HOA Homefront – Management Selection: The Contract

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After selecting a type of HOA management service and a candidate company, carefully review the proposed management contract.

Price is NOT everything:

Hiring a management company solely on price is a mistake. Associations may find that “you get what you pay for”. The factors affecting fees are as follows:

1) Desired level of service.

2) Workload, the number of accounts the manager manages.

3) Quality of staff — more qualified managers command higher salaries.

4) What’s Included/Excluded – There is normally a list of additional charges and fees.

Base management fees are the beginning, not the end, of a thorough review. Take a deeper look at service level and costs.

Contract review

Legal counsel should review the contract before it is signed, but if not, consider the following key concerns. Space does not permit a complete list of all the important items, but here are a few to consider.

Workload

How many other associations does the manager manage simultaneously and what is their size? Fifteen accounts may be enough or two may be too much, depending on the nature of the other accounts and the level of service desired by your HOA.

Links with suppliers

Does the company simply require or offer additional services for a fee? Does it have any affiliated vendors it refers to for routine non-management work such as maintenance or repairs? Although these services are convenient, the association should have a choice, as these services could be obtained elsewhere at a lower cost. Management companies must, under article 5375 of the Civil Code, disclose affiliated entities in advance – right?

The duration of the contract

Management contracts normally specify a specific term. Starting to run an association involves a lot of start-up work and it can take months for the business to start making a profit. A minimum term of up to 12 months with a right of withdrawal or reasonable redemption fees is fair. Avoid contracts that automatically renew each year with no right to terminate — such contracts benefit the company, not the association. However, general managers need some job security, so a guaranteed term is normal for GM employment contracts.

What about additional charges?

Too many management companies compete on price alone (as opposed to service, qualifications, and reputation), and too often the focus is only on base fees. One way for companies to compensate for lower base management fees is to have many additional fees. Check these fees, including document or transfer fees and owner fees for services.

Fund management

Management companies often suggest that the association’s funds be deposited into the company’s trust bank account and that the manager sign the association’s checks. This is more convenient, but the best choice is to require the account to be that of the association and not allow management to sign checks.

Loyalty insurance

The association is required by the Civil Code 5806 to take out loyalty insurance (dishonesty) and the management company must do the same. Ensure that the association’s coverage includes management and meets or exceeds the minimum amount specified by Civil Code 5806. Check with the association’s insurance broker to ensure that the fidelity insurance meets legal requirements and sufficiently protects the association.

Find a good manager, carefully review the contract and ask within reason changes. Start a strong manager-association relationship — and keep it going for a while!

Kelly G. Richardson is a Fellow of the College of Community Association Lawyers and a partner at Richardson Ober DeNichilo LLP, a California law firm known for advising community associations. Submit your questions to [email protected]

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