WHO'S
THE BOSS?
PROPERTY
MANAGERS: Misconduct allegations revive a debate on whether some kind of
regulation is needed.
October 20, 1996
They control millions of
homeowner's dollars. They have the power to slap a lien on a property and force
a homeowner into foreclosure. They have as much say over day-to-day life in a
neighborhood as the local police or city government.
Approximately
3,000 California property managers specialize in running homeowners associations
_ collecting homeowners' dues and enforcing state laws and local codes
regarding these legally organized communities of single-family homes or
condominiums.
In Orange County _ home to one of the heaviest concentrations of homeowners
associations in the nation _ two recent failures of property management
companies and allegations of criminal misconduct have revived a debate on
whether any kind of regulation would improve the industry's services.
Last week,
a respected Dana Point real estate agent shocked the seven homeowners
associations he managed by admitting to forging checks and embezzling as much
as $70,000 over more than 10 years, wiping out the reserves of some of the
associations, according to officials at the homeowner groups.
And earlier
this year, Santa Ana-based Marquis Management Group _ which managed 110
homeowners associations in Southern California, including 58 in Orange County _
filed for bankruptcy amid accusations that the owners levied bogus fines and
late charges, used homeowners' funds for personal cars and shopping sprees, and
lied about the company's financial health.
Property
management firms _ which staunchly oppose efforts to impose regulation _ say
it's unfair to let a few bad apples tarnish the entire industry.
"Marquis
is a very rare case," said Karen Conlon, president of California
Association of Community Managers, a trade group.
NEED FOR
RULES?
In
California, property managers who run apartment complexes and commercial
property must have real estate licenses, but those who handle homes and condos
face no such requirement.
The
California Association of Realtors _ which lost a 1983 battle to require
property managers of homes and condos to have real estate licenses _ says
increased regulation by the Department of Real Estate would raise the property
management industry's standards, give consumers a place to file complaints and
provide financial restitution to victims in the event of fraud.
"There's
no place to go, no place to complain," says Anne Soukup, president of the Portofino
Homeowners Association, which is missing about $16,000 in reserve funds. The
group's property manager, Dana Point real estate broker Milt Hanson, confessed
last week to stealing the money, Soukup said. The association is scrambling to
raise cash to pay bills.
Hanson,
owner of Doheny Realty, told Soukup and others he is dying of cancer and has no
money. He did not return phone calls seeking his comment.
The
Department of Real Estate is investigating the case, but so far state
regulators see no need for further regulation of the state's property managers.
"There's
not a serious enough problem statewide," said Jim Antt Jr., commissioner
of the California Department of Real Estate.
If
anything, Antt said, Gov. Pete Wilson wants to reduce state regulation over
California businesses, making the case of increased supervision of property
managers a hard political sell.
"Licensing
won't solve all of our problems," Antt said. "If somebody sets out to
forge checks or commit fraud, legislation isn't going to stop them."
THE MARQUIS
MESS
Elizabeth McMahon
of San Clemente says she nearly lost her home when Marquis tried to foreclose
over an unpaid fine. "There needs to be some kind of protection," she
said.
What began
as a disputed $5 late charge ballooned into nearly $3,000 in charges levied
against McMahon by Marquis and a collection agency also operated by Marquis
owner Diane Fullerton, according to McMahon.
A few
months later, McMahon was notified by a foreclosure services company _ also
controlled by Marquis _ that her home would be sold. After Fullerton refused to
answer her letters and phone calls, McMahon said she was forced to spend more
than $2,000 in legal fees to block the foreclosure. The two sides eventually
reached a confidential settlement, McMahon said.
Fullerton,
former president and owner of Marquis, could not be reached for comment. An
attorney for Marquis declined to comment.
Most of Marquis'
assets have been liquidated by a court-appointed trustee and law-enforcement
agencies are investigating potential wrongdoing, attorneys say.
But McMahon
wasn't the only homeowner impacted by Marquis ' collapse. The bankruptcy
entangled more than 11,000 Southern California homeowners, including 6,000 in Orange
County, court records show. Bankruptcy law prevented most of the associations
from terminating their contracts, forcing homeowners to continue sending their
dues to the failed company despite the lack of services.
And
associations were given little say when a court-appointed trustee sold their
management contracts to a third-party company, Condominium Management Co.,
according to Laguna Niguel attorney Marie Molnar, who represented Lake Forest
Townhouses Community Association, which was managed by Marquis.
"My
client just wanted the right to choose its own management company," said
Molnar, who tried unsuccessfully to block the sale. "This has shook up a
lot of people."
LEARNING
THE ROPES
The
industry says that it's becoming more professional and service-oriented as it
matures from a loose-knit group of mom-and-pop operators to a collection of
larger, regional companies.
The
complexity of ever-changing disclosure and compliance laws and concerns about
liability have driven a growing number of homeowners associations into the arms
of professional management firms. Some lenders refuse to do business with
associations that attempt to use volunteers and manage themselves.
As a
result, property management firms are enjoying rapid growth. Consolidation and
competition is forcing out many smaller companies, including real estate agents
that entered the business as a way to survive in the downturn.
"As
the industry gets more specialized and sophisticated, I think you'll see more
real estate agents getting out of the business," said William Sasser,
president and co-owner of Transpacific Management Service.
In response
to the complaints, the industry is hoping to head off new regulation by
adopting industry standards and creating a voluntary certification process for
individuals and companies.
The
industry-led CACA already has certified about 20 percent of the state's
property managers and is preparing to unveil a certification process for
companies soon.
Individuals
must have two years of experience, take a four-hour class and pass an exam.
Companies
will be required to open up their books to outside accounting firms to verify
solvency and strength, according to Jeff Olsen, president of Professional
Community Management and chairman of the CACM.
"Auditors
will come in, test the internal controls and review how the company is handling
cash and handling the trust accounts," Olsen said.
WATCHING
THE STORE
Marquis
owner Diane Fullerton was a member of the CACM working toward certification at
the same time her company collapsed amid charges of misconduct.
"The
problem with trade associations is that they are voluntary," said Alex
Creel, senior vice president of the CAR, a trade group for real estate agents.
"You don't have to belong. We are a trade association ourselves and we see
great value in self policing. But we think there needs to be some regulatory
oversight, too. You need both."
In light of
the Hanson case, the CAR plans to reopen the issue at its board meeting in San
Diego later this week, Creel said.
There have
been some efforts to regulate property managers in the state legislature. This
year, Assemblywoman Jackie Speier, D-South San Francisco, helped create AB
1317, a new law designed to protect homeowners who face foreclosure because of
disputes with association boards and property managers over dues and fines. The
law encourages mediation and attempts to make it harder for associations and
property managers to foreclose over fines or late charges.
The
problem, however, with this and other consumer protections is that there is no
state agency to enforce the laws.
"There
needs to be a consumer agency enforcing these rules," Danoff said.
"Otherwise, for an individual homeowner, the only option is to sue and
spend a great deal of money on legal fees. People can't afford that."
But Melinda
Masson, chief executive of Merit Property Management, said the state doesn't
have the staff or funds to take on new oversight duties of property managers.
"The
state can only be as effective as the funds that are available," Masson
said. As a member of the DRE's advisory committee, Masson said she sees
firsthand how regulators are unable to pursue complaints or problems because of
staffing and budget crunches.
"In a
perfect world, we all want a big brother to come in and make sure everyone is
behaving," Masson said. "But in this case, private regulation can be
more effective than public regulation."
Masson and
others said homeowners associations already have enough power to control
property managers simply by getting more involved in operations, overseeing
finances and, if necessary, firing property-management firms.
McMahon
says she tried unsuccessfully to convince her board to replace Marquis long
before the bankruptcy.
"They
wouldn't listen to me," McMahon said. "It's not really the homeowners
who are running things. The property managers have taken over."
SIDEBAR
HOMEOWNERS
BEWARE: KNOW YOUR MANAGER // REAL ESTATE: Tips for associations faced with a
vital choice.
In the
absence of state regulation and oversight, the need for homeowners associations
to carefully select and monitor their property management firms is critical.
Here are
some tips for hiring a property management firm or reviewing the performance of
an existing manager.
Make sure
that the company and its employees are certified by the California Association
of Community Managers, a trade group working to improve industry standards. If
not, make sure they are working toward certification.
Take a tour
of the company's facilities. Find out how homeowner funds are handled. What are
the company's internal checks and balances for handling money?
Ask if the
property management company or its principals own or control any related
business that could pose a conflict of interest, such as a collection agency,
landscaping company or foreclosure service.
Ask to
review the company's balance sheet. Is the company solvent? Is there cash
available to invest in technology and improving services?
If the
company is quoting a price substantially below the competition, find out why.
Property managing is a competitive industry, so rates shouldn't vary widely. In
Orange County, rates depend on the association's size, ranging from $5 to $15
per unit or home.
Ask if the
company or its employees hold any state or federal licenses. If they do, check
with the appropriate agencies for complaints or disciplinary actions.
Get proof
of insurance. Companies should carry fidelity bonds to protect against theft,
errors and omission coverage and workers' compensation. Check up on the
policies each year.
Check
county court records for lawsuits filed against the company or its principals,
which could indicate mismanagement. While you're at it, check criminal arrests
and bankruptcies, too.
In addition
to the annual audits required of most large associations, consider hiring a
separate, outside accounting firm to conduct a thorough review of the
management company once every three to five years.
Be
attentive. Pay attention to financial statements at board meetings. Insist on
reviewing only original bank statements and documents to ensure against
tampering or forgery.
Establish a
good relationship with the bank handling your association's accounts. Make sure
the lender knows who has check-writing privileges.
Always
check referrals. Ask for a list of the manager's other clients and call
associations at random. Speak with association board members as well as
residents about the company's performance. Call back once a year to check up.
CHART:
At a
glance. A look at Orange County's largest property managers specializing in
homeowner associations.
Name
Location O. C. Total Associations
units units
managed
Mission
Merit
Property Management Viejo 45,294 53,412 SAMLARC, R. S.
Margarita;
Westpark, Irvine Professional Community Mgt. Lake 39,655 52,226 Leisure World,
Forest Lag.
Bch. Transpacific Management Santa Ana 18,000 23,000 Bear Brand Master,
Assn.
Laguna Niguel; Ocean Ranch, Laguna Niguel Keystone Pacific Property Newport
17,878 21,005 Town Center Assn.,
Beach Irvine;
Marina Hills Masster Assn. Laguna Niguel
Action
Property Management Orange 10,970 16,234 Rancho del Rio,
San
Clemente; Serrano Highlands, Lake Forest
Copyright 1996
The Orange County Register