It is commonplace for homeowners associations to retain outside property managers to assist in the management responsibilities of the association. The process of selecting and retaining the right property manager involves many considerations and preliminary steps that are frequently overlooked by an association’s board of directors to the detriment of the association. As the association’s directors have the ultimate responsibility for properly managing the association and have a fiduciary duty to act in the best interests of the association, it is important for them to be aware of the steps that should be followed before they bind their association to a contract with a property manager.
Step #1- Know what the association’s governing documents provide about the retention of property management.
An association’s governing documents (i.e. the declaration / CC&Rs) typically contain provisions concerning the retention of a property manager, or property management company, to assist in the management responsibilities of the association’s board of directors. For example, those provisions may limit the types of responsibilities that can be delegated to an outside manager, impose restrictions relative to the handling of association funds, and/or require specific insurance coverage. Unfortunately, association board members frequently overlook the requirements that are specified in their association’s governing documents when hiring a property manager and enter into management agreements that do not comply with the requirements of their governing documents. To avoid such a situation, an association’s board, or designated board members, should thoroughly review the association’s governing documents to locate and familiarize themselves with all provisions relating to the retention of a property manager. All such provisions should be fully complied with and, when there are inadequate provisions contained in the governing documents, consideration should be given to the need for amending those provisions to more properly address issues relating to the retention of a property manager.
Step #2- Understand the scope of work that the association will expect from the manager.
Before retaining a professional property manager, association board members should have a complete list of the various tasks that they are responsible for and which they want the property manager to perform for the association. Some of the required tasks may be obvious but there are generally others that are often overlooked. To fully understand the tasks that might be delegated to a property manager, the association’s board should review multiple form management agreements that can be provided by different property managers being considered and/or they can locate such documents on the internet. Guidance and helpful information on the extent of property manager tasks can also be obtained from legal counsel for the association. A contract that is entered into for property management should clearly set forth all of the tasks that the manager is expected to perform and the nature of the compensation the manager is to receive for the performance of those tasks.
Step #3- Properly investigate all property managers and management companies being considered.
It is not uncommon for a homeowners association to drop the ball when it comes to investigating a potential property manager and retain a property manager based on a recommendation from someone, or a personal relationship, or a good sales pitch, or because they received what is perceived as a favorable price quote for the management services. This can lead to disastrous consequences to the association. A property manager / management firm should never be retained without having completed a proper investigation that includes:
a. Verification of required licensing and credentials. State statutes frequently mandate that homeowners association property managers have a specific license and/or certification, or other credentials. Even if there are no such laws, it is a better practice to hire more experienced and better credentialed property managers. Information on the requirements of each state can be researched on line or obtained from legal counsel for the association.
b. Conduct background checks of all prospective property managers. Given the responsibilities that are delegated to property managers and the potential for causing serious financial damage to the association and its members, the association should require background investigation reports on all of the key employees who will be involved in the management of the association. Such reports should be updated periodically.
c. Confirm that the prospective property manager is properly insured. State statutes and/or an association’s governing documents may have specific insurance requirements for association property managers. Before retaining a property manager, the association should obtain copies of the prospective property manager’s insurance certificates to confirm that they possess the required coverage. Because polices are of limited duration, proper insurance coverage should be reviewed annually.
d. Ask for and talk to references from other homeowners associations. Past or existing clients of a property manager are a great source of information. Request all prospective property managers to provide at least three names and phone numbers of the directors of other homeowners associations that the manager has been retained by and which are similar in size to the association in question. Contact those references and ask questions about their experience with the prospective manager. Prepare a list of relevant questions to ask in advance of the conversation and write down the answers.
Step #4- Don’t blindly sign a contract provided by the property management.
An association should never sign a contract for property management services without first thoroughly reviewing and understanding the provisions contained in the proposed contract document. It is commonplace for property management firms to have standard form contracts that have been drafted by attorneys who have focused primarily on the best interests of the property manager and not the association. Those contracts are then typically superficially reviewed by an unwary board member that is not trained in the law and who does not fully understand the ramifications of various provisions that are contained in the document. Special attention should be paid to provisions relating to the fees and other charges, the tasks to be performed, renewal and cancellation rights, and indemnification provisions. It is not uncommon for provisions relating to compensation to be misunderstood because they are not clearly identified as fees. Items that are listed as “additional charges” for such items as attending board meetings, preparing minutes, sending collection letters, or responding to document requests may seem minor, but can add up to significant amounts each month. Understandably, association board members want to avoid paying legal fees as much as possible, but an investment in a few hours of an experienced lawyer’s time in reviewing a proposed management agreement is a good investment. The attorney will be able to clarify provisions and suggest modifications that would be in the best interest of the association.
The retention of the right professional property manager by a homeowners association is one of the most important responsibilities that an association’s board could have. Taking the appropriate steps to ensure that the right professional manager is retained cannot be overstated since the decision will have a major impact on the association and its members.
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