Management company Keeps late fees & fines

Never heard of such a thing.
Don't like it.
Would fire any management company that would propose it.
Should never be an incentive for MC to impose penalties on HOs.

Neal,

It depends on the terms of the contract. I've heard of similar terms in contracts. I don't like them and would not vote to hire any company that had them.

It is normal practice to apply any payments received first to any charges/fines and then to assessments.


Time to reread the terms of the contract to see if the contract can be broken or if there is any specific notice requirement to inform them that the contract will not be renewed.

The Board of course can always instruct the MC to no longer provide service for violations (which will stop the fining).

Unfortunately, when these type of contracts are written, a MC may see fines as an additional revenue stream and (as others have said) become overzealous in enforcement activities.

Hope this helps,

Tim

Maybe its before I am new to this forum because its appears I have limited editing abilities at the moment.

Thanks Tim,

You're probably right about the order of priority in terms of payments, which is why they have things setup in such a way that they get paid first, and the HOA gets what remains. Prior to the BoD asking questions related to Fees\Fine, we had approved a few $100 fines to a specific unit for abusing the house rules frequently. On the monthly financial report created by the MC, it was showing large fines were collected, but the reports made it untraceable (lack of information). The reality was the large fines were being taken out of the unit's dues payment, leaving HOA with about 25% going towards that's month dues. At that time, neither we, nor the unit owner were aware that the fines were technically being paid according to the MC's method of accounting. Yet, when evaluating that monthly financial report, it still showed the additional (fine) amount still being owed. From an accounting perspective, he paid the fine (taken from dues payment), but then was short for the full amount of the current month's dues, which technically triggers another late fee, which the MC collects from the next dues payments.... I honestly don't expect anyone to follow that because it took the BoD 6 months with the help of a CPA unravel the MC's accounting practices.

Thanks again

Perhaps you have poorly worded your question; a management company should never "keep HOA late fees amd fines". Late fees and fines should always be paid to the association; never to the management company.

The management agreement should include to what extent the management company will be involved in collection of delinquent accounts and the costs involved which shall be paid by the association.

The association should have published policies and Procedures which includes the priority in which all payments are applied. We list 7 prioritize categories with assessments being the lowest (last) when payments are applied.

Neal, we all got it from your first post. The Board agreed to something without thinking it through and now doesn't like the results. The answer is simple, take back the power that the Board abrogated to the MC. No fines unless approved first by the BOD, and while the Board doesn't have the power to waive Covenants, they do have the power to wave fees and fines, use it.

Have time now to explain my post a bit better.

When you went into the deal, you accepted your MC's proposal that they would keep penalties.

When they went into the deal, they knew that they were going to take payments intended to pay dues and apply them to penalties first. They knew that by not applying dues payments toward dues, that would cause a domino effect of penalties. They knew that by not giving the HOs prior or subsequent notice, they would keep HOs in the dark and perpetuate the scheme. They knew that by arranging their monthly statements the way they do, your board probably wouldn't catch on to what was going on for a while. More domino effect.

If they had told you what they already knew up front, there's no way you would have signed up for the deal.

My big objection is that they knew all of this was going to happen - but they never disclosed it. And that makes it a sham.

Sure there's a contract. But you probably signed their standard form contract. I'm sure it doesn't say anything about their not being able to do what they do. They wrote it.

Some might say - buyer beware. But that doesn't apply here.

An MC acts as an agent of the HOA. That's a special relationship that makes them a fiduciary. Fiduciaries must disclose. They cannot hide important features of the deal from their principal (your HOA). They owe an obligation beyond what's on paper because of the unique nature of the agent-principal relationship.

The analogy to a bank doesn't apply. A bank isn't your HOA's fiduciary. Bank practices are disclosed beforehand - even if they are hidden in a bunch of gobbledygook that they send. And banks disclose after the fact by sending statements. If you didn't understand what the bank was doing before, you can't miss it after because it's clearly indicated on every statement you get. Your MC did no such thing. In fact, they did the exact opposite - and intentionally.

IMO, what your MC is doing is a scam. My strongest objection is that this scam was set up by the owners of your MC. There's not way I would stay in a deal with someone who thinks that way if I didn't have to - especially where the agent-principal relationship makes me dependent on their actions - because that's the way fiduciary relationships work.

Some say you should modify the relationship by limiting what the MC can do now. I say they will just find another way to burn you - it's inherent in the way they think. I would want out as soon as I could. I feel so strongly about it that in your shoes I would probably file a complaint with my state's District Attorney.

The practical realities are - your MC is going to rip you off for everything they can. That's the nature of the beast you are dealing with. Take your losses while you can. Get out. Delay will only give them opportunity to rip you off some more.

Don't rely on what your CPA thinks. Talk to a lawyer if you need to - you should. But get away from these folks now. They will destroy any goodwill that your board has with the HOs in your community.

The basic question is was the information fully revealed and accepted by the BOD that signed the contract? If it was, then no foul on the MC's part.

I might could agree to fines being applied to dues thus giving "weight" to fines. Like do not ignore them people.

I would not agree with fines being kept by the MC as this sets a negative, go after them to make money relationship. Fines are to correct situations, not to profit from them.

Thanks everyone for their feedback. Despite having 25+ years of being self-managed, and learned a great deal, our HOA has been surprised about what did not know about Professional management companies, and what we should have done during the hiring process.

NpS, what can I say, what you wrote makes it seem like you attended all our meetings since hiring the MC.

For this purpose of this thread I stayed on topic and did not introduce other issues of concerns, such as the MC has their own Maintenance services and lawn services; meaning they come out to the property find work that needs to be done, create work orders to hire themselves, then has their crews inspects their own work. None of this was revealed prior to signing the contract, and the contract make no mention about them having these services. The HOA became aware when we received a $1500 maintenance bill last fall. The MC explained it away as a misunderstanding, and thought they were free to approve their own work requests unless the BoD objected. Then they tried to fire our lawn service because our long time lawn service refused to return any calls to the MC over a period of two months. This behavior was inconsistent with our 10+ years of working with the lawn service company, who always picked up the phone or called us right back (always!). I researched the problem by tracking phone records, etc, and discovered the MC was calling a different Lawn service we fired many years ago but remained in our list of contacts. At our HOA meeting, the MC was recommending that the lawn service company be fired, and replaced with the MC's lawn service. I objected informing the MC that we needed to look into the matter before replacing the lawn service, who we're happy with for so many years, and not fire them based solely on the recommendation of the MC. Once I traced the problem back to the MC calling the wrong lawn service, the MC explained it away as yet another misunderstanding. (note, they could have easily checked the billing history for contact information)

I don't believe the MC intentionally makes errors, or withholds information, in an effort to increase their profits, but it has become clear that when mistakes are made, and information withheld, that increase their ability to make more money, they go with it until the customer(HOA) makes an objection, points out the errors, or demand further disclosure about the MC's business practices. Overall this sets up business culture for the MC that inherently takes advantages of their customers.

I wanted to fire the MC at the end of the first year of our contract (Feb 2015), but the BoD felt that we needed to give the MC more time to adjust. Since then, things have only got worse.

As a side note, which I think is very important, the BoD has started to snipe at each other out of frustration of taking so long to get simple matters resolved. It's apparent to me that the source of the bickering is the MC, who is the primary cause of the delays and misunderstandings on issues that historically have never been a problem for us. As president, my observation is that some members of BoD are so frustrated, they are tempted to allow the MC handle things their way, just so we can move on to normal business which should be the focus of BoD, and not spending most of HOA meetings managing the MC.

Thaks again

>> Some say you should modify the relationship by limiting what the MC can do now.
>> I say they will just find another way to burn you - it's inherent in the way
>> they think. I would want out as soon as I could. I feel so strongly about it
>> that in your shoes I would probably file a complaint with my state's District Attorney.

>> The practical realities are - your MC is going to rip you off for everything they can.
>> That's the nature of the beast you are dealing with. Take your losses while you can.
>> Get out. Delay will only give them opportunity to rip you off some more.

This is the problem our BoD is having, there is a split where some think the MC can be trusted, and they beleive we just need to make some adjustments to our agreement to deal with "the misunderstandings", where I agree with what you have stated, the MC will just find another areas where our HOA and BoD lack experience\knowledge, and exploit it to their advantage. I feel we need out ASAP. Keep in mind, when we deal with the MC, they are very polite, professional, and apologetic, so its hard for some members see past that and understand that the MC can't be trusted to do what is the HOA best interest. My concern as president, if we wait until its extremely obvious to everyone, it will be far too late, and the HAO will be in serious financial trouble. I don't want to be right in the sense that I get to hear "You were right, but now what do we do now that our reserves are all gone because the MC promised us that they would....".

Just found out last week by calling our bank, that the MC has full legal control over our bank accounts. There are no restrictions in place. Not sure how that happened. Years previously the BoD had signed bank documents that required 3 BoD signatures to make any significant changes to the accounts. As is stands now, the MC can withdraw all funds, close the accounts, add\remove BoD members, and the bank would not notify the HOA of the changes (well, maybe they would if they felt it was suspicious). I don't see this as an immediate threat, but I can foresee the MC doing that if they anticipated a pending lawsuit; transfer HOA funds into accounts the HOA has no control\access, and then we'd be forced to hire lawyers to negotiate to get our own money back or wait months\years for the court system to rule in our favor.

Hi Neal

I think you need 2 things. 1. A grading system. 2. More than one MC candidate.

I have attached a sample grading system chart and explanation that we used 5 years ago. If we were to prepare one today, the criteria would be different because our priorities and needs have changed - but you can get the gist of what we were looking for and what our problems were back then.

Our circumstances were different than yours. I wasn't on the board at the time. Our 5 member board had decided to get rid of our current MC. 3 members had decided to pick a "buddy" of theirs. The other 2 objected. The 3 could have called a board meeting at any time and voted to award the contract to their "buddy" - IMO a bad choice for the community.

The 2 objecting board members and I decided to do an end-run on the board. We called a special meeting of the community, invited 3 candidate companies (including "buddy") to make a presentation, and asked the membership to grade the 3 MCs based on their presentations and responses to HO questions. Biggest attendance I've ever seen.

"Buddy" got the worst rating from the audience. He went from a shoe-in to the bottom of the heap.

Something similar can work for you Neal whether you take it to the board or to the general membership.

Since you found this out, has any of the board members forced themselves back onto the account?

>> As an owner of a MC, I have an issue with collecting upfront for late fees, pre-liens and liens.
>> My service agreement clearly spells out that we ONLY collect ONCE the H/O has paid the association.
>> If the association or MC decides to waive a late fee, the HOA is NEVER out any money. We aggressively
>> stay on top of an HOA delinquencies and always send out reminder notices on past due accounts. The
>> only charge to the HOA is postage.

Richard, Thanks for the information; it is good to get the perspective from another MC.

At the next BoD meeting, if not before, we are likely to discontinue all fees\fines as a stop gap. The MC can not require that the HOA impose fines\fees, and historically we have used it sparsely because we are not interested in punishing unit owners who are a few days late in paying the dues because their paychecks schedule does not line up with HOAs 10th of the month deadline for dues. And overall, those who are historically a problem, fines\fee has no impact on them. We use other methods to control their behavior that are more effective.

Here is an example of how MC's accounting works. Say a unit owner is a day late in paying their dues. MC automatically penalizes the unit a late fee (ie $25) that is now on showing the owner owing $25. Assuming the owner pay on time the next month for the normal dues amount, the math looks like this:

* Dues - Latefee ($25) = paid to HOA for current month dues.
* MC takes the late fee
* Unit still owes $25 to HOA for underpaid dues, so the MC penalize the unit owner another late fee for not paying the full amount which then again get deducted from the next month dues.

Our HOA never would have hired this MC if they had explained this process to the BoD in advance, which is why they kept it a very mysterious accounting process for such a long time.

My rhetorical question is, using their accounting method for processing fines\fee: Why would the MC NOT want to fine unit owners as much as possible, for every single trivial house rule violation? The worse things become for the HAO, the more fines they can issue, which they can then take immediately from the following months dues.

The Board of Directors permits the action(s) of the management company.

Only the actual directors may authorize the actual fines.

D'OH

>> This should be in the contract somewhere otherwise it wouldn't be legal.

It may be legal, but how the MC's accounting practices has been deceptive. Here is what it says in the contact

"The home owner fees are directly reimbursed to [Name Of MC]"

That is it. From that one line in the contract, the MC proceeded to take Fees\Fines out of dues payments. During hiring phraze there was no upfront disclosure\discussion beyond the BoD agreeing they could have fees\fines after the dues were collected. The BoD start to flush it out when the we noticed the MC was getting 100% collection rate every month, and in 6-9 months, had collected more late fees & fines than the previous 25+ years combined. When BoD asked how the MC accomplished it, we were told "The owners paid the fine\fee" hoping that answer would be good enough for the BoD, and we'd move on never to question them again about it, but we needed a better answer, and it took over 6 months for them to provide a better answer. Technically\Legally, according the way the MC did the accounting, the owners were given credit for having paid their late fees and fines, but it was taken out of their dues payment.

Neal

The longer this chat goes on, the more stupid the BOD looks. While I do not agree with the practice of the MC, what they were doing was there in black and white. Shame on the BOD.

Fool me once, shame on you. Fool me twice, shame on me.