By Don DeBat

 Several Chicago and Illinois condominium owners who are fed up with being ripped off by management companies who charge excessive fees to access legal documents are fighting back with class-action lawsuits, legal experts say.

On November 20^th, CondoCerts.com Inc., a national web database that sells statutorily mandated certification documents to owners selling condos in Illinois, was hit with a $5-million punitive class-action lawsuit from sellers who claim it’s illegal for the website to charge “more than the reasonable cost of copying those documents.”

Condo owner Robert Ahrendt, the plaintiff in the class-action lawsuit, said he paid $370 for the documents he needed from CondoCerts. However, Ahrendt and other sellers say based on how easy and fast the documents were downloaded, CondoCerts is charging far more than the cost of providing them.

CondoCerts is marketed by Mutual of Omaha as an online document management service. It electronically stores the real estate documents related to condominium transactions and provides copies upon request, tasks typically handled by a property manager.

The class-action suit accuses CondoCerts of violating Illinois’ Condominium Property Act, fraud, unjust enrichment and deceptive business practices.

The suit seeks refunds of monies paid to the company as well as punitive damages and court costs for owners who paid a fee to the company for documents related to the sale of a condo in Illinois over the past five years.

Arendt is represented by Elizabeth M. Al-Dajani and Karnig S. Kerkonian of Kerkonian Dajani LLC, James X. Bormes and Catherine P. Sons of the Law Office of James X. Bormes PC, and Kasif Khowaja of The Khowaja Law Firm LLC.

Another three Illinois condominium owners filed a similar class-action lawsuit over allegations that they were charged unlawful and excessive fees for the documents needed to close on the sales of their condos by a property management company.

Condo owners John Murphy, Cecil Mathew and Nirupa Mathew, on behalf of themselves and all Illinois condo property owners, filed suit on October 5^th in the Cook County Circuit Court against Foster/Premier Inc., Homewise Service Corp. and Next Level Association Solutions Inc. for alleged violations of the Illinois Consumer Fraud Act and Illinois Condominium Property Act.

According to the complaint, the plaintiffs allege that they contacted the companies for copies of their condo disclosure documents in order to sell their properties.

To obtain the documents, the plaintiffs were allegedly charged hundreds of dollars, an amount that was greatly in excess of the “reasonable fee” covering the direct-out-of-pocket costs of providing such information and copying permitted by law. 

The condo owners are seeking an award for damages, pre-and-post-judgment interest, attorneys’ fees, expenses, costs of suit, punitive damages, and further relief as the court deems appropriate. They are represented by Charles R. Watkins of Guin, Stokes & Evans LLC in Chicago and David Fish, Kim Hilton and John Kunze of The Fish Law Firm, PC in Naperville, Illinois.

Often, sellers, buyers, brokers, attorneys, appraisers and lenders are referred to an on-line website portal to access the documents they need, which are provided in an electronic format by a third-party servicer or management company for a hefty fee.

However, legal experts say the sales of the documents often are then recycled multiple times in a single transaction and each party requesting them pays the fees.

A resale disclosure package, which includes documents and mandatory disclosures listed in Section 22.1 of the Illinois Condominium Property Act, could range in cost from as little as $200 to a whopping $1,250 or more for each party requesting the documents. Additional “rush” fees may add hundreds of dollars to the cost of obtaining the documents—even if they are stored on-line.

 “How is it legal for a for-profit management company to resell documents that belong to unit owners in a not-for-profit condo association?” asked condo owner Sara E. Benson, managing broker of Benson Stanley Realty, and president of Association Evaluation, LLC, a Chicago-based real estate data-analytics firm. “The money is not going to the condo association. It’s paid to the management company or third-party provider—entities that do not own the documents.”

Benson believes that providing documents should be included in the management contract’s scope of services. Also, governing documents and resale information should be posted on a password-protected website for all owners, so they can be shared with prospective buyers at no cost, she said.

Because failing to provide documents to the seller as required by the Illinois Condominium Property Act (ICPA) can kill the sale of a condo, Ahrendt, one of the class-action law suit plaintiffs, argues that sellers are stuck paying the unfairly high fees or risk the sale of their real estate.

Ahrendt said he was charged a total of $370 for access to the documents, including two unexplained $20 service fees. Within minutes of receiving confirmation that the transaction went through, Ahrendt said, he received an email saying the documents were ready for download.

The suit claims that obtaining copies of the documents filed with the Recorder of Deeds office typically costs about $2.50 and calls CondoCert’s fees “unreasonable” in light of the fact that they are digital and were immediately accessible.

“Plaintiff, and other similarly situated individuals, had no choice or option but to pay the unreasonable fees and costs charged by defendant to obtain and access the ICPA documents in order to comply with the statute and the terms of the real estate sales contract,” Ahrendt’s complaint stated.

According to the suit, the document-servicing company’s conduct caused Ahrendt and other similarly situated individuals to suffer harm by depriving them of a choice—charging an unlawful and unreasonable fee for the documents, forcing them to pay the unlawful and unreasonable fees in order to comply with the Illinois Condominium Property Act—in order to convey the condominium unit.

Necessary documents also include a statement of any liens or other unpaid assessments against the unit, insurance information, rules and regulations, outstanding association loans, and other information common to the sale of a condo, some of which should be publicly available.

Ahrendt said that after he received a written purchase offer for his condo in May of 2017, he was instructed to use CondoCerts to obtain the documents, and was forced to pay the $370 in fees or risk losing the sale.

“To be clear: a selling unit owner’s failure to turn over the Illinois Condominium Property Act (ICPA) documents to the potential buyer will terminate a real estate sale and the selling unit owner could be precluded from selling his own real property,” the complaint said. “This can cause litigation, monetary and nonmonetary damages for seller.”

Among the four counts in the complaint, Ahrendt and the sellers said CondoCerts violated the ICPA, as the statute caps the “reasonable fee” associated with copying and providing the documents to the direct out-of-pocket cost incurred by the provider.

Ahrendt alleged CondoCerts has basically no cost on its end to provide the documents, as evidenced by the speed with which the documents are provided, the suit claims the $370 is not “reasonable.”

Other counts in the suit include allegations CondoCerts violated the Illinois Consumer Fraud and Deceptive Business Practices Act and that it unjustly enriched itself.

The complaint asks the court to certify a class including anyone who paid CondoCerts for the Illinois Condominium Property Act documents dating back to November 20, 2012. The complaint also seeks more than $5 million in damages, interest and court costs for the case.

***

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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Every day I hear or read about outrageous events in Association Governed Housing Communities. And I see the same issues over and over again.

These are not “isolated incidents” as the HOA industry would have the public believe.

Two very common issues I encounter:

• disputes over who should pay for substantial repairs to exterior elements in condominiums and
• failure to disclose important information to homeowners and homebuyers.

A few months ago, I wrote about Mallard Lakes Condominium Association in Selbyville, Delaware, where several condos were damaged by Superstorm Sandy 4 years ago. A group of condo owners are currently locked in a battle with their Association over who will pay to elevate their condo units as required by FEMA and Sussex County, Delaware.

To refresh your memory, or if you’ve missed it, here’s the link to the Previous blog:

4 years after Sandy, it’s a no-win situation at Mallard Lakes

Over the past few months, there have been some new developments.

Another lawsuit at Mallard Lakes

John and Jennifer Mingora, condo owners who purchased their unit in 2013, have filed a lawsuit against the seller, their real estate agent, and Mallard Lakes Condo Association.

Mingoras allege that important (material) facts about their recently remodeled condo unit were not disclosed to them.

According to public court documents, here’s a summary:

Mallard Lakes has 477 townhouse condo units. 30 of those condo units are located in five buildings on a barrier island.

Superstorm Sandy slammed the island condos at Mallard Lakes on October 29, 2012, causing coastal flooding, and damage to the first floor of several units.

On April 24, 2013, Mallard Lakes Association opened a claim with FEMA. On May 14, 2013, Sussex County designated Mallard Lakes units as “substantially damaged.” To meet the definition of “substantially damaged,” the cost to repair must exceed 50% of current estimated value of the property.

Both FEMA and Sussex County Flood Control Ordinances require “substantially damaged” structures to be raised to prevent damage from a future flood. Until a “substantially damaged” structure is raised to the required elevation, no certificate of occupancy can be issued.

The formal complaint also states that Mallard Lakes Association failed to timely follow FEMA procedures when applying for funding, therefore, the Association received very little money to use toward extensive repairs.

The Association is required by law to raise 24 condo units to a higher elevation, but there’s not enough money to do the job.

After the owners of those 24 units were told they could return – despite the lack of a certificate of occupancy – they were then told they must contribute $60,000 each to cover the cost of  construction to elevate their condo buildings. (4 buildings with 6 units each)

One of those units was owned by Charlotte Hurley of NC. Hurley sold her unit to John and Jennifer Mingora on October 13, 2013.

(In a separate lawsuit, attorneys for Mallard Lakes owners argue that all 477 members of the Association must share in the cost of elevating affected units, see previous blog.)

The Realtor representing both buyer and seller, Cynthia Spieczny of Resort Quest Real Estate in West Fenwick (DE), has sold many properties in Mallard Lakes and owns a unit in the condo association.

However, Hurley, Spieczny, and Mallard Lakes all failed to disclose to the Mingoras that the condo they purchased did not have a valid certificate of occupancy. The buyers were also not told that, as new owners, they might have to pay a $60K special assessment to cover their share of the cost of elevating the building.

Non-disclosure of material facts involving a real estate sale is against state law.

In late September of this year, Mingoras filed the following legal complaint. In the exhibits, see if you can spot misrepresentations in the seller disclosure. The complaint lists seven counts against the defendants, including breach of contract, fraudulent misrepresentation, and civil conspiracy between Spieczny and Mallard Lakes Association.

Mingoras paid $114,900 for the Mallard Lakes property. They seek reimbursement of their purchase price and related costs.

Legal complaint – non-disclosure of material facts

https://cldup.com/cc8OwXJRzB.pdf

Association tries to silence condo owners

Melissa Golden and other condo owners are stuck with condos they cannot legally occupy. They want to set the record straight with their neighbors, because Mallard Lakes Association has misrepresented or omitted key facts in official correspondence with their members. This has led to resentment toward victims of Super Storm Sandy.

But when damaged condo owners tried to communicate with their neighbors, or call attention to the issue at board meetings, Mallard Lakes Association filed a court order to prevent condo owners from speaking out in public.

The gag order was a blatant attempt at stifling free speech, one that was thankfully denied by a Judge this summer.

Judge won’t put gag order on Sandy-damaged condo owners

James Fisher , The News Journal 12:12 p.m. EDT July 22, 2016

A bitter disagreement over Superstorm Sandy damage to a set of Selbyville-area condo buildings won’t be tamped down by a court-imposed gag order, a Court of Chancery judge has ruled.

Vice Chancellor Sam Glasscock III ruled against the condominium association at Mallard Lakes, which had asked the court to stop some unit owners from speaking publicly about a dispute – and lawsuit – over whether Sandy-damaged structures have to be elevated and who will pay if they must be.

Read more:

http://www.delawareonline.com/story/news/local/2016/07/22/judge-wont-put-gag-order-sandy-damaged-condo-owners/87379894/

**Reposted with permission from Independent American Communities blog http://independentamericancommunities.com/

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. This week, we begin an examination of HOA Horrors stories about roaches, bedbugs, and rats across the nation.

A “Biblical” Explosion of Roaches

Cleanliness may be next to godliness, but when your community is invaded by roaches, bedbugs, rats, maggots, and other vermin, it’s time for quick action.

New York City’s famed Ansonia has had an illustrious and remarkable past. The 18-story Beaux-Arts style structure was originally built as a hotel around 1900. Ninety-two years later, it was converted to a 430-unit condominium building.

Over the years, the Ansonia has been home to Babe Ruth, Igor Stravinsky, and Angelina Jolie and has been featured in several movies. During the 1960s and 1970s, it house an infamous gay bathhouse in its basement. Later, the club became, Plato’s Retreat, a renowned heterosexual swing club.

One couple at the Ansonia, Alan Arkin (not the famous actor) and his wife, Suzanne Bagert, said they were hardly able to sleep at night and stopped using their kitchen for fear of crawling critters. They started seeing roaches scurry about in 2006 and had an exterminator spray their unit, but it helped only temporarily. They started sleeping with the lights on.

Ms. Bagert, who worked from home, imagined roaches crawling on her neck. “My brushes my neck and I scream,” she said in an interview with the New York Times. Her husband found a roach in his sock.

After what Mr. Arkin called “a biblical-type explosion of roaches,” the couple filed a lawsuit in New York State Supreme Court against the Ansonia’s management. “This infestation,” Mr. Arkin wrote in his court papers, “has rendered their apartment completely unfit to live in.” According to the filing, the situation was so bad that the roaches were on the floor, the walls, the ceiling, the curtains, and even the couple’s bed.

The suit further alleged that his and his wife’s complaints were met by “doublespeak and half-truths.” Management reportedly responded by sending a maintenance worker to knock cockroaches off of the hallways walls, vacuum them up, and then wash the walls with soap and water, a treatment Mr. Arkin called “grossly and negligently” insufficient.

Mr. Arkin further states that management said the infestation was caused by an elderly tenant on the same floor who would not allow exterminators into her apartment.

Even if you’re the most spic and span housekeeper in the world, if you’re sharing walls, ceilings, or floors with a hoarder, or someone who simply keeps wet cat food out all day, getting rid of roaches – and even ants- can be next to impossible. It’s the actual physical nature of community living that is the most challenging.

If infestation exists, communities would be well served to have a regular maintenance schedule for extermination with mandatory cooperation from all unit owners. If the root source of the problem is overlooked, all the spray in the world will be only temporarily effective.

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This week, we discuss what mold actually IS and how to take action against it.

There’s a Fungus among Us

Mold is a fungus.To Some degree, it is always in the air- both inside and out. Mold is an equal-opportunity organism, and it doesn’t discriminate between new construction and older buildings, geographical locations or poverty and wealth. It can attack one unit at a time or infect an entire building through improperly maintained common elements, including HVAC systems.

A consistent water supply is ideal for mold growth. Building materials such as wood, drywall, and even dust, if combined with enough high humidity and moisture, will produce sufficient food sources for mold to multiply.

Newer buildings are sealed more tightly than older ones. They don’t “breathe” as much, and if there is any kind of leak or water infiltration, mold can quickly grow. Moisture is mold’s best friend. In buildings with central heating and air-conditioning systems, under certain conditions, mold spores can quickly spread throughout all of the units. Any type of leaks in a building – from water pipes to air conditioner lines – must be immediately repaired to prevent mold growth.

Indoor mold growth can typically be seen or smelled. Looks can vary from cottony, wet slime to velvety or grassy growth in a color chart that rivals the rainbow: white, black, red, green, purple, yellow, and brown, to name a few. It smells musty and musky.

Mold can secrete chemicals called mycotoxins, which can find their way into your body, entering through your nose,  mouth, and skin, lodging perhaps in your digestive tract, your lungs, or your brain, according to the New York Times. Among these toxins, are trichothecenes, which were rumored to have been used as a biological weapon during the wars in Afghanistan and Vietnam.

Most states have enacted legislation to mandate that sellers of residential real estate disclose in writing any known presence of mold, fungus, mildew, and similar organisms. Additionally, most statutes allow buyers to obtain an inspection specifically to diagnose mold conditions. It is important to remember than in addition to mold and mycotoxins, various types of bacteria may also be problematic.

How To Take Action against Mold

Removing mold by stopping the water source is the first step. Next, all mold should be treated and removed.The good news is that mold is a fragile organism and is easily killed by exposure to disinfectants, sunlight, and heat. However, mold’s means of reproduction is through a by-product known as “spores.” Spores are produced in huge quantities and are easily airborne and inhaled. To make the situation worse, spores are exceptionally resistant to chemicals and heat.

In these tough economic times, association boards should be vigilant in inspecting and assessing vacant or abandoned units. What often starts out as a small maintenance issues can easily turn into runaway mold in a vacant unit. At a minimum, monthly inspections of the appliances and all related hoses and connections for condensation and leaks should be made.

Mechanical units should be inspected to determine if heating, ventilation, or air-conditioning ducts, vents, and intakes are covered or blocked. Water heaters, furnaces, refrigerators, dishwashers, humidifiers, dehumidifiers, freezers and icemakers, and all plumbing lines and drains should be inspected.

If a unit is vacant, the main water supply to the unit should be turned off as well as the individual water supplies to all fixtures and appliances.

In Chicago, one Wicker Park owner heard water dripping in an adjacent bank-owned and long-abandoned unit. Upon inspecting the condominium, he found mold covering the kitchen and bathroom floors and giant mushrooms sprouting from the carpet. “I only got halfway down the stairs to the basement when I had to stop,” said owner Matt Duffey. “I was blown back by the stench of mildew.”

Boards have a duty to always take a mold complaint seriously and immediately investigate using appropriate and qualified experts. The expert should deliver a written report including recommendations for remediation. If the cost of mold abatement is anticipated to be large, bids from qualified contractors should be obtained.

Associations that ignore complaints often find themselves in the most hot water regarding mold claims. That trouble can easily lead to a lawsuit against the association if it fails to protect the health of its members.

The post HOA Horror: Toxic Stories About Mold Pt. 4 appeared first on Association Evaluation LLC..

. This week, we explore the toxic reality about moldy lawsuits.

Lawsuits Proliferate

Mold lawsuits began mushrooming in the mid-1990’s. The so-called kickoff lawsuit that spawned the huge wave of litigation was the $32 million a Texas jury awarded the Ballard family for property damage and mental anguish in a toxic-mold case filed against their insurance company.¹

In a separate lawsuit, a California jury awarded $8,571,028 in damages for construction defects and personal injuries claimed by residents of a condominium complex in Santa Ana.² The plaintiffs alleged that the complex had mold and extensive water damage from leaking roofs, windows and balconies; faulty plumbing and defective bathtubs, fire sprinkler systems, and drains. Named in the lawsuit were the original develop, a subsequent developer, and numerous other contractors and subcontractors.

Half of the personal injury plaintiffs were children with alleged allergic reactions to mold, including respiratory problems and aggravation of asthma. One owner, Noe Montoya, and his family had been sick for years with nosebleeds and coughs. Mold was everywhere and he had nowhere to go.

In 2003, television celebrity Ed McMahon settled a toxic mold lawsuit for $7.2 million. After a water pipe burst in his 8,000-square-foot, six-bedroom Beverly Hills mansion, McMahon’s home became contaminated with toxic black mold.

“It started with a broken water pipe, which is not a big deal,” said McMahon’s lawyer, Allan Browne. “It turned into a horrific nightmare that only Stephen King could write about.”³ McMahon says the pipe exploded and flooded his den. Subsequent contractors merely painted over the mold and never informed the McMahons of the mold conditions. Soon after the incident, McMahon said, he and his wife became seriously ill, and their sheepdog developed respiratory problems and died.

As a result of the proliferation of lawsuits, most insurance companies now exclude mold coverage from their policies.

The HOA horror stories we’ve highlighted about mold in buildings across the country from Chicago to New York are a toxic reality. Be sure to guard against this possibility inside your HOA: vet all contractors and ensure that your board is using qualified experts to address any mold-related issues.

¹ Ballard v. Fire Insurance Exchanges, Case No. 99-05252, Texas District Court, June 5, 2001.

² Spectrum Community Association v. Bristol House Partnership, et al., Case No. 00CC07398, California Supreme Court.

³ “Ed McMahon: Death Mold Killed My Dog,” ABC News, April 11, 2002.

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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.

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Last week, we talked about the ways that your HOA can unwittingly be stripped of their monies. This week, we talk about the signs that your HOA might be the victim of embezzlement. There are many clues to embezzlement, but the primary clue that theft or misappropriation of funds is occurring is

Although fraud activity may continue for years – even decades – the typical fraud lasts for approximately two years. By the time others become suspicious of fraudulent activity, it has most likely been going on for quite some time -and by then, the missing money is frequently unrecoverable.

Arlen Lasinsky, director of litigation and forensics for a Deerfield, Illinois, accounting firm, describes the “fraud triangle” of white-collar crime. According to Lasinsky, the fraud triangle’s three angles represent 1) opportunity, 2) motivation, and 3) rationalization.

Opportunity presents itself when a person sits in a position of trust and control- and has access to funds. The opportunistic mechanism is engaged due to lack of oversight and proper in-place financial controls. In short, opportunity arises when one person can compromise the transaction because he or she can a) consummate, b) record, c) reconcile the transaction.

Motivation may include job loss, drug or alcohol problems, divorce, gambling problems, death of a family member, illness, or any other change in life circumstances. These all can trigger fraud.

Rationalization frequently includes an inability for thieves to see themselves as criminals. Yes, they are stealing money, but their inner voice convincingly whispers, “I deserve this.” Other rationalizing voices include, “I’ve earned this, and no one will miss it anyway,” “I’m just borrowing a little bit,” and “I’ve made so much money for this place, they owe me.”

Most cases of theft and embezzlement start out small and snowball. Flashing warning signs include the following:

• Not taking vacations;
• Being the first and last to leave the office;
• Creating a fire drill to get reports or copies of bank statements;
• Unreconciled bank statements;
• Living an unusually lavish lifestyle

Just as some volunteer presidents know nothing about how to govern, many volunteer treasurers do not know how to conduct basic accounting – and virtually nothing about budgeting. Or, conversely, they know too much about accounting and how to create false invoices, Photoshopped bank statements, and false bottoms. It’s scary, but true.

One 19-unit condominium association provided a makeshift budget to unit owners. The budget- on just one single sheet of 81/2-by-11-inch paper – simply stated, “Electricity, $250 per month, same each month – same as last year,” and so on for each subsequent category.

At that point, a few residents who actually took the time to read the numbers, doubted the treasurer could perform simple math. They started asking questions, but their questions were aggressively rebuffed: “Why are you asking me questions about the budget? Don’t you trust me? Everything is on the record. How dare you not trust me?” Later, when further pressured by one unit owner, the treasurer responded with a string of expletives and indignantly walked out of the room.

This type of highly defensive behavior combined with refusal to produce documents should be a screaming red flag – with neon-flashing chase lights – to fellow board members and owners dept in the dark. By law, owners are entitled to see all bank transactions concerning their association. Sadly, too many owners only glance at their association’s minutes and budgets and never request copies of actual bank statements. As a result, gross negligence, misappropriation of funds ,and theft may go unnoticed for years – even decades.

In the above case, and unbeknown to the other owners or board members, the treasurer was pilfering thousands of dollars from the association funds.

In addition to secrecy and concealment, other clues include boards that “punish” owners who inquire about financial matters by levying bogus fines and legal fees, and aggressive board attorneys who defend board secrecy. Trumped-up “embezzlement assessments” for the whistleblowers has even resulted in illegal foreclosure on some owners’ homes.

Non-board-member owners should ask tough questions. They are entitled to request records and to lobby for a financial audit. Transparency should always be of utmost priority for board members, especially in areas related to finance. Any form of concealment begs suspicion.

According to certified public accountant Kimberly Waite of Frost Ruttenberg & Rothblatt PC: “It’s not enough to elect a treasurer- every board member is responsible for every action of the board.” Board members have a duty and an obligation to watch the finances and set up controls to reduce opportunities for fraud and negligence.

Ultimately, your HOA is your responsibility. Be vigilant about your HOA’s accounting practices.  Be informed and demand transparency. 

The post Clues That Your HOA Might Be The Victim Of Embezzlement appeared first on Association Evaluation LLC..

Last week we covered: the kickback, overbilling, expense padding, volunteer compensation and underreporting income. In the final installment of this two-part series, we continue highlighting common examples of how HOA’s can unwittingly be stripped of their monies:

• Overreporting expenses. Owners should beware when financial statements show an exaggerated amount for recurring regular monthly expenses. For example, the reported electricity budget is 40 percent higher than the actual electric usage, or the maintenance is reported as double the actual cost. One-time expenses may also be overreported. The goal of overreporting expenses is to create a “slush fund” that can then be siphoned off by whoever is in charge of the bank account.
• False bottoms. This financial chasm is created when income is underreported or expenses have been overreported. False bottoms are created by making false entries in books. By creating a “false bottom,” would-be thieves can extract monies without being easily spotted.
• Photoshopping bank statements. In the age of computers, this illegal act is not at all uncommon. If you go online and Google “How to Photoshop a bank statement,” you’ll get an amazing 508,000 results. The first query: “How do I edit a bank statement after scanning?” Prior to taking off with more than $2 million in assets, one management company sent fake bank statements to more than 40 condo associations it managed.
• Creative accounting. This is any accounting that fails to follow generally accepted accounting principles (GAAP.) For example, GAAP would include preparing a statement of assets and liabilities, a profit and loss statement, and an income and expense report. By failing to follow basic accounting principles and setting arbitrary and misleading matrixes, owners are overwhelmed and often do not admit when they cannot understand the “creative accounting procedures.”
• Insider trading. Invested on Wall Street, this highly illegal act occurs when board members use their power, position, and inside knowledge to acquire property for personal wealth and gain. In associations whose bylaws or covenants, conditions, and restrictions (CC&Rs) contain a right of first refusal, board members have been known to avoid presenting the sale to the board in an open meeting and signing their own waiver in order to purchase a pristine unit at below-market value. High-end cooperative associations are equally vulnerable to this type of abuse, wherein board directors deny purchase applications and subsequently purchase the unit for their own personal pleasure and financial profit. Under the “buddy rule,” fellow board members simply look the other way. Note that association insider trading is not regulated in any way. “Insider trading” is typically the illegal act of trading stocks to one’s own advantage through the use of confidential information. If only Martha Stewart could have been so lucky!
• Debit cards. They simply are an embezzler’s dream come true. Association debit cards have been routinely used for traveling, gambling, medical bills, gas, groceries, cell phone bills and even lingerie purchases at Victoria’s Secret. Some associations are lulled into a false sense of security when two signatures are required on checks. Debit cards require only one signature.
• Forgery. Perhaps one of the oldest scams around, forgery is still running rampant in homeowner associations across the nation. In several cases, signatures of deceased or mentally impaired owners were used to cash checks. Additional means of embezzlement include double billing, false billing, data falsification, inflated management fees, phantom labor, bundling, and unapproved billing.

Best practice would mandate association finances to be transparent to the owners at all times. The monies belong to the owners as a whole – not the board officers or members. Next week, we’ll discuss some clues to help you discover if your HOA is the victim of embezzlement.

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By Deborah Goonan, Independent American Communities, CHPPI

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