Any such thing as an efficiency audit?

Started by AdrienneP • 18 replies • 1927 views

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AdrienneP (Washington)
Posts: 28

Posted:

Hi there, I am a concerned member of a very conflict-ridden HOA. Community infrastructure has fallen into considerable disrepair and there have been multiple attempts by the Board to raise dues, all of which have failed to achieve the majority of votes required to pass. While most members of the Board and their supporters believe that dues are insufficient to cover reasonable expenditures, others believe that existing expenditure is highly inefficient and refuse to countenance any dues increases. I myself cannot be sure where the truth lies (in common with the majority of homeowners belonging to the association).

I cannot see any way to break this gridlock without some kind of independent external analysis of the situation - in effect, an efficiency or value-for-money audit of the HOA's operations. Something that goes beyond a narrow financial audit that merely checks for impropriety. So I am wondering if such a thing exists? I would really appreciate your feedback on what can be done in such a situation.

Thank you!

RichardP13 (California)
Posts: 3,868

Posted:

Adrienne,

Do you have a Property Manager managing your association. If so, a competent one should be able to accomplish this for the association.

AdrienneP (Washington)
Posts: 28

Posted:

Thanks, Richard. Unfortunately, the General Manager himself is the target of considerable criticism among those opposed to dues increases, and there is no way he could perform this function. Any other suggestions?

RichardP13 (California)
Posts: 3,868

Posted:

If you have a General Manager, it would seem then you have a rather substantial size association.

My opinion, someone who has experience as a financial analyst and has some knowledge of how HOA's work, the more experience, the better.

If I had access to the proper documents, I could do an analysis with no problem. There should be no problem finding someone capable in Washington.

How much time it takes depends on a few factors. You need about two years of financials, the reserve study, and insurance policies. Does the General Manager work for the association or is an employee of a management firm. How many employees might the HOA have. Does it run a country club, what type of amenities, is it a condo community or a single family detached community, does it have mixed use, are the HOA assessments equal or based on a square footage formula.

TimB4 (Tennessee)
Posts: 21,062

Posted:

Adrienne,

Welcome to the forum.

If your Board is currently seeking to raise assessments and maintenance of the common elements have been deferred due to lack of funds, I seriously doubt that the Board would be willing to spend money for an efficiency audit. Since an efficiency audit is an analysis of the procurement, maintenance and implementation of resources, one good place to start would be with your Reserve Study.

Reserve Studies identify the current life expectancy of common elements, expected preventative maintenance, repairs and replacement cost. It then identifies how much money is currently set aside, currently being set aside and what needs to be set aside in order to pay for those expenses in the future (ideally without the need for a special assessment). This can give the membership a good idea of the Associations financial health. For more on Reserve Studies (including how to do one yourself), see the following thread on this forum (note: some earlier links in that thread are no longer working but were updated later in the thread):

http://www.hoatalk.com/Forum/tabid/55/forumid/1/postid/103517/view/topic/Default.aspx

As for individual contracts, including your PM, the best way to evaluate them is to draft a request for proposal (RFP) and bid the contracts out. This is the only real way to tell if the Board is paying a fair market price for the work they want done.

As far as the actual performance of any individual contractor, you need to review the contract and verify (by spot checking) that the work you are paying for is actually being done and at the level you expected. Note: unless the individual are actual employees of the Association, the Board may only specify the desired results not how those results are obtained (goes to the definition of Independent Contractor or Employee which has tax consequences).

Hope this helps,

Tim

FredS7 (Arizona)
Posts: 927

Posted:

An "efficiency audit" would at best show that some previously spent money was not well-spent. But the money is gone, and the audit won't get it back.

A better approach would be to guarantee that the association is efficient going forward.

LarryB13 (Arizona)
Posts: 4,099

Posted:

Adrienne,

Do not waste your time on what you call an "efficiency audit." Your association has been overrun by the nay-sayers, irrational childish owners who think they are entitled to a free ride at someone else's expense. No matter what the results of the audit are, they will not change their minds.

The budget process varies greatly. In my association the board determines the budget and that's the end of the story. In theory, the owners could call for a special meeting to override the budget but the reality is that it will never happen.

In some associations, the board adopts a budget that is subject to rejection by the members. They hold a special meeting and members vote to accept or reject the budget. Unless a majority vetoes the budget, it passes. I think this is a waste of time and negates the purpose of having a board.

Then there are those associations where the bylaws were written in Hell by Lucifer himself. The board approves a budget that does not become final until approved by a majority of the members. I suspect that this is where your problem lies. The budget adopted by the board, who has studied the problems in detail, can be overridden by the slobs who know nothing and care little about anything but their own personal finances.

There are many possible legal remedies but all are going to cost you serious money. Unless there are more than a handful who feel as you do your best remedy may be to bail out now and go elsewhere.

NpS (Pennsylvania)
Posts: 4,216

Posted:

In my HOA, all the real power is with the board.

Board approves a budget (prepared by board or MC).

Board-approved budget is ratified by homeowners. But .. ratification only requires a majority of a quorum (20%). So it only takes around 11% of the homeowners to ratify.

On the other hand, it takes 51% of our homeowners to reject the board-approved budget. Never going to happen - unless we have a really crazy board and a bunch of really angry owners.

Sikubali jukumu. Read all posts at your own risk.

KerryL1 (California)
Posts: 14,550

Posted:

I may have misunderstood Adrienne's comment, but it looks to me hat the Board itself cannot reach agreements through voting. Can you supply us with th actual citation about WHO approves your annual budgets?

Along with Richard's other good questions, how many homes are in your HOA, Adrienne?

DouglasK1 (Florida)
Posts: 2,046

Posted:

Quote:

Posted By LarryB13 on 03/03/2016 6:36 AM

Then there are those associations where the bylaws were written in Hell by Lucifer himself. The board approves a budget that does not become final until approved by a majority of the members. I suspect that this is where your problem lies. The budget adopted by the board, who has studied the problems in detail, can be overridden by the slobs who know nothing and care little about anything but their own personal finances.

Ours are similar to this, but only require a majority of members present at a meeting with a quorum. We do this at the annual meeting, and luckily have never had issues, but I agree that it is really pointless. Our CCRs also say that "in no case shall the assessments approved fail to provide for the appropriate assessment necessary to maintain the minimum level of reserves for the major maintenance to the streets and drainage system". It would be a real mess if the members vetoed the budget because they disagreed about how much that required, and the CCRs don't say how to resolve that situation. One of the main duties of the board is to "cause the common area to be maintained", but such a clause could potentially make that impossible too.

Quote:

Posted By KerryL1 on 03/03/2016 7:35 AM
I may have misunderstood Adrienne's comment, but it looks to me hat the Board itself cannot reach agreements through voting. Can you supply us with th actual citation about WHO approves your annual budgets?

Unfortunately, the OP isn't really clear if the board is failing to pass an adequate budget or if the board has passed one but the membership won't approve it. It would be good to see the citation you requested, maybe they are having the membership approve the budget when it isn't required.

The OP seems to imply that she is not on the board, but that isn't 100% clear either. There is also no way for us to know at this point if the naysayers have merit, or if they just don't want to pony up what it requires to properly maintain the HOA. As many of us know, it is often not cheap to properly maintain an association.

Escaped former treasurer and director of a self managed association.

GenoS (Florida)
Posts: 4,276

Posted:

Sort of a similar situation here with regard to some homeowners' perceptions maintenance. They're not happy with the upkeep of the property and common elements but they are convinced the problem lies with how our resources are allocated (i.e. they think our maintenance contractor is taking us for a ride). They are unwilling to even consider that maybe we don't have enough in the budget to cover both routine and long-term deferred maintenance. We have an official list of maintenance man duties that's 5 pages long which represents way more than what one person might be reasonably expected to accomplish. Nevertheless, the owners in question adhere to the belief that there is substantial money to be saved if only we could micro-manage his time. We can't do that, though, since we want to maintain his status as a contractor and not an employee.

For those complaining about misallocation of resources, those who think there is wasteful spending, I suggest asking them to submit their own detailed plan with numbers that demonstrate where, exactly, any money could be saved to reduce expenses. Don't hold your breath waiting for them to respond.

AdrienneP (Washington)
Posts: 28

Posted:

Hi there, I apologize for my silence. We are in major (Facebook!) discussions about an upcoming special election for a dues increase and I have been glued to that page. Thank you so much for your feedback so far!

To answer your questions:

No, I am not a Board, or even a committee member. Just a concerned resident wanting to become more involved and make sensible proposals that can help to break the current deadlock. After the discussions in recent days, I may decide to stand for election.

In accordance with state law, our budget is approved by default unless a majority of owners reject it. However, a dues increase must be supported by 60% of votes. You can see the problem there.

Our Board as it stands is divided, with a small majority in favor of major dues increases, and a minority in favor of greater transparency, consultation with members, and exploring opportunities for greater spending efficiency. Hence, the Board last year approved a budget contingent on a substantial increase in dues, but those dues increases were rejected by the membership.

I myself am very supportive of the minority Board members as I have major issues with the lack of information flowing from the Board and the administration. They could be right in all respects but I have no way of knowing because they do not engage with dissenting members and generally conduct their business in a non-transparent manner.

At the same time, multiple instances have been cited of inefficient spending that make for uncomfortable reading. These instances may ultimately have been unavoidable, and they may also be marginal to our overall budget. But in the absence of adequate information it is almost impossible to know. Hence my idea of an efficiency audit.

Procurement practices seem to be an issue. I'm told that contracts are often sent to the Board with only one bid (instead of 3), or without copies of bids, with the justification that no other bids were received or that it is simply "too difficult". I find this very worrying, even though I understand that sometimes it can be difficult to get the full number of bids. I'd be interested in knowing how strictly other HOA's enforce their bidding procedures.

I have looked at the reserve study (on your recommendation TimB4), and it indicates that with a moderate increase (+/- 25%) in contributions we can bring our fund back up to a fairly solid balance. The dues increase requested last year was almost 50%. An expansion in operational spending appears to be underway to clear the maintenance backlog. As to the efficiency of operational spending, I have no idea. Again - efficiency study!

I've been told there is no way the current Board would support this kind of analysis. However, the composition of the Board could conceivably change after the next AGM. If it did, would it be worth considering this kind of study, or would it be extraordinarily expensive? I see it as a way of providing objective expert opinion to the debate and helping to break the gridlock.

Thanks again!

NpS (Pennsylvania)
Posts: 4,216

Posted:

Hi Adrienne

Sounds like you would be a great addition to your board. Hope you take that direction. Perspectives sometimes change when you're actually in the soup and not just stirring it.

In theory, the idea sounds good. But I would caution against it.

The best suggestion I can make is to compare what it would be like to get an efficiency audit done vs a reserve study.

At least the reserve study has some pre-set structure to it. Not only that, but you can look at a sample of the kind of reserve study that any provider would give you (because each provider has a fairly standardized package) and you can decide: "Will this be useful to us?"

I don't think you'll get that degree of up front certainty with an efficiency study. You're idea of what should be in the efficiency study will be different than mine. If we go with the provider you like, I could say that the study didn't cover the right things the right way. To me, there's way too much subjectivity in the selection process.

What makes more sense to me is to prepare a policy manual. It could include such things as: "We always get 3 bids for anything over a $5k expenditure" or "in an emergency, XXX can authorize the expenditure of up to $1k without going to anyone else" or whatever policy you want to come up with. But IMO, finding fault with what's going on is too easy to do and not likely to produce results that will be "useful to you."

There are many self-proclaimed experts out there. Some good. Some not so good. But I doubt you can just call another HOA and ask which efficiency expert they've worked with. I doubt many have taken that path. You might want to think about why they haven't.

Sikubali jukumu. Read all posts at your own risk.

KerryL1 (California)
Posts: 14,550

Posted:

I still think, Adrienne, that Richard's are good ones to which you could reply. I added the size of your HOA and now ask about the size of your Board. This info helps some of us--well, me--visualize your HOA, which can be useful.
And also: Does any dues increase, no matter what size, require a vote of the Owners according to state law?

Are board meetings in WA, required to be open to members (Owners)? I think Mark of WA has said they are, but I may be wrong. By "non transparent," do you men their meetings are closed?

Re: transparency, have you or others requested in writing copies of various contracts. IS your HOA required to give them to you viz. your won docs or state law?

Most agree three bids are best, but are they required in your documents? Or in WA law? Our PM has been at HOAs in our urban area for 11 years and has LOTS of contacts re: high rises like ours. But, still, there are times when there simply aren't three vendors qualified & available for the work we need.

With a 25% increase over your current contributions to reserves, what percent fully funded would your HOA be? In other words, what is "fairly solid," in your opinion? (In my HOA, that would be a hi ute increase and would raise owners' dues more that 20%, which is the limit in CA. We'd need Owners' votes.

It's wonderful that you want to become more active in your HOA, Adrienne. I hope that a lot of "seems" and "appearances" about one thing or another are confirmed--or not confirmed. It sounds like a lot of info is sketchy.

SheliaH (Indiana)
Posts: 6,964

Posted:

In many ways, my association has the same financial issue as yours, except there haven’t been any issues with providing people information on where and how the money’s spent (our problem is that most people don’t give a rat’s ass and don’t bother to read anything the association mails out anyway!)

With that said, here are a few other things you may want to think about: do you have an issue with delinquent homeowners? People often forget when some don’t pay, that increases the costs for everyone else to address the shortfall. That could be why some Board members want a 50% increase because they know some of that money has to be spent on chasing the deadbeats (a few of which may be the same ones screaming the assessments are just fine where they are).

I also wonder if the disrepair may also be due to homeowners behaving badly – sometimes people treat the common area any way they want because “it’s the association’s responsibility to maintain” – and they figure it should be doable with $1.98. In addition to getting the finances in order, it may be time to revve up rules enforcement to deal with stuff like people changing the oil on the street (thus hurting the pavement and creating potholes) or pet owners letting their critters run wild to poop everywhere, get into trash cans and spew litter all over the placed.

You will also need to take a hard look at what needs to be repaired, what caused the problem and the last time anyone looked at the trouble spots – brace yourself for lots of maintenance deferrment. Don’t forget about building codes – you didn’t say what kind of community you have, but if it’s a townhouse community like mine and you find you really need to replace the roofs, the building code has probably changed since the last time it was addressed so you’ll have to spend more money just to meet current requirements.

In addition to a reserve study (you didn’t say how old yours was – if over five years, it’s past time for an update), you may want to get a financial audit of the books – that will be the best way to see if the money went where it was supposed to go. You’ll also need to look at the budget’s line items for the past 3-5 years – what’s gone up faster than others and why? That’s where you can look at the minutes to see what and when the Board discussed various issues and see if anyone noticed these items were increasing and took steps to address it.

How often have assessments been increased? No one likes increases of course, but if it’s been years, you’re probably underfunded in a big way and that could also explain the need for a huge increase – you may not be able to avoid that.

Ask these questions at your annual meeting and see what happens. As others have said, you sound like someone your association really needs, so I hope you throw your hat in the ring. If other homeowners succeed in voting out the current bunch, just know it will take some time to figure out exactly where you are, prioritize what needs to be done and then do it.

If it is not right do not do it; if it is not true do not say it. Marcus Aurelius

LarryB13 (Arizona)
Posts: 4,099

Posted:

Quote:

Posted By AdrienneP on 03/04/2016 10:57 AM
Procurement practices seem to be an issue. I'm told that contracts are often sent to the Board with only one bid (instead of 3), or without copies of bids, with the justification that no other bids were received or that it is simply "too difficult". I find this very worrying, even though I understand that sometimes it can be difficult to get the full number of bids. I'd be interested in knowing how strictly other HOA's enforce their bidding procedures.

You just pushed one of my hot buttons! Where does this 3-bid nonsense come from? You are an HOA, not the Pentagon building a nuclear submarine. At least one of our regulars on here insists that they must get not only three bids, but that they must be SEALED bids.

Where do you people come up with this? Do you think contractors are chomping at the bit just waiting to bid the next HOA job? Your HOA would be the last place I would waste my time bidding for a job. I have no interest in working with a bunch of unskilled homeowners who cannot make a decision without waiting for the next board meeting. Whatever you want done will almost certainly be of utmost importance to your board as they sweat out the details making their big decision but in the greater scheme of things it is just small potatoes. There are other customers willing to pay more right now without all the pseudo bureaucracy.

If you already have a contractor who will put up with your board, who shows up more or less when he is supposed to, and gets the job done satisfactorily, why go messing around with seeking other bids? Yes, I have no doubt that everyone who is concerned about the efficiency of the board's spending knows someone - my brother-in-law, for sure - who would do the job for half the price except that he lives in Florida and does not have a Washington license but if he did he would do the job for much less.

From what you describe, there is certainly room for the board to improve its relations with the rest of the owners, although I wonder how many of these dissatisfied owners bother to attend board meetings. Nonetheless, I encourage each dissatisfied owner to seek a seat on the board instead of nipping at their heels.

SheliaH (Indiana)
Posts: 6,964

Posted:

Maybe it’s because I spent a number of years working in consumer protection and saw what happens when people rush into hiring contractors without doing their due diligence, but I have no issues with getting three bids – my general rule is the more expensive the job will be, the more important it becomes. It’s not about finding the cheapest contractor (which is where most HOAs run into problems), but finding someone who will do good work at a competitive price (subjective, I know). In the end, you get what you pay for, so the challenge is in finding the sweet spot in the middle

For me, bids are just part of the puzzle – I want someone who’s worked with HOAs before (so I can ask for references and check them), will explain what needs to be done in a way I understand it, answers all my questions completely and accurately, shows up when he says he will, finish the work when he says he will (if there is a delay, give me a heads up and explain why) and cleans up the work area before leaving.

The key is in knowing what you want before sending out bid proposals so no one wastes time – if the contractor doesn’t think he can do the job or doesn’t want to be bothered, that’s ok, we won’t expect a bid. However when those bids come in, the board should be prepared to review them carefully and make a decision without endless waffling.

If it is not right do not do it; if it is not true do not say it. Marcus Aurelius

KellyM3 (North Carolina)
Posts: 2,239

Posted:

Quote:

Posted By FredS7 on 03/03/2016 6:36 AM
An "efficiency audit" would at best show that some previously spent money was not well-spent. But the money is gone, and the audit won't get it back.

A better approach would be to guarantee that the association is efficient going forward.

Fred is correct.

The only way forward is the look ahead, create the transparency you (and the board) desires and go to work to build trust. It can be done and has been done.

Unless there is some criminal activity, it doesn't pay to look backward at "dumb" decisions or poor leadership as it will slow you down from what really matters.

KerryL1 (California)
Posts: 14,550

Posted:

Without reviewing the whole thread, Adrienne, Kelly citing Fred, seems to feel right.

Would it help to assemble a Finance Committee with only one director on it to review, say, your bidding policy? If none, perhaps they can be charged to craft one.

But I still think answers to Richard's questions will help you.

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