Hundreds of condo owners marched through the streets of Doral on Saturday, April 16 to demand that authorities take steps to stop a wave of fraud hitting their neighborhoods. You can read the entire story in the link that I have provided below at the end of the blog:
After I read this story I sent it to my fellow board members and one of the directors on my board who has a lot of experience governing the condo replied with an outstanding observation of the condominium concept. I have edited some names out so that we don’t get sued by the unscrupulous management company that had control of our condominium for ten years but everything else he says here is verbatim:
The condominium framework is ripe for fraud.
1) Most owners don’t want to be involved, yet are quick to complain. If more owners voted during elections, served on the Board, volunteered on committees, and spent even 10% of the time on building operations (that they would normally spend on their own single family dwelling), the easy pickings that stem from owner apathy would greatly diminish. But you can’t change people.
2) The system of monopolized management firms (MMF) has got to stop. Our Condominium was a good example of “one stop shop” building management, whereby the former management company took over everything soup to nuts, and milks the cash cow for all it’s worth. There is no incentive for management firms to trim resources, because they make money on everything they bring in. The relationship becomes parasitic, and the host is allowed to live just enough to continue providing income, while not enjoying any value add. On top of that, it becomes difficult for the uninitiated to get rid of said parasite, since as we saw, the entire management-maintenance infrastructure would need to be replaced almost overnight. The State needs to view these Monopolized Management Firms as condo monopolies that they are and put the brakes on the practice.
(a) Management firms should NOT be providing accounting services. By providing accounting services themselves, they strip away the checks and balances that an outside accounting firm can yield on a monthly basis. This practice opens up the operation to fraud, through “creative” accounting practices that would serve the Monopolized Management Firm (especially when it comes to showing pseudo-performance during contract renewal). If nothing else, condominium accounting needs to be separated out, in much the same way that an external auditing firm is separated out.
(b) Management firms should not make money from condominium employees via the so called “burden fees.” This practice represents a conflict of interest, and provides massive incentive for the Monopolized Management Firm to hire more resources than necessary just to increase their profits. And the flip is that when if they are prohibited from bringing on more staff, they’ll cry that poor maintenance is the fault of the Board, who won’t allocate for more resources. It’s a perfect setup for parasitism.
(c) Condo services need to be modular. By structuring services this way, the removal and replacement of any one module does not cause a cascade effect to the detriment of the entire operation. By default, it also results in a modular management firm, which can be replaced without the wholesale collapse of infrastructure. This model would include separating out accounting, engineering and housekeeping (three areas typically folded into the Monopolized Management Model model).
(d) The accounting firm needs to review and further certify the work of the yearly auditing firm. In too many instances, a management company would bring in an auditing firm that massages numbers, gets a rubber stamp of approval, and then collects it’s auditing fee. Instead of a double check against fraud, yearly auditing has turned into just another check mark with no real value to the Association. Again, by providing accounting services, the Monopolized Management Firm is basically given the keys to the hen house, with no oversight.
(e) There should be a separate condo collections module for assessments which feeds the accounting module, and which takes care of delinquencies. Monopolized Management Firms will not aggressively pursue condo collections (and risk the ire of the membership), to the detriment of the condominium. A separate module has the incentive to keep accurate track of receivables, because it can make more money from pursuing delinquencies. It’s an example of a healthy incentive to act, rather than an unhealthy incentive not to act.
Considering the amount of condos and HOAs in Florida (especially the larger ones, where the problems discussed above become even more monumental as the numbers get bigger, and as things get lost in the sauce) the State should mandate:
1) Limitations on management firms, thereby eliminating monopolistic tendencies that are hurting the industry.
2) Random auditing, using the same model that the DBPR and the health department uses to gauge a business’s adherence to regulations.
3) A separate certification for accountants specific to Condominium Association bookkeeping and best practices.
4) A separate certification for auditors specific to Condominium Association bookkeeping and best practices.
5) A separate ombudsman organization (outside of the DBPR) which is funded by condominium contributions, and whose contributions are affected by complaints (using the insurance model).
And overall, the State has to get away from the arms-length stance which protects it from taking over a failing condominium. The entire mechanism is setup so that condominium operations carry on with the minimum amount of regulation, so that a failure doesn’t become the State’s problem. This framework has been recognized by Monopolized Management Firms contributing to the breeding ground of condominium abuse. There needs to be a mechanism by which the State can step in with a forced transition, thereby protecting property values and the tax base I know that receivers can be put into place but that is just switching Coke for Pepsi because there is no incentive for the receiver to leave due to the incredible windfall they get from these appointments. Without this safety net, Monopolized Management Firms and corrupt/incompetent Boards can continue to abuse the system, knowing that there is nothing to stop them. The whole condominium setup is basically an honor system (like paying taxes to the IRS), but without the stick (like getting audited by the IRS for non-compliance).
And then we wonder why corruption and mismanagement is rampant in the condominium industry.
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