No Easy Answers to HOA and Condo Questions – But There Are Answers.

I just got off the telephone and thought the topic of conversation was a good one for a blog. A woman (board member) from an Association, I’m presuming a small one because it was clearly not well managed, called and said she had just a simple question and did not want legal services. She proceeded to go into a dialogue about the board’s quandary with regard to funding reserves giving me a short history of their confusion. I finally had to cut in to tell her it wasn’t a simple question. Her questions revolved around the following:

How much does a board need to put in reserves – is there a law?

If the reserves account is not funded can it affect sales?

Can the board get into trouble if it does not get a reserve study done by professional and does not follow it?

Where could she go to find out specifically what the board should do?

I can tell you these “easy” answers: there is no law as to funding reserves, except to require studies and disclosures. Whether there is any legal liability for failure to fund reserves depends on a lot of factors, but a board should strive, in my opinion, to make sure that the board has a competent study to review (that satisfies what the law requires) and that there is an attempt made to keep the reserves funded to try and avoid major special assessments. Certainly, there are associations that choose to do all projects by special assessment. That can work, but it commonly leads to problems where some of the owners can’t come up with the special assessments or would prefer some sort of fun be established.

The other answers to the questions are that underfunding can affect the sale of a property, but there are many other factors as well. For example, the buyer may be so enraptured with the property that they don’t care of the reserves are funded or not. They may not fully understand what it means to have unfunded reserves or deferred maintenance. They don’t even try to understand the financials they are given.  I can tell you, though, that the first time they get a big bill for a special assessment, they often wake up and start shouting.

A board can get into trouble for failure to fund reserves. I’ve heard about many Superior Court lawsuits over the past years brought against boards and associations that have underfunded reserves.  I don’t know of an appellate case at the moment but there are reports of judgments that I have heard disclosed. More often than not, the discussions come through an educational seminar where insurance company representative is explaining to the group the various types of lawsuits that are filed against associations and why. The lawsuits can come from current owners, and often come from new owners who don’t feel proper disclosures were made.

I have had owners call me for consultations that are up in arms because of a recent large special assessment notice or because they found out the reserves were poorly funded. When they want to look at what causes of action may have, I ask them to send the reserve study were given when they bought the property or in the past annual disclosure packages. Many don’t even know what I’m talking about, but once we track it down, either through the Association or buried in their records, we go over it, and I find myself “educating” the owner as to what they purchased or what had been disclosed over the years. It doesn’t make them any less mad, but it does help them understand they don’t really have a viable cause of action based solely on nondisclosure of the financial picture.

California law requires an Association to have a reserve study done every three years and that includes a physical inspection of the properties including the common area facilities and buildings in a townhouse association or condo association. There are complaints floating around that some reserve studies are not worth the paper they’re printed on, but there are many associations that have commissioned studies, followed them, and are not completely submerged (“underwater” may be more descriptive term) when it comes to funding a large project. Even those associations can get hit by a big ugly surprise if the inspections failed to disclose deep-seated problems such as extensive dry rot, problems relating to deferred maintenance, etc. However, an association that is in a good position according to its reserve study is in a much better position than those that have not commissioned or followed any reserve study even if it encounters other problems in any construction project.

As for a regulatory agency, there is none in California. Some owners go to their legislators, but honestly, the legislators are not well-educated on the details of the runnings of homeowner associations. They keep passing legislation to require more reports and disclosures as they hear about the problems individuals face from being uneducated, but they can’t point anyone to a specific law or case for legal premise in answer to the kinds of questions the woman on the telephone asked me.

When she asked for resources, I pointed her to my website. She had been there but only spent enough time to see that I was an attorney who seemed to know a lot (the guru name does stop some people from using their own time to review articles and seek specific information I think).

She had overlooked the advantage of a great resource.  Not only are there lots of free articles, a chance to sign up for an e- newsletter, e-news archives from all my newsletters, FYI’s, and blogs to follow, there are about 35 Primers for $25 each on specific topics, three of which specifically address Reserves, and one specifically on how much money an HOA should have in reserves. Determined to keep my ear, she asked me what “Primer” is. I told her it was an educational tool containing about 20 pages of specific information related to the practical and legal aspects of the topic described in my web store and on my publications page. She asked if she could go in and pay and download the publication. The way it works, I told her, as set when someone orders of publication, I get an email notice and send out the PDF document with a copyright notice.

There are also three books available on my website and one is called THE DAVIS STIRLING ACT IN PLAIN ENGLISH. I realized early on that interpreting California law is not that easy, whether you are a layperson or an attorney not well-versed in homeowner association law. In 2014, the legislature completely reorganized the Davis Stirling Act and broke it up into about 100 sections trying to make it easier for people to understand, but truly, when you get referred back and forth to this statute in that statute, and are still left with the idea that in some cases the law controls and in some cases the governing documents control and it’s not easy to determine which controls, you need to look for more precise help. In addition to the publications that I have written and continue to write, I offer consultations to individuals and boards and him in the process of writing a compliance manual for small California homeowner associations, because I recognize that there is a large percentage of small associations in California who can afford professional management and whose board members need a good resource to pull all the necessary conceptual aspects and practical and legal requirements together in one place. Look for release of that publication in January, to be followed with several Board training and educational webinars.

But truth be told, most people want a quick answer to an “easy” question and don’t want to do the “library” work, even with free resources.

I know it can seem hard and frustrating to try and find information, I mean really good information, about homeowner Association issues, problems, questions, and concerns. For that reason, I’ve been writing on the subjects for about 25 years. I started my website in 1999 by republishing articles written for various industry publications, FYIs provided to clients, legislative updates, and other free publications. Over the years I developed primers, guides, and other affordable and more specific educational tools. You can find these at www.californiacondoguru.com in the sections on Articles, Publications and the E-News Archives, as well as some specific FAQs for first time visitors. And in the webstore at http://store.californiacondoguru.com/servlet/Categories.

From my teens as a horsewoman on a dude ranch, I know that you can lead a horse to water, but you can’t make him drink. Lots of people want easy answers to “easy questions” even when those questions  take 15 minutes to express. Sadly, I have to say there are hardly any easy answers. But there are answers.

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