What to Look for in HOA Management Contracts

By Kelly G. Richardson, Esq. CCAL, HOA Homefront Column

[Part 2 of 3-part series on selecting HOA management] After selecting the management service type and candidate firm, look closely at the proposed management contract. 

Price is NOT everything:

Hiring management solely on price is a mistake.  Associations may discover “you get what you pay for.” Factors affecting the fee are:

1)      Level of desired service.

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

3)      Quality of personnel – more highly qualified managers command higher salaries.

4)      What is included/excluded – Review the list of extra charges and fees.

The base management fee is the beginning, not the end of a thorough review. Look more deeply at the service level and costs.

Reviewing the contract

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 important items, but here are some to consider.

Workload

How many other associations is the manager simultaneously handling, and how large are they? Fifteen accounts may be fine, or two may be too many, depending upon the nature of the other accounts and your HOA’s desired service level. 

Vendor tie-ins

Does the company require, or simply offer, additional services at a fee? Does it have affiliated vendors to which it refers ordinary non-management work such as maintenance or repairs? While such services are convenient, the association should have a choice, because such services might be obtained elsewhere at less cost. Management firms must under Civil Code 5375 disclose affiliated entities up front - did they?

Contract Length

Management contracts normally specify a specific term. Starting to manage associations involves start-up work. It can take months for a company to realize profit, so a minimum initial term up to 12 months with a cancellation right or reasonable buyout fee is fair. Insist that automatically renewing contracts allow for cancellation at any time after the first year. However, General Managers need some job security, so guaranteed terms are normal for GM employment contracts.

What about extra fees

Too many management companies compete solely on price as opposed to service, qualifications, and reputation, and too often the base fee is over-emphasized. Some companies offset a lower base management fee with many extra charges. Check those charges, including document or transfer fees and homeowner charges for services.

Required reports

Ensure the contract requires management to provide the monthly board reports required by Civil Code 5500 and the Annual Budget Report and Annual Policy Statement (Civil Code 5300 and 5310).

Funds handling

Management companies often propose that association funds be deposited in the company’s bank trust account and the manager signs association checks. While more convenient, it makes it harder for HOAs to control their funds and requires even more careful review of reports. 

Fidelity insurance

The association is required by Civil Code 5806 to carry fidelity (dishonesty) insurance and so should the management company.  Make sure the association’s coverage includes the management and meets or exceeds the minimum amount specified by Civil Code 5806. Check with the association’s insurance broker to make sure the fidelity insurance meets the legal requirements and sufficiently protects the association.

Find a good manager, carefully review the contract, and request reasonable changes. Start a strong manager-association relationship - and keep it for a while!