“Novice buyers often fall in love with the decorative staging or the lakefront view of a for-sale unit,” said Sara E. Benson, a Chicago real estate broker and appraiser with more than 30 years of experience.

“However, you need more high-tech inside information than typically available on a Multiple Listing Service printout,” advised Benson, CEO of Association Evaluation LLC, a Chicago-based real estate data-analysis firm. (www.AssociationEvaluation.com)

Working as an exclusive buyer’s broker for decades, Benson always did the behind-the-scenes condo-investigation homework for clients. On every deal, Benson dug into the condo documents—budgets, board minutes, history on special assessments, status of reserve funds, and common-area conditions before she let a buyer blindly sign a sales contract.

Why? Because more than half of the 337,000 community associations in the U.S. are facing “serious financial problems,” reported the Community Associations Institute. And, 72 percent of association-governed communities were underfunded in 2013, according to Association Reserves, a California-based company that helps associations with budget and operational issues.

In 2012, Benson utilized her real estate appraisal background to develop a unique algorithm analyzing more than 140 data-points regarding the internal workings of community associations. Using the data, she commissioned a team of computer scientists and programmers to create a new, patent-pending scoring system—the “Private Association Rating”—or PARScore®, a revolutionary new high-tech, data-driven analytics process.

So, how does a condo shopper obtain the often hard to get financial information? The simplest way is just ask for it, and make the deal contingent on getting the information.

“You should insist that your Realtor or real estate attorney attach a special “Condominium Association Inspection Contingency Rider” to the contract to make completion of the deal contingent on receiving important documents and often hidden financial information.

The rider requests the following information: Declaration or Covenants, Conditions and Restrictions (CC&Rs), association rules and fine schedules, current and prior year’s operating budgets, most recent 12 months of board minutes and audits.

The rider also requests most recent reserve study and reserve study review, current reserve and operating account balances statement, lawsuit disclosure statement, owner-occupancy disclosure statement, life safety completion statement, and most recent 24 months of special assessment history disclosure.

The Contingency Rider also requires the seller to pay any expenses related to gathering the documents and providing them to the buyer.

The Contingency Rider also includes a new benefit—a Buyer’s Inspection Notice—which calls for visual examination of the property’s commonly owned elements, such as recreation facilities, swimming pool, fitness center, parking, elevators and common roof deck. The prospective buyer pays for the visual inspection as part of the PARScore® fee.

While surfing the web, a Chicago-area condo shopper found Association Evaluation through a Google search.

The buyer, who plans to move from north suburban Gurnee and hopes to buy a condo in southwest suburban Oak Lawn, downloaded the free “Buyer Kit,” the Condominium Association Contingency Rider, and the HOA Contingency Rider using the following links:

• Buyer Kit: https://associationevaluation.com/buyerkit/

• Condo Rider: https://associationevaluation.com/wp-content/uploads/2014/06/AE-Condo-Inspection-Rider.pdf

• HOA Rider: https://associationevaluation.com/wp-content/uploads/2014/06/AE-HOA-Inspection-Rider.pdf

The buyer also asked Association Evaluation to complete a PARScore® evaluation on the Oak Lawn condominium he plans to buy. He already has received the association’s declaration, bylaws and insurance certificate. “Financial information and other documents listed on the Association Evaluation website have been requested,” he said.

“Today, potential buyers of condos or homes in HOAs have access to digital tools that de-clutter murky data in favor of transparent information that actually empowers the consumer in advance of their purchase,” said Benson.

The Association Evaluation team already has captured more than 50,000 Chicago-area and Illinois condo associations and HOAs in their database, and has completed hundreds of PARScore® reports from Bethesda, MD to Palm Springs, CA.

Through the proprietary algorithm, PARScore® provides a standardized rating between 400 and 900. Every association is assigned a unique Permanent Identification Code (PIC). More than 140 data sets are analyzed and scored against the coded individual associations by using the patent-pending PARScore® point system.

Depending on the number of units in the condo building, the cost of a PARScore® typically ranges from $300 to $850.

Collected data includes direct investigations with association directors and property managers, as well as on-site inspections of the communities. Additional data sources include monitoring corporate filings such as lawsuits, judgments and bankruptcies.

Financial reporting includes verification of operating and reserve-account monies. Board minutes are examined for adherence to standard accepted business protocol procedures and to ensure against unexpected and costly special assessments that have been discussed by the association’s directors, but not yet levied at the time of sale.

A check for date of last reserve study and date of last financial audit also serves to greatly reduce risk. News, Internet and media sources are consistently monitored for each association.

For more housing news, visit www.dondebat.biz. Don DeBat is co-author of “Escaping Condo Jail,” the ultimate survival guide for condominium living. Visit www.escapingcondojail.com.

The post Condo Buyers Should Never Buy Blind Without Insider Info appeared first on Association Evaluation LLC..

“Many condo management companies now charge prospective buyers and sellers excessive fees of hundreds or thousands of dollars for providing condo documents that should be free for the selling unit owners to provide through their broker,” noted Sara Benson, president of Association Evaluation, LLC.

Launched in 2012, the Chicago-based real estate data analysis and technology firm developed the Private Association Rating, or PARScore, which provides a standardized high-tech condominium association rating between 400 and 900 via a data-driven proprietary algorithm. Every PARScore report includes a site evaluation of the common areas by a certified association evaluation professional plus a review of the association documents.

Documents necessary for a real estate buyer to review before committing to a purchase include the declaration – or covenants, conditions and restrictions – bylaws, house rules, regulations, board meeting minutes, state mandated disclosures, prior and current year budgets, and the reserve study.

“Doc fees can range from $50 to $250 per document, so the price can really add up depending on the number of documents requested,” said Benson (right). “On average, fees run approximately $500 for electronic delivery for a complete set needed for a condominium sales transaction.”

Reviewing condo documents is critical, consumer advocates say, because buyers need to know well in advance if the association being bought into is on the brink of bankruptcy or fiscally fit and a sound investment.

“You wouldn’t want to get hit with that $50,000 special assessment six months after the closing, would you?” Benson asked.

Most governing instruments and state statutes were created long before online delivery was a possibility, consumer advocates note. They allow for a “reasonable cost” of copying association-related documents.

However, in the age of the Internet, association documents are often stored electronically and can be shared with a simple click of a mouse. There are no paper, ink, or shipping costs. There is no manpower time associated with copying documents and sending them to the buyer by USPS or FedEx.

“Despite this, many management companies – and some boards – are using the documents as a literal profit center,” Benson said. “These are new expenses conjured up by property managers, charging fees for materials that are owned by the sellers or documents that are a public record.”

“Realtors and condo buyers and sellers are beginning to wonder if this is a ‘reasonable cost’ when delivery is paperless.”

Benson recently formed a Broker Advisory Board that is dedicated to improving the lives of current and future residents in association-governed communities by fostering transparency, accountability, credibility, and best practice governance in community associations nationwide.

Several members of the advisory board strongly questioned the ethics of the relatively new practice of some management companies to market condominium documents to buyers and sellers, creating a lucrative income stream for the management firm while representing a not-for-profit condo association.

Housing advocates find it surprising and of great consumer concern that the media is not scrutinizing the practice of management companies charging upfront fees for providing the documents and disclosures, and then charging a second fee for the property transfer at the back end of the transaction.

This practice likely is a violation of the Fair Housing Act because the fees amount to hundreds, perhaps thousands, of dollars. This affects affordability and that can be discriminatory.

If these hefty condo and homeowner association fees are tacked onto the closing statement required by the Real Estate Settlement Procedures Act, shouldn’t management companies be subject to all of its provisions?

For more housing news, visit www.dondebat.biz. Don DeBat is co-author of “Escaping Condo Jail,” the ultimate survival guide for condominium living. Visit www.escapingcondojail.com.

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Last week, we discussed how to react when you discover HOA fraud. This week, we discuss when it’s time for legal advice. The short answer is, never! Going to court against your homeowners association is equivalent to suing yourself. Amazingly, the aggrieved homeowner is simultaneously paying for both the prosecution and the defense at the same time. It’s a no-win situation. The association always has the upper hand in terms of cost. They have the money –

Occasionally, an owner will “win” a lawsuit, but at what cost? He or she often spends all of his or her savings and many times bankrupts not only him – or herself, but his or her association as well. Lawsuits can take years – many years. And then there’s the crapshoot of trying to collect damages.

Suspecting board fiscal misconduct, Gary Palm, a Chicago attorney, University of Chicago professor emeritus of law, unit owner, and prior board member of the 2800 Lake Shore Drive Condominium Association, fought a recalcitrant board for 13 years to get access to financial records he rightfully was entitled to view within three business days under city and state statutes. Legal fees were in the hundred of thousands of dollars. Experts speculated that because of Palm’s advanced age, the association was waiting for him to expire and give up the good fight. The association appealed. Out of money and running out of time, Palm could no longer afford to hire an attorney and self-represented before the Illinois Supreme Court. In April 2013, the Supreme Court ruled in his favor.¹

Like it or not, attorneys serve an absolutely critical function in community associations – and some of them are superb at problem solving and facilitating agreement. Often a well-worded demand on an attorney’s letterhead is more powerful than all other options.

When the time comes to hire, always choose an attorney skilled not only in real estate, but specifically in your state’s condominium and HOA statutes. Avoid attorneys standing in the “breadline” – those who take on assignments without specific areas of knowledge. The practice and interpretation of condo and homeowner association law is a specialty. Just like surgeons, attorneys have specialties. You wouldn’t want a heart surgeon performing your brain surgery. Likewise, you wouldn’t want an attorney who specializes in traffic law represent you in community living disputes. Interview your attorney and do not be afraid to ask questions. (One Supreme Court justice once said that in his opinion, less than 20 percent of the attorneys in the United States were qualified to practice law.)

An experienced attorney will respect you for asking questions and is always pleased to dwell on his own accomplishments. Further, you want to make certain the relationship is a mutually good fit from the very beginning. Some of the questions to ask in the initial interview include:

“Does your company represent individual owners”

“Do you have any conflicts of interest in representing me?”

“Are you experienced in litigation?”

“Specifically, are you experienced in community association law?”

Honest answers to these questions will help you make the right choice in retaining a lawyer. Sometimes it is urgent to hire an attorney. If fraud has been discovered and the perpetrator(s) might be a flight risk, it may be necessary to get an immediate court order to freeze the association’s assets. Far too often embezzlers are caught fleeing the country with dyed hair and their passports and thousands of dollars in cash in hand.

¹ Palm v. 2800 N. Lake Shore Drive Corporation, Illinois Supreme Court decision, April 2013.

The post You’ve Discovered HOA Fraud: When Is It Time for Legal Advice? appeared first on Association Evaluation LLC..

This week, we discuss how to react if you do not bulletproof your HOA against embezzlement and discover your HOA is the victim of fraud. Finding the proper authority to investigate allegations of fraud can prove to be extremely difficult. If your association has been a victim of the “condo confidence game,” gather as much evidence as possible. Double-check all bank statements, checks paid, check endorsements, invoices, receipts, and any other related financial data. Call the police and file a police report. The police will ask the following questions:

• Who is taking the money?
• How is the money being taken?
• Where, if know, is the money going?
• Who are the victims?
• What are the dates and times of theft, if known?

Even with the information, calling the police and filing a report does not guarantee they will make an arrest. As cities are under tighter and tighter budgets, police departments are generally wary of taking on anything that smells like a condominium or homeowners association. “It’s civil” is a repeated refrain that places the jurisdiction in the courts – not at the police level. Occasionally, arrests are made, but they are few and exceedingly infrequent – and the theft must be absolutely in-your-face blatant and outrageous. Remember the detective who stated, “They may have been stealing the money, but they have been given the authority to do it.”

Similarly, calling the state’s attorney or attorney general’s office will result in the same chilliness: “It’s civil.” Well, actually, it’s not civil at all, but that’s what they like to say because your local police do not have the manpower or time to investigate homeowner association theft when more serious and violent crimes are occurring every minute of every day, Your local legal aid society? It won’t help either.

If actual embezzlement or breach of fiduciary duties can be proven, one o the best first steps to take involves a multi-pronged approach: Prepare a detailed letter outlining the facts. Document the proof and include attachments in the letter. Demand the violator(s) “cease and desist.” Have the letter signed by as many owners as possible. Simultaneously send the letter via USPS Certified Mail – with return receipt requested – to both the board attorney and the association’s insurance company.

If the fraud or misconduct involves a board member acting unethically, there is a strong likelihood the member will not be covered by the association’s directors and officers policy.

The post How To React to HOA Fraud appeared first on Association Evaluation LLC..

Last week, we gave tips to bulletproof your HOA against embezzlement and asked, “Who is guarding the guardians?” This week, we continue our discussion about HOA fraud and how to protect your investment.

Frank Abagnale, one of the nation’s most respected authorities on the subjects of forgery and embezzlement, knows about thievery. He was credited wiht the dubious title “the world’s greatest check forger.” So, of course, the FBI ended up hiring him. He was the focus of a 2002 autobiographical comedy/drama movie directed by Steven Spielberg and starring Leonardo DiCaprio as Abagnale. The movie? Catch Me If You Can.

Consider two houses side by side. They are absolutely identical in every way except one house has a shiny metallic security sign in the front yard. The other house does not. Regardless of whether the alarm system is hooked up in either house, which one will the thief choose to break into first? The one without the warning. According to accounting-fraud specialist Lasinsky, white-collar crime perpetrators will move to the easiest target every time.

Management companies can provide a benefit to associations by serving as an extra layer of oversight. Yes, they too can commit fraud, but the association’s books are generally being handled by an independent corporation rather than a single individual or board member. Management companies are far and away more accountable to the board and residents than a single board officer might be. No one person should ever have complete control of any homeowners association, no matter how small.

The most important step in bulletproofing your association’s funds is prevention. Associations need a “financial-procedures manual,” and every association should mandate use of the manual to be a part of its bylaws. The manual should specify a series of checks and balances, such as timely bank reconciliation and keeping more than one set of eyes on the books. These two activities alone are critical to preventing fraud.

There has never been a time in history where complete and accurate financial accounting has been more urgent. The transparency of an association’s finances is absolutely critical to maintaining fiscal health and preserving values. Treasurers and management companies alike should provide monthly accounting reports – or at least quarterly reports – detailing all account balances and expenditures.

Additionally, association bank accounts must be reconciled monthly. Quarterly reports to unit owners should be accrual based, including an operating account budget to actual variance report and cash flow projections. Further, a detailed unit-owner maintenance-receivable report including any delinquent fees and prepaid balances should be provided to the owners. Please refer to our 35-point guide and checklist for bulletproofing your association for an in-depth look at how to protect your HOA against embezzlement.

Next week, we will be discussing the appropriate steps to take if you do uncover fraud within your HOA.

The post Bulletproof Your Homeowners Association’s Funds Against Fraud – Pt. 2 appeared first on Association Evaluation LLC..

Some states, such as Florida and Illinois, have recently mandated licensing to oversee property managers, but there are far too many loopholes and exempt associations. Unfortunately, the chances of a thief being punished for stealing a few hundred thousand dollars from an association are slim. A trusted board members or manager has to steal several million to get any real attention, and even then the case may not get to court before the accused passes through the pearly-white gates of the great HOA in the sky. This aspect of the length of legal proceedings is of special concern in senior communities.

Many cases of association theft involve check fraud – a major financial crime. The US Office of Comptroller of the Currency has reported more than 1.2 million fraudulent checks are written every day – more that 13 per second. In 2003, check fraud exceeded $20 billion, up from $12 billion in 1996 and $5 billion in 1993, according to the Nilson Report.

With advancements in inexpensive desktop publishing software, the problem is steadily increasing. A 2011 survey conducted by the Association of Financial Professionals revealed 71 percent of the organizations responding confirmed that they had been a victim of payment fraud, up 55 percent from 2005. The vast majority – 93 percent – indicated that they were victims of check fraud. All organizations – whether large or small – experienced check fraud.

Another rapidly growing- and evolving- segment of fraud involves Internet banking. Despite encrypted and secured websites, Internet banking is not safe. A USA Today report noted cyber robbers are targeting small businesses online banking accounts. Millions of accounts are hacked every year. In the report, Doug Johnson, vice-president and senior advisor for risk management for the American Bankers Association, suggests commercial bank customers take precautions when banking online.

“Each bank sets its own policy regarding a business customer’s liability related to unauthorized electronic transfers,” Johnson noted. “Banks urge business customers to be aware of their responsibility to keep computers used for online banking free of malicious programs. [sic] ACH or wire transfers should always be initiated under dual control, with one person initiating the transaction and another person approving it.”

What this ultimately means is that HOAs and condo associations will be held accountable should electronic theft or fraud occur. Under federal law, if an individual’s bank account gets hijacked, the banks must restore the funds. Business owners are not as lucky. Most banks will not reimburse a business customer – even if the customer has done nothing wrong – should an Internet security breach result in theft draining the company bank account to zero. Paula Fleming, spokesperson for the Boston Better Business Bureau, observes,: “In this day and age when practically everything is done on the Internet, it’s extremely important to take the necessary precautions.”

A private alert issued to banks by the Financial Services Information Sharing and Analysis Center warns small and midsized organization never to use a PC dedicated to Internet banking for e-mail or web browsing. “Banks typically do not publicly address this issue,” noted Jennifer Bayuk, former chief information security officer at Bear Stearns.

In it’s online Fraud Report (10th annual edition, 2009), Cybersource, a leading provider of electronic payment and risk management services that was purchase by VISA in April of 2010 for an impressive $2 billion, reported 2008 recorded losses of online sales are estimated at $4 billion for the American market alone. (Since 2008, the Federal Trade Commission no longer separates Internet-related fraud from consumer and identity theft fraud.)

Despite such staggering numbers and financial losses, according to the US Department of Justice, the imprisonment rate for check fraud alone is merely 2 percent. Capture and imprisonment of cyberfraudsters is even less. Frank Abagnale, one of the nation’s most respected authorities on the subjects of forgery and embezzlement, states: “Punishment for fraud and recovery of stolen funds are so rare, prevention is the only viable course of action.”

The post Bulletproof Your Homeowners Association’s Funds Against Fraud – Pt. 1 appeared first on Association Evaluation LLC..

By Deborah Goonan, Independent American Communities, CHPPI

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Las Vegas Review-Journal:  Lawyer who stole $1M from clients gets eight more years in prison

http://www.reviewjournal.com/news/las-vegas/lawyer-who-stole-1m-clients-gets-eight-more-years-prison

• The Takeover: Inheriting Old Books
• Avoiding the Sting: Guarding and Vigilance
• Banking on the Cloud: Cyberbanking Safeguards
• Show Me the Money: Maximizing Efficiency and Return

Do you have any horror stories about shady HOA practices? We’d love to hear them! Email us at info@associationevaluation.com

The post DISPATCHES FROM THE FRONT: NEVADA LAWYER DEFRAUDS HOA OUT OF MORE THAN $1M IN “DESPICABLE” SCHEME appeared first on Association Evaluation LLC..

According to a Realtor.com article:

A Florida appellate court has considered whether a purchaser’s lawsuit adequately stated claims against a listing broker for failing to disclose latent defects on the property. Paul and Mary Cummings (“Sellers”) entered into a contract to sell their townhouse condominium to Erik and Carol Syvrud (“Buyers”). Both parties were represented by real estate licensees in the transaction.

Subsequent to the close of the transaction, the Buyers were shocked to discover numerous structural defects in their townhouse and to a number of buildings inside the condominium association. In fact, the unit owners had been notified by the condo association that they would face a special assessment of over $20,000 PER UNIT. None of this information had been disclosed to the Buyers at the time of purchase.

The article further states that:

The Buyers filed a lawsuit against the Sellers, the Buyers’ real estate licensees, and the listing broker, Today Real Estate, Inc. d/b/a ReMax Today (“Listing Broker”). The lawsuit sought to void the purchase contract as well making various claims for damages resulting from the nondisclosure of the defects.

Florida law demands full disclosure from the seller of all known facts which “materially affect” the value of the property and are not visible or known to the buyer. Therefore, a listing broker can be held liable for negligence and fraudulent misrepresentation when such defects (as the ones aforementioned) are not appropriately disclosed.

Both parties went back and forth regarding the waiver of nondisclosure in a purchase contract. As stated in Syvrud v. Today Real Estate, Inc., 858 So. 2d 1125 (Fla. Dist. Ct. App. 2003), under Florida law, an “as-is” clause does not eliminate the obligation of the seller to divulge known hidden defects to the buyers or those defects of which a listing broker has knowledge.

Perhaps if both brokers had been more diligent regarding the disclosure of material defects and armed themselves with the pertinent information about the upcoming special assessment – this messy lawsuit could have been avoided.

Using the Private Association Rating Score System (PARScore®) reduces liability. 

Have a story to share? Email us at info@associationevaluation.com.

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Over the past few weeks, we’ve discussed

• Inheriting Old Books

• Guarding and Vigilance

• Cyberbanking Procedures

• Efficiency Maximization and Return

Let’s pull it all together, here is the complete 35-point checklist to BULLETPROOF your building association.

Inheriting Old Books

1. Open new accounts
2. Update bank signature cards.
3. Obtain a transition statement.
4. Destroy all old checks.
5. Keep new checks locked.
6. Report any theft to police.

Guarding and Vigilance

7. Keep board officers’ deeds and state-issued IDs on file.
8. Perform credit and background checks on employees.
9. Have monthly bank statements sent to two different people.
10. Require fidelity insurance and bond money handlers.
11. Require that different people write checks and reconcile books.
12. Require board members to review bank statements within 10 days.
13. Never allow the management company to access reserve accounts.
14. Never rely on computer-generated reports instead of bank statements.
15. Require budgets to conform to GAAP.
16. Require use of established financial software.
17. Require two signatures minimum on each checks, with amounts over $2,500 requiring three signatures.
18. Never allow credit or debit cards.
19. Require invoices before paying bills.
20. Use safety checks with watermarks and warning bands.
21. For sizable accounts, use an automated fraud detection tool.
22. Perform periodic audits on a schedule.
23. Do not let accounts exceed FDIC limits.

Cyberbanking Procedures

24. Have a procedures manual for Internet banking protocol.
25. Have a dedicated computer for financial transactions.
26. Run up-to-date operating systems and antivirus protection.
27. Ensure financial websites are secure- look for an s after http.
28. Require two separate authorizations to process banking transactions.
29. Change passwords on a regularly scheduled basis.
30. Always exit the bank’s website completely.
31. Consider Positive Pay with a $1,000 limit.
32. Check electronic transactions every day.
33. Use extreme caution with mobile devices for banking.

Efficiency Maximization and Return

34. Collect assessments using ACH payments.
35. Invest association monies wisely.

Using this checklist as a guide will ensure your condo association’s health and your own peace of mind! Share your stories with us! Email us @ info@associationevaluation.com or follow us on Facebook!

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