these new rules will affect your association and what steps you can take to protect against the financial impact of the new federal loan limits.

Has your association been affected by the new FHA rules? If so, how?

flickr photo credit: HUD Public Affairs

For additional information:

HUD: Condo/PUD/Subdivision Lookup

HUD: Mortgagee Letter 2009-46B: Condo Approval Process for Single Family Housing

HUD: Mortgagee Letter 2009-46A: Temporary Guidance for Condominium Policy

HUD: Mortgagee Letter 2009-46 A & 2009-46B Frequently Asked Questions

 Most apartment associations have rules that prohibit or limit greatly the ability of owners to rent their units. The strong argument has always been that the unknown variable – the tenant – could be a detriment to the value of the property as many unit owners in the past have been reluctant to live in a mixed-use community. However, with so many empty units and so much financial strain on both apartment associations and homeowners, flexibility is the new buzz word of the industry.

 For starters, new buyers may balk at purchasing a unit with rigid ownership terms. In a stagnant real estate market, smart associations will adopt more flexible rules regarding what unit owners can do with their properties. Allowing long-term rentals and taking part in the tenant vetting process can give associations some control over the rental while giving the unit owners the flexibility necessary to avoid foreclosure.

 Associations should limit how many people can occupy the unit. Also, setting a consistent rental rate and conducting background screenings on all rental applicants can help associations maintain property integrity and ease the concerns of existing owners. Those owners wanting to rent their units should be required to file all leases with the association and pay all association fees and any administration costs.

 If your apartment association is considering allowing rentals, check with your association insurance broker to understand how these changes could affect your coverage. Remember that any change to the association rules should be run past your broker to avoid any gaps in coverage.

 Flickr photo credit:  interpunct