Step 3: Effective Systems & Policies

Building HOA Protections

HOAs, like for-profit businesses, must have systems and policies in place to effectively operate. These are integral to save costs and decrease the amount of time Board members spend running the HOA.  Credibility and risk minimization are also critical aspects of why HOAs must operate on a platform using systems and policies

HOAs cannot, generally, choose the owners purchasing property and thus becoming members in the HOA.  In most cases, owners are righteous and support the HOA.  Some owners don’t.  Many HOAs have investor-owned properties.  In many HOAs, the minority of owners can consume most of the allocated time to ownership matters.  The purpose of establishing systems and policies is to not perpetuate this factor but to build protections for the HOA.

The only barrier to entry for an owner is being able to acquire a property that is part of an HOA.  This is important because owners may cause issues with or against the HOA.  Thus, besides insurance, the only avenue for HOAs to reduce risks and hazards of operating as an HOA is to establish a basis of operations that provide tools and support to permit the HOA to complete its required objectives.

Rules and Regulations (Operating Policies) Governance
Financial Tracking System Financial
Correspondence and Communication Storage Governance
Access to Expert Advice Financial, Maintenance and Improvements
Maintenance Requests and Work Orders Governance, Maintenance and Improvements

Rules and Regulations (a.k.a. Operating Policies)

The policy document for HOA.  Aside from CC&Rs, the Rules and Regulations are the most user-friendly document owners use.  They can refer to it for practical reference and understanding of basic items within the HOA.

The Rules and Regulation provide enforcement provisions by the HOA and clarity to owners. The document can be revised as needed by the Board with the revised document being provided to all owners in the HOA before becoming effective.  Advance notice to owners is generally thirty (30) days.  The Rules and Regulations cannot conflict with the CC&Rs. This is most commonly found in an HOA attempting to limit a right otherwise provided in the CC&Rs.

Case example:  Jane wants to adopt a dog to live with her in her condominium unit.  The HOA CC&R does not exclude dogs as pets. A new Board member dislikes dogs and has convinced the Board to enact Rules and Regulations that prohibit dogs.  Up to this point, owners have not challenged this, but Jane disagrees with the Board’s decision to deny her getting a dog.  She is aware of the CC&Rs which do not exclude dogs as pets. Jane writes a letter to the HOA Board explaining this and that the Rules and Regulations cannot remove a right that she would otherwise have under the CC&Rs. The Board must permit the dog as Jane is correct.

Cautionary note:  Service animals are not classified as pets.  If the owner has proper documentation for the service animal, the animal can love in the HOA whether or not there are pet restrictions in the CC&Rs. 

Rules and Regulations can be as powerful as CC&Rs.  The R&R’s can establish safeguards that protect the HOA’s and owners’ best interests, whereas CC&Rs tend to be less detailed and specific.

Case example: Owner Joe wants to rent his condo unit.  He asks the Board for guidance.  Joe is referred to the Rules and Regulations which provide specific requirements and detailed guidance to Joe. Having written items like this is a time saver and reduces potential issues later.

Cautionary note: The excerpt found in Exhibit 3.1 from actual Rules and Regulations should be modified to your HOA dependent upon the CC&Rs, local and State laws, and HOA preferences.

Financial Tracking System

A reporting system for assessments, expenses, and more.  Even a basic financial tracking system is vital for HOA creditability and reporting to owners and third parties.  HOAs not only have an obligation to owners to track and report financials but also to third parties such as real estate professionals, buyers, or sellers of HOA units, mortgage companies, etc.  These parties all rely on the HOA to produce a credible financial report on which many will base very important decisions. HOAs that do not employ a sound financial tracking system are at higher risks to third parties, increased Board and HOA liability, and decreased owner property values.

Case example:  An HOA runs itself and uses a spreadsheet to track assessments received and expenses paid.  Board member John prepares this for Jane, an owner who is selling her unit.  Jane provides the income statement.  This is the report that tracks revenue (assessments) and expenses (bills paid) to an HOA during a period.  She also gives John the balance sheet, a report that illustrates HOA assets and liabilities at any given point in time.

Jane, not an expert in finances, simply provides these to her real estate professional, who in turns shares with buyer Steve.  Neither Jane nor John notice an error on the balance sheet that shows the HOA having $50,000 more than it actually has, which is only $5,000.  Based on this report, Steve makes an offer on Jane’s unit and the sale goes through.  Five months later, the HOA and John inform owners that the HOA needs a new roof and each owner must pay $7,500 as the HOA only has $5,000.  Surprised and frustrated, Steve approaches John to question where the $45,000 went.  John tells Steve that the report was in error.  Steve is very upset and notifies Jane with the intention to have her pay the $7,500 or a portion of this sum, due to the error in the report.  John used a spreadsheet that had an error in the formula he prepared.

Every HOA must use a system, preferably a commercially available, real-time tool that has regular support and service to avoid this sort of unfortunate outcome.  Data entry mistakes happen, but having an error in a formula is easily avoidable when you’re using a proper system.

Recommended minimal financial reports for internal HOA purposes:

    • Profit and Loss Statement (Income statement)
    • Budget vs Actual (actual income and expenses compared to your budgeted amounts)
    • Balance Sheet (reports assets and liabilities)
    • Aging Receivable Report (assessment outstanding)
    • Unpaid Bills – list of what bills are unpaid
    • Bill Payment List – list of what bills were paid in a period
    • Collections Report (what assessments were collected and by whom)
    • Statement of Cash Flow (shows where the cash came in and went out)

Recommended minimal financial reports for third-party HOA purposes:

    • Profit and Loss Statement (Income statement)
    • Budget vs Actual (actual income and expenses compared to your budgeted amounts)
    • Balance Sheet (reports assets and liabilities)

Commercially available systems, like QuickBooks, include these reports. 

Correspondence and Communication Storage

Dedicated system to synchronize email, correspondence, and document storage.   HOAs are businesses and need to maintain sound data storage and security systems.  Consumers (or HOA owners) expect and require–especially when dealing with sensitive or confidential information.  Data storage, security, and privacy are paramount items, particularly in today’s landscape.  Even the storage of hard copy documents with sensitive, confidential owner information has requirements to adhere to.

A common error is that HOAs do not secure documents, data, and correspondence.  Rather than having systems and processes in place, there is often a patchwork of systems used with significant deficiencies in data and document retention and document disposal.  This becomes a risk area where HOAs cannot afford to make mistakes.

Case example: Three HOA Board members use their personal email accounts for the HOA business, while two other members use their employers’ email accounts.  Jane, an HOA owner, emails the HOA Board through the only channels provided which include HOA Board member’s work email.  Jane provides her bank information to the HOA Board to update her auto dues payment as she explains she is going through a divorce and divulges content that she would not want others to read.

John, the HOA Board President–and one of the members using his employer’s email for HOA matters–reviews Jane’s email during his work hours and conducts other HOA business during this same time.  John, working on employer items at a local coffee shop on his laptop does not realize he left his computer screen on and unlocked with Jane’s email open when he is called away to pick up his coffee order and then use the restroom.  Unsavory Mark realizes Jane’s banking information is clearly visible and takes a picture of this with his cell phone.  John returns to his work area and goes about his business.  A few weeks later, Jane learns that her account has been compromised, and this causes all sorts of issues for her from late payments, to credit reporting and lost money.  Jane realizes that she only provided her account information to the HOA, which she trusted to follow the procedures set forth by the HOA.

What a mess. There are several issues here, including the fact that John conducting the HOA business on a work computer in a public area.  Aside from Unsavory Mark, there are a host of problems and issues that expose what HOAs may encounter and need to consider safeguarding. 

HOAs must act as a company and safeguard its owners’ information.

Aspects of Sound Data and Document Policies, and Best Practices

  • HOAs should enact a policy that includes technology systems that already have security in place, rather than the HOA building these.
Best practice:

Start from the ground up, that is the basic contact system for HOA and owners:

    • Start with obtaining an HOA dedicated email with limited user access using a reputable provider (Gmail, HOA’s own URL, etc.)
    • Hosting platform – use a cloud-based system to store communications and documents, ideally one that integrates and provides ease of use. Ensure the chosen option has document storage hosted on a secure server from a reputable, sizable provider.
    • End with processes for adding and removing HOA owners from systems when one owner sells and a new owner buys HOA property. Something simple – if not integrated, one that includes:
      • Entering new owner name, email, and contact into the system and set to active
      • Verifying the previous owner is set to be deleted from systems
      • Notify new and old owners with updates if the system does not automatically complete this
    • Destroying confidential data and documents by using proper document shredding and disposal services.
Best practices:
  • Limit hard copies. Only using electronic documents and copies reduces risk exposure while removing most of the hard copy security factors
  • For hard copies, retain a reputable shredding service or take to a proper disposal center that can provide the HOA with a certificate of disposal.
  • Be able to explain the HOA’s policy to owners who may question this. Retaining an outside service can help alleviate these concerns.
Best practice:

Use a service like JSP Toolbox or a cloud-based server with built-in security measures. This is a responsibility that is best served by having a professional service administered.

  • Have clear policies on what happens when an owner no longer is a member of the HOA; i.e. the owners sell their HOA property.
Best practice:

Overcommunicate to avoid issues. It’s best to send a notification to the HOA owner that their account is terminated so that it is communicated to them that further HOA payments are not processed and that the HOA has acted to close matters.

Access to Expert Advice

The buck stops here, but maybe it shouldn’t.  HOAs can feel like it is on an island at times when faced with challenging items or owners.  Having expert advice or resources available to guide during difficult times makes a big difference. 

The best advice is simply knowing when to ask for help.  HOAs that wait too long to ask for help or try to deal with things on their own oftentimes cause more harm than good.

Case example:  Owner Josh has asked the HOA to repair the front concrete stoop leading to the front door on his home.  Each home in the HOA has the same concrete and the stoop is exclusively used by that unit.  Josh thinks the HOA should pay for the repair and replacement of this.  The HOA CC&Rs are clear that this is a limited common element and an owner’s cost responsibility.  Thus, the HOA can complete the repairs using their preferred vendor but must charge the owner back the costs. The Board of the HOA favors Josh and decides the HOA should pay for this because Josh keeps his property well maintained and has helped the HOA.  Three weeks later, owner Mike realizes his concrete stoop is cracked and unlevel.  He sees the work that was done at Josh’s unit and requests that the HOA pay to repair his stoop.  Mike is the opposite of Josh–he doesn’t take good care of his property–and the HOA Board does not particularly care for him.  The Board notifies Mike that he alone must cover the costs.

The problem is the CC&Rs are not being consistently applied to all owners.  Faced with a dilemma and realizing other owners are asking the same requests, the HOA needs advice after having acted, albeit unwisely.

HOA Board members must adhere to the CC&Rs and know the documents when presented with conflicting positions or requests from owners. By permitting positions inconsistent with the CC&Rs, the Board and HOA create risks and liability as acting against the CC&Rs by the body that is charged to guide and enforce these, which equates to a loser position if challenged. And in these cases, the HOA would lose excepting extraordinary facts.

HOAs have different ways to get advice and differing levels of advice.  Here are a few options:

    1. Full-service professional property management. You can hire professionals to manage all aspects of the HOA. With this comes costs and benefits which may make sense for your HOA.  And management company professionals can provide certain kinds of advice to HOA clients. However, depending on what is needed, you may need to hire additional pros. 

Cautionary note:  Not all professional HOA management companies are the same. Levels of expertise can vary dramatically.   The nature of professional management is not developed through dedicated college training nor graduate education specific to the industry, but rather professional accreditations that may or may not be indicative.  Like paths in real estate–such as sales–the HOA property management career choice is not always a clearly defined path, but one where skills are learned and developed through work in the industry and educational opportunities. Given that the industry does touch many aspects from legal, accounting, real estate, and service, the skills and expertise you select to use should be carefully vetted.

Additionally, professional HOA management may take roles of liaison and taskmasters, meaning they simply complete what the HOA asks of them and provides HOAs with other professionals for advice.  Some may take a perspective of advisors and consultants where well-rounded expertise is part of the service offering.  And still, some may simply perform limited services to an HOA for things like financial management or maintenance only.

    1. HOAs are not confined to use full-service professional management and may get their needs met using other approaches. These alternatives can provide higher levels of service and control, which can fit HOAs more appropriately:
      1. Limited-scope professional property management. Hiring management to perform one aspect of your HOA or a specific project are options. The benefit is limited expense, but the downside is that this service may not address other aspects that are needed in the HOA.
      2. Directly hiring outside professionals, like lawyers, engineers, contractors, etc.  This eliminates the middle party (like a professional property management company) and can result is faster, more cost-effective servicing.  The downside is that these outside pros may be less familiar with how an HOA works, and what an HOA needs.
    2. Combination of professional property management using tools of full service and vetted vendors for advice and servicing.  JSP Toolbox provides this platform.  Many find it useful to have available expertise, resources, and vendors in a pricing format that is cost-effective and understandable.

How to Get the Most from Expert Advice and Best Practices

  • Be specific in what you are asking – the more detailed the better.

Best practice: Understand generally the potential outcomes and make sure to ask the question the right way to get the answer to match the outcome.

  • Set a limit on what you plan to spend to address the issue.

Best practice: Use a vetted vendor with the proper experience to work effectively and expeditiously for the HOA.

  • Provide the expert on what and when it is needed to properly advise the HOA.

Best practice: Organize documents, maintain or transfer all to electronic format for easy dissemination, centralize storage based on subject matter or project for easy location, and respond timely with information being requested.

  • Understand the advice to a point that you can clearly explain this to another – particularly an HOA owner.

Best practice: Correspond in writing so you can refer to it in the future, if necessary.

Maintenance Requests and Work Orders

Owners fret over a few things more than maintenance being completed when they want it done.  In HOAs, that equates to the HOA having systems in place to not only operate effectively but to manage costs and responsibility between HOA and owners of requested items.

Effective systems to process maintenance requests and work orders involve levels of cooperation with owners and HOAs and educating.  The responsibility matrix found in Exhibit 2.1 provides insight over who covers what in an HOA.  This will vary according to specific HOA CC&Rs, but a matrix like this is very useful in assisting owners and the HOA in properly addressing maintenance items.

Case example:  Steven Point HOA does not have a formal Maintenance Request/Work Order system for its owners.  Instead, owners can email one of the five Board members who then hire a vendor they know to do the work.  The owner who emailed may or may not receive notification of what happens after the email is sent in.

Vendor Joe is contacted by Board member Adam to repair the deck rail on Owner Jane’s unit.  Adam didn’t have a clear understanding of whose responsibility it is for deck railing repairs.  To appease Jane, Adam hired Joe, who he found online without checking into Joe’s insurance, references, or licensing.  The easiest way to access the work area is through Jane’s unit.  The HOA retains a master key to access units in case of repairs. 

Eager to get started, Joe lets Adam know he can start the next day.  Adam says great and provides the master key to Joe, who promises to return it to Josh when the work is done.  Adam forgets to let Jane know about the work timing.

Joe shows up at Jane’s unit around 9:00 am to do the work.  Joe knocks on the door several times and no one answers. Joe then uses the master key to enter Jane’s unit believing no one was at home.  Jane was at home but in the shower and could not hear the knocking.  Jane makes her way to her living room and is startled and scared to see someone working on her deck rail.  In fear and startlement, she screams loudly.  Joe, innocently working on the rail, is startled by the scream and loses his balance on the deck, falling several stories landing on concrete and dies.

The issues alone with this flawed maintenance system are significant and bring into potential risks and liability several parties who all started with good intentions:

    1. Adam never notified the other Board members. The other Board members believe Joe was not authorized to conduct work and use the master key for non-emergency work through accessing owner units.  The Board has potential liability for improper vetting of vendors and acting inconsistently with the CC&Rs.
    2. Joe, an unlicensed and uninsured vendor, loses his life. His family members bring a lawsuit against Steven Point HOA for his death asking for millions and potentially bankrupting the HOA if insurance does not cover the terrible loss.
    3. Jane is traumatized by the events, resulting in missing work to the point of losing her job and incurring significant medical costs. Jane’s unit, in turn, falls delinquent from lost income and inability to pay the mortgage and HOA assessments.  Jane sues the Board to help put her life back together and offset costs.

Cautionary note:   As dramatic as this example is, it can and does happen.  The lack of systems and processes at Steven Point HOA resulted in innocent parties being harmed and catastrophic outcomes for the HOA.  If insurance covers the HOA actions, it will no doubt result from years of litigation.  This impacts all owners in the HOA. If insurance does not cover the HOA actions, the HOA owners could be financially harmed to the point that the HOA is unable to continue.

Having systems in place is more than tracking items; it’s an important component of HOA operations and risk mitigation practices.

5 Processes for Sound Maintenance Request & Work Order Systems

    1. Using the HOA CC&Rs and Rules and Regulations, develop a written and clear process for Maintenance Request & Work Orders:
      1. Be specific on how owners are to submit Maintenance Request & Work Orders
      2. Include owner contact information like emails, telephone numbers, best times for work, and nature of work needed on submission
      3. Detail timing on these and process for completion in a response to owners after receiving the submission – this can be a simply prepared statement like “Thank you for your Maintenance Request. The HOA has received this and will complete non-emergency repairs, pending vendor scheduling, but likely within 7 business days. Your contact information is noted and should access to your unit be needed; you will be notified.”
      4. Identify if the needed work needs to be paid by the HOA or owner.
        1. If the work requested is owner cost coverage, reply to the owner with such information while providing a vendor or service reference or recommendation for the owner.
        2. If the work requested is HOA coverage, utilize vetted vendors to complete the request by sharing the owner’s written request with the vendor.
    2. Assign work to the vendor and obtain the timing of work to ensure compliant servicing and that vendor has what is needed to complete the work.
    3. Obtain and review feedback from the owner on service work completed to ensure satisfactory work and that owner is clear that the process is now over.
    4. Promptly approve or pay the vendor for service performed to ensure good relations.
    5. Track the work order in HOA records so that it can be located by unit, work, and vendor for later reference or warranty servicing.

The right tool makes the job easier.  Effective systems and policies selected over antiquated processes for HOAs are like a carpenter using a circular power saw over a handsaw.  While both get the job done to some extent, one is much more efficient, effective, and able to best serve the user.  HOAs are entrusted to operate with the best interest of the HOA to serve the owners. It’s vital that HOAs have strong and effective systems and tools to carry out these objectives.  Particularly as sophistication levels have advanced, so too have risks associated with running HOAs from the security of owner information to who is residing or renting in the HOA. 

One risk lies in owner assessment payments to HOAs where checks are written and deposited by HOAs. In these forms of owner payments, most times banking information is included. Any deficiency in the system to handle checks can lead to a security concern or in the worst case, a breach.  While easily avoidable with proper systems and policies, an HOA lacking these is taking unnecessary risks.

A common and problematic issue is renting in an HOA.  Having in place effective systems and rules around renting are vital for many aspects of HOAs, including safety, property value, and marketability of units.  Exhibit 3.1 illustrates sound Rules and Regulations around rentals in an HOA.  While these policies may vary among locals and HOAs, these are an example of a type of effective system to assist HOAs.


Exhibit 3.1 – Sample Rental R&R
Exhibit 3.1 - Sample Rental R&R

NEXT — Step 4: Communications