Financial Risks of Choosing an Unproven Management Firm

Consider the financial risks of hiring unproven association management firm

With the recent changes in the U.S. housing market and the rise of online real estate platforms, many less experienced real estate agents and brokers have shifted their business from real estate sales to condominium and homeowners association management. While some smaller, unproven management firms may have a great sales pitch, there are potential risks associated with smaller, less experienced, and less financially secure management firms that could have a major impact on your community association, such as:

Impartial Manager Fiduciary: A small management company will have fewer HOA managers, and they may be overly reliant on one or two managers, who may also be principal owner(s) of the management firm. It is important for the community manager and firm to have an independent relationship for the continuity, transparency, and efficiency of the HOA operations. It can also take time and resources for less experienced managers to learn the specifics of the HOA and establish a reputation and rapport with the board and the homeowners. Does the smaller firm have the experience, financial backing, employee recruiting opportunities, and insurance coverage to survive and guide your association through any financial or disaster situation? If the smaller firm had a financial setback, would your association be impacted? It is important to understand the financial risk you are taking as a board member of your association.

Lack of Communication: An unproven management company may not have enough staff or advanced systems to respond to the HOA’s queries or concerns in a timely manner. This can lead to frustration, misunderstanding, legal issues, and mistrust between the HOA and the management company.

Low-Quality Vendor Services: A less experienced management company will not have a rigorous vendor selection process or a wide network of reliable and reputable insured and licensed vendors. This can result in low-quality or overpriced services for the HOA and a lack of independent financial oversight of the relationship between the management company and the vendor. The ethical issues can also carry over to the Board of Directors and affect the long-term maintenance and financial strength of the community and insurance coverage. All three items can have a detrimental impact on the resale value of homes within the association.

Inadequate Accounting and Reporting: A small management company may not have the expertise or the technology to handle the HOA’s accounting, reporting, and Human Resource needs. This can result in errors, discrepancies, or delays in the HOA’s financial statements, which can affect the transparency and accuracy of the HOA’s financial health.

Risk of Income Loss: A smaller management company may not have the skills or the tools to manage the HOA’s cash flow, collections, and reserve funds. This can result in a decrease in revenues or an increase in expenses, which can affect the HOA’s ability to fund its operations and capital projects.

Risk of Fraud, Theft, or Embezzlement: Last but certainly not least, a smaller, less experienced management company will likely not have the proper safeguards or controls to prevent or detect fraud, theft, or embezzlement of the HOA’s funds, including from online cyber security threats. This can result in a significant loss of money or assets, which can damage the HOA’s reputation and financial stability. We have helped many associations over our history that have had funds stolen from smaller management companies leaving the community in financial shambles. CMA has the experience and resources to help any association recover, but it can take years to fill the hole which will impact the resale values and insurability of the association.

These are just a few of the possible financial risks of an HOA going with an unproven management company. However, not all management companies are the same, and some may provide excellent service and meet the needs of your community. It is important for the board to do its due diligence and research before hiring any management company, regardless of its size. The board should also monitor and evaluate the performance of the management company and its insurance coverage and licensing regularly, and communicate any issues or concerns as soon as possible to reduce the financial impact on the association.

CMA has the expertise and resources to help guide your association through any crisis or loss. As the largest community association property management company in Atlanta, Alpharetta, Augusta, Dunwoody, Peachtree City, Roswell, Birmingham, Fairhope, Nashville, Destin, Santa Rosa Beach, and Naples, we are here to help your community thrive.

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