What Are Best Practices?
In some states, certain aspects of HOA governance are dictated by state law. In others, it is left to the discretion of the Board of Directors to adopt policies and procedures that are in the best interest of the Association. The industry refers to these policies and procedures as Best Practices.
Well-governed HOAs are typically those that make use of the Best Practices guidelines when developing a governance model for the community, regardless of the laws of a particular state.
The due diligence inquiry focuses on these core concepts that are critical to the success of the HOA…
Reserves, Financial Reporting, Governance, Management, and Insurance.
Each of these concepts is an important component and critical to the success of HOA stewardship.
Reserve planning and execution of a well-crafted funding strategy are the cornerstones of a financially stable HOA over the long-term. Do not be misled into thinking otherwise. The reserve fund is an asset of the Association. As a buyer, it is important to know the true “value” of the reserves beyond simply knowing the account balance at the time of purchase. The CIDA REPORT™ helps you interpret the reserve study and will place the Association’s current funding status in perspective.
Financial reporting is just as important for an HOA as it is for any other business. Balance sheets, budgets, and audits are among the HOA documents of most organizations. Unfortunately, the reporting standards within the industry are a mix and match of unenforced statutes and internal rules that amount to an “honor system” which is subject to almost no regulatory oversight. The CIDA REPORT™ examines the reporting practices of the HOA so buyers know where they stand. The financial reporting requirements of HOAs may be established by the governing documents, state statutes, or both. In those instances where state statutes supersede the requirements of the governing documents, the Association must comply with the law regardless of the fact that the governing documents may allow a lower reporting standard.
Governance of the HOA is the responsibility of a Board of Directors which is typically comprised of unpaid volunteers whose only qualification for serving on the Board may be that they own a home in the HOA. In almost every state in the U.S., HOA Boards are minimally regulated and subject to almost no government oversight, if at all. In the annals of HOA lore, the horror stories about HOA Boards are legendary. Is the HOA you are considering one of the horror stories or a success story? The CIDA REPORT™ can help you to answer this question.
Management and governance of the HOA are two distinct functions. Management refers to administrative activities that are necessary to the day-to-day operation of the Association. Governance refers to the planning and decision-making activities that determine policy, direction, and ultimately the success or failure of the organization. It is not an understatement to suggest that books have been written on the subject of the difference between management and governance. Understanding the difference between the two is critical to a successful HOA.
The Association’s insurance program is important to the financial stability of the organization in the same way that a well-designed insurance program is important for a family. In a housing development with attached living units, it is likely that much of the obligation for ensuring the property (including your unit) lies with the HOA. Buyers need to know what coverage is included in the Association’s master policy to better understand what their own insurance obligations will be if they purchase a home in the HOA.
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