If you live in a planned interest development (PID) or common interest development (CID), your community is most likely run by a homeowners’ association (HOA). In most developments, the HOA has numerous responsibilities, including the obligation to set a budget and assess HOA dues, and to maintain, repair, and replace the development’s common areas (such as common landscaping, or amenities such as pools and tennis courts). Commonly, an HOA’s board of directors (the board) can’t handle the obligations alone, and must turn to a property management company for help.
This article reviews the major considerations an HOA should look at when hiring a property management company.
Review the Governing Documents
The HOA’s responsibilities are found in the development’s governing documents (commonly including the HOA’s articles of incorporation and bylaws, a declaration of covenants, conditions, restrictions and easements, and any other written rules and regulations). Before hiring a property manager, the board must review the governing documents to determine the extent of the HOA’s responsibilities, and whether there are any limitations on hiring a manager to carry out HOA obligations.
Most development’s governing documents allow the board to hire a property manager, and many contain specific provisions authorizing the HOA to employ outside help. If you have questions relating to your board’s authority to hire a manager, consult your HOA’s attorney (or another experienced attorney in your area).
Determine the Scope of Work
After reviewing the HOA governing documents (and provided there are no restrictions on hiring a manager), the board is in a position to assess, and create a list of the tasks it needs a manager to perform. For example, the board might determine it only needs help with common area maintenance and repairs, or it might decide help is also needed for HOA accounting, dues collections, rule enforcement and communications with members. Property management companies commonly offer a menu of available management services, including common area maintenance, security surveillance, enforcing rule violations, billing, or collecting dues and assessments.
Depending on the amount and type of work needed, the HOA may need an on-site manager with consistent hours, or an off-site company to perform specific, limited tasks. Either way, to avoid potential misunderstandings and conflicts later, the manager's availability and time commitment must be clearly defined upfront.
Check on Licensing/Credentials
Some state laws require property managers to have a license, certification, registration or other credentials. Your HOA’s attorney, or another experienced local attorney can help you determine what’s required in your state. Consider only property managers with the proper licensing or credentials.
Even if not legally mandated, it’s wise to require some type of certification (an active real estate license at a minimum). A number of property manager licensing credentials are available. One of the best is certification by the Community Associations’ Institute (CAI), which offers specific training for HOA managers. For more information see the “Professional Credentials” section of the CAI website.
Consider Background Checks and Insurance
It’s also important to check that the management company requires its key employees to pass a criminal background check (a search of the individual’s police record showing no criminal history), and that the checks are periodically updated.
Also review the management company’s insurance. Your state’s laws or your development’s governing documents might contain relevant insurance (again, review your governing documents and check with an attorney to determine the applicable requirements). Obtain a copy of the company’s insurance certificate, and consult with your HOA’s insurance agent to determine if the company’s coverage is adequate.
Also ask the prospective management companies for referrals. Talk to references and other known clients of the company. Talk with members of the community, and the board members of other HOAs the company works for. Assess whether the management company’s style is a good fit for your HOA and the tasks you want done.
Review the Contract Carefully
After selecting the best manager for your HOA, it’s time to negotiate a management contract. Most management companies have a standard contract to use as starting point. But don’t just sign what’s provided. Review the contract carefully, paying special attention to key provisions such as the term, cancellation rights, and fees.
Typically property management contracts have a term of one to three years. It’s commonly in the HOA’s interest to negotiate a shorter term. Try to obtain a one-year contract, with the option to renew after each year.
Also review the termination provisions. Make sure the HOA has the option to terminate the contract with a minimal amount of notice (30 days is common). Also make sure that the termination right of the management company provides enough advance notice to allow the board to hire a replacement company (ideally not shorter than 60 days).
Make sure the contract spells out all the obligations of the manager, and also includes all charges, costs, and fees. Check this list carefully—sometimes “incidental fees” can add up to big money. For example, in addition to its monthly fee, a manager might add on charges for things such as attending HOA meetings, fuel surcharges, or postage.
Finally, run the contract by your HOA’s attorney (or if your HOA doesn’t have one, find an experienced attorney in your area to review the contract) before signing. The attorney can alert the HOA to any issues and changes needed.
The Board Is Ultimately Responsible for HOA Obligations
Don’t think that hiring a property manager means the HOA board is off the hook. The board is still liable to meet all its obligations under the governing documents. Board members owe a fiduciary duty to the HOA, which means they are responsible for the well-being of the HOA and must act in its best interest. This duty is not eliminated by hiring a manager (for more information on an HOA board’s fiduciary duties see Nolo’s article “Fiduciary Duties of HOA Board Members”).
It’s the board’s duty to supervise the manager, and to ensure the manager adequately performs the duties required under the management contract. Although the HOA might have legal recourse against a bad property manager in a lawsuit for breach of contract, the property manager owes no fiduciary duty to the HOA, and typically has no legal obligation to the HOA outside the terms of the management contract.
Taking the necessary steps to ensure the HOA hires the best property management company is important. Since the decision will impact the entire development, it’s worth doing it right.