Mixing Board President and Management Company President Roles Led to Fraud

If there is one easy piece of advice I can offer condominiums – always use an unrelated management company to manage your books. While this won’t eliminate fraud it most certainly cut down on it.

For owners in the Lovers Key Condominium, Estero, Florida – this lesson came with a rude shock: $291,500 stolen from the association’s funds by past president Charles Bennett III, and past vice-president Kenneth Marwick. In this case Lovers Key Condominium also used Bennett’s property management company, EID Management & Realty, to operate their condominium.

When the president of your board is also the owner of the management company you contract, it is too easy for bad things to happen.

In this case both Bennett III and Marwick have pleaded guilty to first degree grand theft charges. Both have been sentenced to prison time and following probation.

Being in the role of both control of the condominium board and the management company they were able to funnel money into companies controlled by the two men, all of them unrelated to association activities. (video)

As more and more money sits or flows through condominiums and HOAs, we need legislation that forces boards and management companies to be non-related. The use of two eyes – the boards Treasurer and a management company is a powerful way to keep the books legitimate and funds safe, and that relationship needs to be kept separate.

HOA Treasurer Indicted for over $1 Million in Fraud – Please Get More Than One Person Doing Books

Here’s another example of an HOA possibly being defrauded by the treasurer. Aaron Yashouafar of the Paradise Spa Home Owners Association in Las Vegas just got indicted for looting more than $1 million from an HOA. Over a year it is charged that he wired himself $250,000 for personal projects, and then deposited two insurance cheques for over $830,000 into an out of state account.

To me it doesn’t matter if your HOA or condominium account has millions of dollars or tens of dollars – any money misappropriated is a hardship on the owners.  There are some very simple steps to help prevent fraud:

1. Self-managed boards should always have co-signatures required on cheques, and standing polices that limit the amounts of electronic transfers.
2. Books and statements should always be presented by the treasurer to the board at each meeting.
3. If possible, use a management company to do the bookkeeping. While it’s not unheard of for a management company to “go bad” – it’s a lot, lot (lot) less unlikely because your accounts are run through a third-party, who has to make all your account statements available to your board and treasurer.
4. Move the role of Treasurer around – do not let the treasure remain the same person for more than two year. The bookkeeping isn’t too hard, and even for self-managed, outsourcing the bookkeeping is hugely inexpensive – just search the internet for services.

Case Study On Condominium Price: Cloud 9 Sky Flats

Some people look at the price of housing much like stocks – if they go down enough, then at some point they have to be a great value to buy. Today we are looking at The Cloud 9 Sky Flats at 5601 Smetana Drive, Lake Minnetonka Communities, 55343.

The Cloud 9 a 165 unit conversion from an office building into a condominium that was turned over from the developer in 2005. Conversion from an office building is a little uncommon in itself (though not unheard of) and brings with it some baggage – including in this case windows that don’t open, a lack of balconies, floor plans not originally designed for residence, and large lot based parking among other factors.

Zillow shows four units currently for sale in the complex. Most attractive to purchasers are the unit prices which average at $152/sqf. This is around 50% of the cost of the units from only a few years ago (2006 peak). Half off a condominium seems like a good price on its own, but the condominium has several other issues that may mean the price is appropriate, and not at a discount.

First off, multiple individuals have been charged with mortgage fraud cash back scheme on over 40 of the units sold in The Cloud 9 during 2006 through 2008. These fraudulent sales both artificially inflated the price of the units, and then assisted in the price collapse as more than 80% of those sales went into foreclosure.

Second, the condominium appears to have a maximum rental limit of 20% of the total units – of which that number has been met. Current owners will have difficulty renting until other units stop, and investors are blocked from buying because they are unable to rent the unit.

Third, three of the four units are priced above the Zillow Zestimate on average by 7%, indicating that compared to the surrounding area, the units may still be overpriced. The fourth is 15% above the Zestimate, but has been on the market for 304 days, and may have been set when prices could have been higher.

Fourth, Re/Max Results show 43 active listings in the building (remember, in a condominium of 165 units) – or more than 1/4 of the units are available for purchase. If you buy into The Cloud 9, there will still be one quarter of your neighbours trying to sell, and as such actively pushing the value of you condominium down.

I always indicate that when buying housing, you should always buy what you think best suits your life, in a price that you can afford – with some financial room in case of unexpected costs or job loss. Outside of that, little matters if you are buying a home, including the current price unless you hope to flip or sell in only a few years.

If the question is if The Cloud 9 represents a good deal – it might be, but not if you base that decision compared to its price 5 years ago. There are enough issues to show that the price was artificially inflated, that the excitement over an office conversion (with all the related baggage) has worn off, there are current bylaws which encourage downward pressure on the price of units, and more than 1/4 of the owners want to abandon and sell out from the building (raising the question of why).

Importantly, for a building with so many foreclosures – at least 1/3 historically – and so many currently on the market, you should look at the financial statements of the corporation closely. Check to see if the foreclosures or current sellers have led to the condominium carrying a deficit because of a lack of paid condominium fees. If there is a deficit, new owners will at some time have to pay for that deficit, so make sure the price of the condominium reflects a discount for any deficit carried by the condominium, and you have enough cash if the condominium issues a special assessment or raises monthly contributions.

Condo Using an Individual Accountant Who Stole $800k+

UPDATE 18 Aug 2011; William W. Scott was found guilty on multiple charges, and stealing more than $800k.

Being on the board of a medium (50+ units) or large condominium (100, 200, 500+ units) will often have you managing more money than you are used to. A 200 unit condominium can easily have a million dollar yearly budget, and reserve funds from the hundred thousand to millions.

At the end of the day, the board is responsible for not only the good use of those funds, but the safekeeping of those funds.

People are people, and even friends can be untrustworthy and unreliable. So goes the story of William W. Scott of Bishopville South Carolina. In a 09 February recording with local police officers he outlined a series of imprudent financial actions with condominium accounts he had access to. In total, it is alleged that more than $800,000 was taken from these accounts.

When dealing with money, one of the best actions a board can take is to bring in reputable third parties that have a focus with condominiums. To this extent, I always suggest a management firm, and a deposit service unrelated to the management firm.

The deposit service (and pick one specializing in Condominiums) will be able to offer advice on how to manage the condominiums funds within any legislative requirements you may have. The management company will act as one more trained set of eyes that can quickly spot abnormalities that may occur in the investments. Between these two additional checksums – a professionally recognized deposit service and a good management firm, you lessen dramatically chances of illegal loss of funds.