November 23, 2018

HOAs: Corporations, and Neighbors

Ray Harwood

Ray Harwood
President/GoodClix, LLC

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First, some background.

A little over two years ago, at the age of 62, I bought a home in my first-ever HOA community.  The annual Member Meeting was held the month after I moved in, and seven board members were elected: two people who had been on the board "forever", and five new people who apparently didn't like how the community had been looking, and wanted to come in and make instant changes.

Not knowing what to expect -- from HOAs in general, nor from the apparent power play that was unfolding -- I decided to observe the organization in action by attending a few board meetings.  With some professional level management experience, I was quick to figure out that nobody on the board had any real management experience, and nobody understood anything about corporate-level finances.

I spent hours studying the governing documents: corporate charter, CC&Rs (Conditions, Covenants, & Restrictions), and Bylaws.  It took some doing, but I was able to obtain copies of most of the historical meeting minutes, a few recent financial reports, and the very latest policies -- of which there were only two.  Over the course of that board term, I sat on the sidelines at every board meeting, chiming in when they would let me.  ("It's a board meeting, you're not a board member; you can speak when we call on you.")  I pointed out when they were about to violate their own governing documents (several times), and pointed out items worth mentioning (like the $17,000 irrigation water bill -- double the maximum for the previous two years.).

Then I decided to run for the board: I ran for and got on the board, was Secretary for a year, and was recently re-elected and am now President. 

I'll stop my historical yarn there, and get right to the meaty part of my post.

It's safe to say that not all HOAs are bad.  But from what I hear through my contact with a variety of people in HOAs, the general reputation is far from stellar.  I've been trying to figure out why that is, and I have made two observations about "how HOAs operate" -- or more to the point: how they don't operate.

First of all, if you observe all of the communication that goes out from most HOAs to their "membership", it all sounds like it was written by a commission-based lawyer who lost his last ten cases and has 6 kids in college.  Almost nothing that goes out sounds "neighborly".  The newsletters that are sent out quarterly sound like they were cut-and-pasted from a big corporate book, along with numerous reminders to "bring in your trash bins, pull up he weeds from your yard, and take down your decorations within 10 days -- or else!"  I get it... sometimes an association has to get serious and pushy, but that first letter that goes out -- the one we lovingly call a "Courtesy Letter", even though it's anything but courteous -- should sound like a neighborly reminder.  We all know it'll still get the eye-roll from the recipient when they open it, but why can't it be free of quotations from documents and state statutes and just say, "please take care of this"?

HOAs aren't neighborly.

Secondly, if you take a close look at how the HOA structure actually operates, it doesn't really operate like a corporate business.  Any business (incorporated or not) that handles its affairs the way many HOAs do wouldn't last 2 years -- and maybe even not 6 months.  What business would write those nasty letters to its customers -- even those that are behind just one payment by 15 days?  Everyone involved with the HOA knows we can levy fines, add late fees, rebill charges, and demand letter fees, and even put a lien on your home after 1 year or if you owe at least $1200 (in Arizona: ARS 33-1807; other states vary). We don't have to treat our neighbors like they're the enemy.

I've been on a couple of social media sites, and people get as riled up about HOAs as they do about anything else, I suppose.  But an HOA is different than most anything else business-wise.  If you don't like how one grocery store treats you, you can just drive a mile and go to a different one.  To say "if you don't like the HOA, just sell your house and move" sounds simple enough, but it's a harsh reality that dissatisfaction with an HOA leaves you almost no other alternative than to move -- or put up with it, or fight it.  No other type of business operates this way!

"Board members are volunteers" you'll hear, mostly from management companies and attorneys.  And while they're right, they make it sound like board members from all other non-profit corporations aren't volunteers.  I've seen that the board members of many HOAs wield exceptional power, and make day to day decisions like who should be fined, whose appeal should be granted, and whose architectural request should be denied.  But board members are supposed to be making policy, and approving budgets and major capital projects -- not dabbling in daily minutia.

Officers of an association (they're not board officers -- they're association officers; many people don't even get that part right) are often the same people who are board members... but they should be careful distinguish between their two dissimilar roles.  As the board, they should write policies that grant (and constrain!) the authority of the officers to make decisions during the time in between board meetings.  The Board of Directors really only has power in a board meeting

The Board should also grant (and constrain!) the authority of the management company.  Very often the management company has a standard contract that they require all HOAs sign, and that contract stipulates a broad range of mostly-vague authorities to act as agent for the association.  No self-respecting corporation -- for-profit or non-profit -- would simply give an external person full authority to act on behalf of the board and the officers!  Yet most HOAs do just that.

My point here is that most HOAs aren't run like a corporate business should be run. 

If you're in an HOA, do you know where your historical documents are kept? Things like meeting minutes, approved resolutions and policies, copies of membership lists for voting.  Do you even have a Retention Policy that says how long to keep corporate documentation?

I'm working with the newly elected board complement and our management company to make these changes:

  1. Treat our homeowner-members like neighbors at all times -- even when we have to take a hard line.
  2. Run the association like a real non-profit incorporated business.

Comments? You can contact me directly via my AdvisoryCloud profile.

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