Ask the HOA Expert

Cash vs. Accrual Accounting
Question: Which accounting method is preferred for HOAs, the Cash Method or the Accrual Method? Currently, we use the Cash Method and it seems to distort the actual financial situation. We're showing a profit when, in fact, we're losing money.

Answer: Accountants recommend the Accrual Method because it shows a more timely and accurate picture of income and expenses. With Accrual accounting, income is posted when the goods are delivered or services rendered; expenses are posted when the bill is incurred. But few folks handle their checkbooks like this. With the Cash Method, income is posted when received and expenses are posted when paid. But this method can cause income and expenses to fall outside the budget time frame to which they apply (monthly, quarterly or yearly).

While Accrual is the most accurate way to track finances, it is more labor intensive since more transactions need to be recorded. For example, income must be reported when earned and when it is received. The good news is that computers and software have simplified the accrual accounting process. In the final analysis, the board needs to adopt an accounting method which it can understand and deal with. Those that have used the Cash method forever will have a difficult time changing. BACK

Nominating Committee Criteria
Question: What are the duties of a board appointed Nominating Committee?

Answer: The Nominating Committee is appointed by the board to identify candidates for election. The committee is usually charged with these tasks:

1. To verify that candidates are in good standing with the HOA (no outstanding delinquencies or rule violations)
2. To inquire whether a candidate has special training or expertise (accounting, engineering, project management) which would be useful to the director position.
3. To verify that the candidate is aware of the meeting schedule and able to attend all board meetings.
4. To provide candidates an overview of the director duties.

While the Nominating Committee may recommend certain candidates, all members in good standing are entitled to run for the board and should be included in all meeting notices, proxies and ballots. BACK

Renting My Unit
Question: I live in an HOA that has rental restrictions. I recently got transferred and am unable to sell my unit because of market conditions. I need to rent it but am afraid of violating the rules.

Answer: You are not alone in your predicament. I suggest that you request an exception to the rental restriction due to the circumstances you describe for a period of, say, one year, to allow time for the real estate market to recover. If circumstances have not changed in a year, ask for another year extension. By requesting a temporary exception, you aren’t opening the door to everyone else unless they are caught in the same bind. The board could say no but if your inability to sell or rent causes you to lose the unit to foreclosure, the HOA will likely lose fee revenue. It’s in the best interest of the board to compromise when circumstances dictate. BACK

Recommending Service Providers
Question: Some HOA websites and newsletters include a service directory which are recommendations of members. The board has been advised by our lawyer to refrain from posting such lists. I feel the service of these lists overpowers the possibility of legal risk.

Answer: The fact that the HOA posts member recommendations does not constitute an endorsement by the HOA. But to satisfy the lawyer, the board can simply add a disclaimer to that effect. BACK

Tree Cutting Policy 2
Question: Our governing documents have strict policies regarding tree cutting and clearing. The reason for the tree policy is to preserve the streetscape and prevent clear-cutting. The board gets requests from time to time asking permission to cut trees. We inspect and sometimes approve the cutting but if it’s a large tree and there is no disease or damage, we usually deny the request.

An attorney/resident is requesting to cut of two tall trees that are about fifteen feet from his house due to the potential of the trees falling. He is stating that the HOA will be liable if the tree falls. Is the HOA truly at risk?

Answer: Not all large tree cutting requests should be summarily dismissed. There are several good reasons for large trees to be removed:

1. There is a fire hazard. Trees should generally be located at least 30 feet from the building, especially if they are more flammable like pine trees. This is especially true in areas that are prone to wild fires due to drought and windy conditions. Keeping trees 30 feet away helps create a defensible fire zone.

2. Trees create leaf debris that clogs gutters and downspouts. Certain kinds of trees create year round leaf debris that substantially increases gutter cleaning and blockages. Removing such trees in close proximity to structures makes good sense.

3. Trees that overshadow and inhibit the landscaping. Developers often plant many trees because they are small and more of them makes a better marketing impact. But when many small trees grow large, they can turn the common area into a dark and foreboding place where flowers, bushes and plants won’t grow. Thinning out selected trees is often recommended for the health of the landscaping and trees. Ornamental trees need room to flourish.

4. Leaning Trees. Under windy and wet conditions, leaning trees are more likely to fall. It usually best to remove them before they do.

5. Trees that are diseased. Certain species are subject to infestation that will eventually kill them. It’s best to remove them early to slow the spread of the blight.

When confronted with a specific request that goes against the grain (tree pun), it’s prudent to get a licensed arborist to review the trees in question. If the arborist believes they are a danger or should be removed, remove them. Otherwise, no. The board is not responsible for Acts of God, only for handling business in a prudent manner. Use experts to your advantage. BACK

Director Privacy
Question: I am having trouble contacting the individual directors on the board of directors. The HOA President says there are "privacy issues" to giving out phone numbers or email addresses. I’ve asked our property manager and I get the same response. I thought that as a homeowner I have a right to directly contact my board members.

Answer: All members, even board members, have the right to privacy. Your board has hired a management company to handle business. The manager, in turn, contacts the board as needed when business matters exceed the manager’s authority. I suggest you contact the manager with your request. Either he will be able to help you or will ask the board president or board for direction. This is a reasonable process to protect an individual board member’s privacy. BACK

ARC Compliance
Question: Does an Architectural Review Committee (ARC) have the right to ignore published regulations relating to the installation of playground equipment on a residential lot? Our Rules and Regulations specifies that before an application is approved, the owners of adjacent properties must be notified.

Answer: If the ARC has a procedure to follow and it has not been followed, you have the right to appeal the matter to the board of directors. The requirement for neighbor input was put there for a reason and should be honored as long as it exists. BACK

Use of HOA Lawyer
Question: Can owners and board members be prohibited from conferring with the HOA’s lawyer by the board president who is the appointed liaison?

Answer: Since conferring with an attorney probably triggers cost to the HOA, the board should have a strict policy concerning how and when it is done and who has authority to do so. This policy should be communicated to the attorney in writing so he knows who he authorized to deal with. BACK

Embezzlement in HOAs
Question: How susceptible are HOAs to the embezzlement of funds? What are common safeguards and how effective they are?

Answer: Embezzlement has not been all that prevalent in HOAs because historically most had little money to embezzle. However, as more states enact mandatory reserve fund requirements, more HOAs are accumulating substantial reserves for future repair and replacements which will entice embezzlers.

To safeguard these funds, they should be deposited in a separate bank account apart from regular operating funds and should only be accessible by a few designated parties, like the board President and Treasurer, who have specific authority to sign checks. A property management company typically would not have authority to write checks against the the reserve account. It’s a good policy to require two signatures on reserve account checks although the bank typically will not reject checks that carry only one authorized signature.

It’s also a great idea to provide all board members with monthly copies of the bank statement. Embezzlement usually happens when only one person (like the President or Treasurer) is getting this information. When others have regular access to it, the odds of embezzlement drop dramatically.

Another form of embezzlement involves reimbursements. A board officer could easily steal money by submitting bogus or inflated requests for reimbursements. The board should have strict policies on reimbursements which include type and amount. No board member should be paying for HOA expenses from their personal account. It’s just too easy to manipulate the invoice and embezzle. All invoices should be payable by the HOA and go through the normal payment system.

Embezzlement typically doesn’t happen over night. The embezzler is one that usually is entrusted with substantial funds with no one else overseeing them. After a period of time, the temptation just gets too great. The theft often happens because of an urgent personal debt payment or a gambling, drug or alcohol addiction. The thief typically intends to repay but rarely does. Once stolen, the money is seldom recoverable. While two or more people could conspire to embezzle, it rarely happens. The key to avoiding embezzlement is to set up a system with unrelated parties watching the HOA’s cookie jar. BACK

Unit Owner Maintenance
Question: Our HOA currently has a board member who is insisting that unit owners who choose to, should be allowed to clean their own unit’s vinyl siding. (A former board regrettably had granted him permission to clean a small area on two units which had an accumulation of algae and the cleaning left a noticeable shadow.)

The board has scheduled the entire building for vinyl siding cleaning next year but this board member is insisting that we allow individuals to wash their own to save money. The board has denied his request however, I don't think he is going to give up. Can you provide me with some solid arguments toward why homeowners should not be allowed to perform their own maintenance?

Answer: If the board decrees unit owners should not maintain building exteriors, that is the way it is. The common elements belong to ALL unit owners jointly so the HOA has the responsibility to do maintenance and repairs, not individual unit owners. In addition, there are both risk and quality control issues when individual owners are involved.

Whether he is convinced or not, bottom line, the board majority has spoken and he needs to respect that decision. Part of serving on the board is respecting "majority rules". If he continues to undermine the board, he will be ostracized from the process by the other board members and lose his ability to make a difference. BACK

Board Overriding Member Vote
Question: What are the possible repercussions when a board throws out a membership decision voted on at the Annual Meeting?

Answer: If member approval is required to do what you describe, the board must follow the dictates of the vote. If the vote was advisory only, the board could go a different direction but that clearly would invite well deserved challenge from the member majority who expressed their preference. Smart boards would not do such a thing. BACK

Developer Mismanagement
Question: Our HOA is half sold and is being managed by the developer who charges us for it. The outside maintenance is terrible. The sprinkler system doesn’t work and weeds were out of control. Thoughts?

Answer: You need to review your governing documents to see if there is a deadline for the developer to turnover the HOA to a board of owners. There usually is a trigger based on number of units sold or a certain time that has passed, whichever comes first. If there is, you and other owners can demand turnover to the owners. Get an attorney to make the point if necessary. Once an owner board is in place, it can act on behalf of all owners.

If the developer is not yet required to turn over control, you are certainly within your rights to point out the developer’s management shortcomings. You’re paying for the service and failure to maintain the common area diminishes your property value. BACK

Non-Resident Directors
Question: We have an upcoming election for directors and two of the candidates are not full time residents. They are from a troublemaker group and plan to participate in board meetings only by phone. Is there anything that the present board can do to prevent this from happening?

Answer: Candidates for the board are not required to be residents. And if all board meetings are handled by phone, no big deal. But if they are saying they won’t attend in-person meetings, this is a big deal and such information needs to be conveyed to the voters. As to what you can do about it…You can encourage and nominate others that are willing to fulfill the board job as intended. If the dissidents don’t get voted in to begin with, the rest of the board won’t have the challenges of dealing with them. BACK

Using Email for Notices
Question: We are nearing completion of our HOA website and getting ready to launch. The board intends to use email for meeting notices, dues notices and event reminders. Right now our governing documents state notices must be sent by US Mail. Is this going to pose a big issue? Also, should we get each member’s written consent to communicate via email?

Answer: Since a high percentage of citizens now regularly use email and it’s free, fast and efficient, many HOAs are now communicating that way. However, since your governing documents require use of mail, the members need to vote to approve a change. I suggest holding a special meeting including distribution of proxies to ensure a quorum to handle this issue as soon as possible.

Yes, you should get written approval from each member to use email. Some don’t have computers or rarely use them. Also, you should consult with an attorney about communicating certain kinds of information like rule violations, delinquency notices and legal notices solely by email. While it may be okay, it’s still a good idea to mail such notices as well. BACK

Onerous Fines
Question: I was recently fined $300 for not letting the board know about a tenant moving into the HOA within a timely manner (I did so within a week). Isn’t there a grace period of sorts to allow for communicating this information? Also, $300 seems excessive.

Answer: A $300 penalty is not reasonable. This is the kind of fining policy that would probably cause a judge to revoke the entire fine and fine the HOA for having such a policy for such a petty issue. Fines should be reasonable and "fit the crimes". BACK

HOA Sponsored Parties
Question: Our HOA recently completed a major reconstruction project and the board would like to celebrate the event with a barbeque. Can the HOA pay for the function or should we have a potluck?

Answer: Budgets for most HOAs are barely enough to cover required expenses, much less socials. Unless the HOA has a social budget, it should be potluck. BACK

Banning Pick Ups
Question: Our parking rules do not allow vehicles with dual axles to be parked on the property. But we now have quite a few residents that drive pickups so equipped.

Answer: Restricting certain kinds of vehicles is usually due to size (like an RV), commercial use (like a contractor’s truck) or recreational use (like a boat). Since parking in most HOAs is a limited commodity, it makes sense to limit parking to automobiles, van and small trucks in residential use. Some small trucks these days have dual axles so rather than focus on the axles, the rule should be interpreted according to vehicle size. The board has the authority to amend parking rules and it sounds like it’s time to do just that. There is a sample Parking Policy in the Policy Samples section. BACK

Children at Play Signs
Question: We have a situation where residents are placing "Children at Play" signs on the streets to slow down the traffic. However, the board is confiscating the signs. What is the board's responsibility to control children playing in the streets?

Answer: It is the parents’ responsibility to supervise and control their children. They should never allow them to play in the street (like "duh"). But as long as the signs are temporary (only placed when the kids are out near the street), the board should not restrict them. Some things, like slowing traffic, is good for all residents. BACK