Did you know that there are over 325,000 US community associations that collect over $65 billion in dues each year? That’s a significant amount of money required to operate and maintain our communities, and a major responsibility for association boards and property managers. It’s ultimately the board’s fiduciary responsibility to ensure that financial and physical assets are properly managed and protected from damage, theft, and fraud. Most boards also rely on a team of experts for support, including property management companies, CPAs, attorneys, insurance agents, etc.
Something will happen, so it’s better to be prepared
Unfortunately, accidents will happen, property will become worn or damaged, and unscrupulous people will exploit association weaknesses. The only question is whether your association will be the next one impacted. The community association’s board and property management team are responsible for safeguarding these critical areas:
- Income – homeowner dues and other revenue, like clubhouse rentals
- Financial assets – applicable investment and utilization of that income
- Physical assets – buildings and amenities
- Real estate value – other aspects of the community, like architectural standards, that impact property values
Are you doing everything you can to avoid or minimize risk in your community or communities? The business process of protecting money, assets, and property value is called risk management. By identifying and proactively addressing key risk areas in your community, you can limit the possibility of damage, theft, and fraud. Here are four major risk areas:
- Destruction of property. From minor vandalism to major building damage caused by age, acts of nature or general neglect.
- Loss of income. If your clubhouse is closed for major repairs, it can’t be rented.
- Injury. When unsafe conditions exist and cause an injury, the association may be at least partially responsible.
- Theft. This could be misappropriation of money from financial accounts, or removal of assets like pool furniture.
Implement policies and controls to minimize risk
Now that you understand the importance of identifying and managing risk in your association, here are some specific actions you can take as a board member or property manager to minimize the chance of a major issue or loss:
- Set internal controls. Define who can handle money, and the spending levels that require additional approvals or signatures. Separating responsibility for payments and deposits can eliminate a major opportunity for theft or fraud. For example, the person who writes checks should be different from the person who deposits funds. Hiring a management company is one way to segregate these financial duties. Finally, don’t forget to regularly change account and system passwords.
- Limit debit card use. While popular for association spending, the individual expenses are hard to track. During an HOA audit, we found a board member charging gas on a debit card – to visit other states.
- Invest wisely. If there’s extra money in the association’s accounts, consult with a CPA or financial advisor to set a conservative investment policy. Choose insured financial instruments like CDs and money market accounts, avoiding high-risk investments like the stock market… and Bitcoin.
- Maintain adequate insurance coverage. An experienced insurance agent can help you review current policies covering association property, liability, income, employees, and, more recently, cyber risk. These policies should be regularly evaluated as the community grows and ages, with coverage adjusted accordingly.
- Fund and utilize the reserve account. Maintaining the appropriate reserve fund balance and making repairs prescribed by the (up-to-date) reserve study are critical for maintaining the community’s physical assets. Don’t cut corners today, or you’ll increase the risk of major future maintenance issues.
- Review the financials. This includes a monthly financial review and reconciliation by the board treasurer as well as the property manager. You should also conduct an independent audit (or similar financial engagement) at a minimum of every two years to verify an association’s financial health and risk management practices.
Start now. Stay vigilant
I hope that this article has helped you identify at least one thing you can do to improve risk management in your community. Start with that one idea – no need to overhaul everything all at once. Assemble your team (board, property manager, CPA, attorney, insurance agent, engineer, etc.) and work together to evaluate current physical and financial practices. From there, you can prioritize any required changes and create a reasonable implementation timeline. When you look back a year from now, you’ll be very impressed with your accomplishments!
Neal Bach, CPA