How to Avoid the #1 Mistake Community Association Board Members Make
What is the #1 mistake board members make while serving as a volunteer for a community association? It is by far the biggest mistake that board members make. It is such a big mistake that it usually results in having to repeat the process within 12 to 16 months. Make no mistake about it. This is an easy mistake to make. And yes. Mistakes do happen. But I am here to help you avoid this mistake and not have to learn from this mistake.
The #1 mistake board members make is making a buying decision mostly based on the base management fee when vetting a new management company. I get it. You have a budget and the budget has a fixed amount of money set aside for management services. Furthermore, you are a volunteer and you are not getting paid for the job and you have a million other things to do which you would rather be doing. So naturally you want to make the quickest decision possible when seeking a new management company. Unfortunately, that is the worst approach possible. That is like getting married with someone that you just met for coffee. Or simply put, it’s like tying the knot for better or for worse with someone that you just met and you really have no idea who they really are and what they are really like. But upon first impression, you liked them and they seem like a good person. Besides, you are so busy and everyone else on the board is so busy, making a quick decision based on the base management fee seems like the best approach given the time constraints of the situation.
Regardless of the time constraints of today’s board member, the facts speak for themselves. A typical community association that is 50 units and under goes through 3 management companies over a course of 5 years. This is based on my research over almost 20 years. Yes there are exceptions to the rule. However, if you plot out the data, the resulting graph and it should show a typical bell curve with most associations changing management companies ever 1.5 years and the outliers either rarely change management companies or they change every year.
The significantly better vetting methodology is to take a holistic approach and understanding the overall value and management philosophy of the organization. The base management fee that a community management company charges is in no way reflective of the overall quality and value that a company provides. It is such a small piece of the overall puzzle. There are so many other factors that board members should take into account. The better approach is to understand the overall cost and the overall value that the company can provide and then compare and contrast these elements in order to make a more educated decision.
For example, if you hire a management company that offers you a low base management fee and assigns you a really good property manager, it appears you have made a great decision. However, on average, the typical property manager stays with an association account for 6 to 9 months. So you can bet that on average, you will get a new manager every 6 to 9 months. And what if you are now very unhappy with the new manager? This is the unknown factor that was not originally taken into account.
The other example is the management company that offers a low low price and the association signs up with the understanding that everything is included and virtually nothing is ala carte. Yet, over time, there are bills that the management company is submitting and invoicing the association for services rendered. In this scenario, the agreement the association signed is probably very vague and did not specify exactly what was included and what was not included.
The best approach to vetting a new management company is to develop a spreadsheet that specifies the items that the board wants to specifically learn about how the management company deals with those items. For example, here are some items that might be on the spreadsheet:
- Base management fee (what does this include, what are the ala carte services)
- How many hours does the management company base fee include? (then determine the hourly rate that the firm is charging you and decide if this makes sense from a business stand point)
- Google the management company. What are their google ratings? What about the owner of the company? Are they on LinkedIn? Are they focused on community management or are they involved in a wide variety of real estate services that doesn’t show a focus on community management?
- Board meeting process (what is the process from start to finish including post mortem)
- Large scale project management process (what are the exact steps involved when handling a large scale project)
- Management philosophy (is the company just focused on responsiveness or is the company dedicated to creating enhanced community living)
- Analysis of the agreement (what is included and what is excluded, how detailed is the agreement)
- Communication protocol and online portal review (how does the management company communicate with the board members and homeowners)
- Management company income (how does the management company make money, all the revenue streams)
These are items that include the base management fee and include other items that are equally important to understand when vetting a new management company. For example, if the management company says that large scale project support is included, the board should dig deeper and understand exactly what that means. And ask how that could be possible to include all that extra effort without charging an ala carte fee for project support. Remember, you are looking to hire a company that you can trust and is transparent in how it makes money as the management company of your association.
In summary, it is extremely important for board members to take the time to properly vet management companies when looking to switch to a new firm. In order to do this successfully, it takes time and effort. It is best to have a time line of about 3-6 months to make this transition depending on the size of the association. The bigger the association, the more time should be set aside. It is also important to determine the most important features and qualities of the new management company when conducting the search. If you make a good decision, the business relationship between the association and the management company should be mutually beneficial for all involved parties and create a better community living experience for all the homeowners.