Suspected Developer Fraud

Started by LindaK3 • 9 replies • 2931 views

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LindaK3 (Tennessee)
Posts: 2

Posted:

Here are the details: Private development..80 lots sold with 45 homes built as of now. Total number of unsold lots in developed area: 110. Annual HOA fees are $600. Lot owners AND homeowners are both supposed to pay but Developer has not ever charged the lot owners. Property includes 2 small lakes. Property is 850+ acres with only about 200 acres developed as of now. The HOA was incorporated as a non-profit in 2005. There are by-laws and covenants. Developer refuses to have an annual meeting. Developer refuses to turn over any HOA financial records at all for any of the last 5 years. Both are required by the by-laws AND Tennessee state law. Developer does very limited maintenance on the 200 developed acres. He has also never filed an income tax return. When pushed, Developer indicates the HOA funds have never covered the cost of maintenance and his development account "covers" the shortfall. He also claims that the 600+ undeveloped acres are "common area" and the HOA is responsible for the taxes on that portion. ($11,000/yr) This 600+ acres is completely undeveloped except for 4 wheeler tracks. At times there is a locked gate at the entrance to this area. Sometimes it is unlocked. He allows one homeowner to hunt there. Developer allowed major, major logging to occur all over the 900 acres over the last 2 years. He needed the money to survive. It did not work as the bank has recently informed him of pending foreclosure. No one seems to know what to do with a broke Developer who has never had any intention of following his own by-laws, state law, and federal law (IRS). There apparently is no money whatsoever in any account where HOA funds were deposited. Since he completely controls the HOA Board (all his family) what can we do?

GlenL (Ohio)
Posts: 5,491

Posted:

Since he completely controls the HOA Board (all his family) what can we do?

In reality not much, except for a lawsuit which at best the homeowners would have a 50-50 chance of winning and even if they did, if his finances are as bad as you have implied, very little chance of recouping anything. This is unfortunately a common risk when you buy into a developer controlled HOA. The developer pretty well has carte blanch to do as he or she pleases with few exceptions. Some states (not TN to my knowledge) have taken steps to limit some developer excesses.

About the only thing I can suggest now is that you get together with the other homeowners and try to get them to pony up some cash and contact an attorney versed in property law to find out everybody's rights and more importantly responsibilities if the developer goes belly up. For instance the homeowner's will need to make sure there is insurance to cover any common areas, least someone, even a trespasser be injured on them or you all could end up loosing your investments (homes).

Another place to check is with your local Zoning Board, often developers have to post a bond or bonds before they can build. You want to make sure that if there are bonds that they are not released.

Studies show that 5 out of 4 people have problems with fractions

SusanW1 (Michigan)
Posts: 5,202

Posted:

Here's a metaphor;

He owns and runs the fair, you have one booth. He is not doing what he promised. therefore, get all the booth owners together and file a breach of contracct or some other legal paper that says he has failed to do as he promised for all booth owners.

Other than that, what he wants to do on the fairgrounds is his business.

SharonB7 (Tennessee)
Posts: 2

Posted:

So other than a lawsuit to bring this Developer to task - nothing much can be done? He does not have to comply with his own Covenants or By-Laws or Tennessee statues? Unbelievable. What if he was reported to the IRS for not filing a tax return? If the Developer loses the property in foreclosure can the Homeowners petition the new owners and/or the bank to take over the HOA? and elect their own board?

SusanW1 (Michigan)
Posts: 5,202

Posted:

There MUST be a turnover for a Member-run HOA to be put into effect.

So however you can make that happen - approach the court after he goes belly up, encourage the present developer to turnover early - would help you out.

If the Developer sells, then you have a new owner. I doubt if he/she would give over control to the homeowners.

If he has failed to live up to the covenants (as you understood them to be a part of the purchase agreement,) then take him to court for not honoring his contract with you.

Can you share what CCR or bylaws he has not honored/

SteveH20 (South Carolina)
Posts: 32

Posted:

Linda,

We (our HOA) are in a similar situation but I have yet to hear from anyone who has actually obtained an attorney and challenged the Developer's power in court. It appears the homeowners have no rights (even though we own land in the development) and can do nothing to correct or question wrong doing.

At this point, it appears either there is no hope of getting a judge to agree the Developer has limits on his power or the situation is so rare no one ever taken the issue to court. I suggest there must be some limits on his power and he must be accountable for our money (dues), expenses, budgets, contracts, etc.

He literally can set the annual dues, special assessments, contracts, discontinue annual meetings, provide false financial statements, etc. and not be accountable to anyone.

This doesn't make sense to me but what is right and what is law are apparently two different issues.

SharonB7 (Tennessee)
Posts: 2

Posted:

Susan: The Developer Linda was referring to has not:
1. Held annual meetings nor has he shared an independently audited HOA financial report since the inception of the HOA incorporation in 2005 - in the Covenants & By-Laws.
2. He alleges that he can spend our HOA dues any way he chooses on the entire development (900 total acres - 605 totally undeveloped land) - non of the common areas have been conveyed to the HOA.
3. He has never filed a tax return on the HOA which is a 501 (c)(3.
4. He does not collect HOA dues on undeveloped lots which have been sold even though the Covenants and By-Laws specify that the HOA should collect these dues.
5. We believe he has never maintained a separate HOA account - it is all lumped in with his development account. (however we can not prove this as we have never seen a financial report).

ThomasR12 (Alabama)
Posts: 1

Posted:

If there still are empty and unsold lots the developer should be paying the $600 for each and every lot himself. If he refuses to pay the freight, now is the time to get the few on board and demand a meeting to dissolve the Protective Covenants and the entire Association. These are nothing more than a way for developers to use as slush funds. They will rack up the cost by installing water meters and electric meters for the entrance signs, that only advertises for the criminal elements. Single family dwellings don't need any Associations. If the developer planted grass, my suggestion is to have it removed and blacktopoped. Then there would be no cost. If he decides on any additions such as pools and tennis courts, you'll be paying to maintain those as well, while the developer sits back and laughs. The associations are nothing more than scams. The conenants can get really restrictive and most can not sell their homes when they want to leave, and as soon as they hear the word Association, they will walk away. It will be a community of rental property!

PetunkaM (Florida)
Posts: 1,009

Posted:

If there still are empty and unsold lots the developer should be paying the $600 for each and every lot himself.’

Thomas, Are you sure the developer is obligated to pay association fees for unsold lots? That would be very unusual.

LindaK3 (Tennessee)
Posts: 2

Posted:

Thanks for all input. We did talk to an attorney who told us clearly that his refusal to have meetings and give a yearly financial report was against Tennessee law because the HOA is a nonprofit corporation and must be operated under the nonprofit corp. law. He also said the only way for us to make him do something was to sue. It just boggles my mind that a developer doesn't believe he has to be accountable to the homeowners who trusted him to be honest. He's using our HOA funds to pay taxes on an area that is basically raw land...no roads, no paths, heavily forested. He's allowed heavy logging to be done on that property and, of course, taken the money from that. It just seems wrong that the HOA pays the taxes on that area but he can go in and log it and walk away with his pockets full. He's got his own personal stash (the HOA) to pay his taxes!!

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