Protecting the Homeowners Association's Nest Egg

Toni Brown, president of the Falls Run Community Association, said her association lost money to Koger Management. (By Michael Temchine For The Washington Post)

Toni Brown is president of the Falls Run Community Association, an active-adult community in Fredericksburg that is among the associations that say they lost money to Koger Management. All together, the Falls Run association and a related condominium association lost about $300,000, Brown said in an interview. "It is a lot of money, and as I understand it, there is no recourse yet," she said. The association has filed a claim as a creditor in Koger's bankruptcy case for unauthorized withdrawals by the company, and it has filed a claim with its own insurance company. At this point, however, residents have not recovered any money.

Falls Run consists of 585 single-family houses and 199 condo units and has indoor and outdoor pools, a spa and a community center. Each household pays $140 in association dues per month, with condo owners paying a bit extra to take care of their buildings. Not counting the condo fees, association residents send nearly $110,000 in cash in to their management company month after month. It's not a bad idea to require that a company handling that kind of money--for multiple clients--be licensed and post a bond or insurance.

So far, Brown said, they have not had to increase dues or levy a special assessment to cover the loss. But residents are still angry over the incident, she said.

Brown said the residents who serve on their board began to notice problems in 2006, when, over a span of months, control of the association transitioned from the developer, Del Webb/Pulte Homes, to homeowners. They continued to use the same management company, Koger, that the developer had been using. She said the management company would fail to respond to requests for information about their accounts, or send partial information. "It was constantly clouding the situation," she said, adding that board members found bank accounts that they could not access.

Brown said the board members have learned important lessons and have changed the way they do business. They have a different management company now.

"We monitor. We're really quite diligent, in fact," Brown said. And they make sure they have access to any account that is in their name.

As one might expect, she's in favor of greater accountability for management companies. "Associations like ours are ripe for being ripped off," she said. "The management companies have a great deal of latitude with our money."

She said boards must put checks and balances in their systems to make sure their money is handled properly. Now, nothing gets paid on behalf of the association unless it has gone through an approval process. "We also increased our insurance to cover fraud and errors and omissions," she said.

Pia Trigiani, a lawyer with Mercer Trigiani, an Alexandria firm that represents community associations, has lobbied on behalf of the Virginia measure. She said the industry has tried to regulate itself, but as the business has grown, the amount of money at risk and the responsibility entrusted to management companies have increased. Even with increased supervision at the state level, she said association board members will need to be vigilant. "You need to protect your own assets," Trigiani said.

Third-party audits, careful oversight by board members and insurance against embezzlement or theft are still the order of the day. "You've got to be careful in thinking regulation is a foolproof protection," Trigiani said.

Even small homeowners associations, including those that don't pay for professional management, need to be diligent in handling money on behalf of their neighbors. Tom Xander is treasurer of Westwood Estates, a neighborhood of 48 single-family houses near Tysons Corner. Dues are just $101 per household each year, generating an annual budget of about $5,000. Expenses don't extend much beyond snow removal and a bit of lawn mowing. Westwood spends about $380 annually year for an insurance policy that provides liability coverage for the association's directors and for the association if someone were to be injured on the neighborhood's common property. The association hasn't felt a need to hire a professional management company. "It's expensive, and we are so small and our issues are so few, the financial burden seemed more imposing than justified given the scope of our operations," Xander said.

If oversight measures pass in Richmond and Annapolis, the cost of professional management will probably increase, if only to pay for bonding and insurance. But if the requirements help keep homeowners' money safe, it would be well worth the cost.

E-mail Elizabeth Razzi atrazzie@washpost.com.