Homeowners Faced with Staggering New Fees

May 29, 2004

By Dan Ackroyd

You have seen the recent T.V. commercials. Realtors are a homeowner's friend and are working to "protect" homeowners. The smiling faces make buying and selling a home painless. Now, those same realtors are selling out you. This is the conclusion of homeowner groups across California.

In February, Assemblyman John Laird introduced a bill on behalf of the California Association of Realtors (CAR). The purported aim of the bill was to require homeowner associations to disclose to homeowners and potential buyers the state of the reserves in homeowner associations. Homeowner associations are required to set aside money in reserves in order to pay for the capital replacements of such things as streets, drains, swimming pools etc.

The bill has already passed the California Assembly on the consent calendar by a vote of 80-0 and is headed to the California Senate Housing Committee. Homeowners believe that the Assembly saw some of the good aspects of the bill - namely, more disclosure on reserves - but failed to see the new cash register that management companies had built into the bill for themselves. The devil is sometimes in the details.

According to the California Research Bureau, 14 to 20% of lawsuits against boards of directors are for financial mismanagement - and of these, the number one issue is the lack of reserve funds. According to the California Department of Real Estate, real estate agents report that lawsuits are the number one threat to the future viability and market competitiveness of homeowner associations.

So realtors did themselves a favor by introducing this bill to require full disclosure about reserves so that there would be less chance of a lawsuit after a buyer moved in and was hit with a massive special assessment to make up deficiences in the reserve accounts.

But, then, say many homeowners, they were sold out by the realtors.

Community Associations Institute (CAI) lobbyists seized on the bill as another way to make money for their members - lawyers, management companies, accountants etc. They had inserted into the bill that the homeowner association could charge "reasonable" fees to reproduce these reserve reports.

For years, homeowners have been complaining to the legislature that in practice, "reasonable" means "unlimited". They cite such instances as the fees charged by Merit Property Management of Mission Viejo, one of the largest management companies in California. It is reported that Merit charges a flat $600 for a set of board minutes for a year along with a copy of the CCRs and Bylaws.

While it is not known how many pages are in each set of minutes, a generous estimate of 4 pages for each set would result in 48 pages for a year. Even if one allowed a scandalous $1 per page, this would mean that Merit would get $552 for the CCRs and Bylaws. Homeowners wonder if they are bound in gold vellum or have King Arthur's signature on them.

The first version of AB 2718 stated that if fees were charged according to the provisions of Section 1563 of the Evidence Code, those fees "shall be presumed to be reasonable." It did not require that the fees be so charged.

But then CAI swooped in and even that language was obliterated from the bill.

Evidence Code Section 1563 allows 10c a page, and clerical costs of $6 per 15 minutes (or fraction thereof) to locate documents. As most documents are on a computer these days, the costs of searching would be minimal. Using this standard, Merit would probably only be able to charge less than $50 for all the minutes, CCRs and Bylaws. Their current price gives them $550 extra.

Homeowners think that this is an outright scam, and are outraged that the legislature would even consider this.

Homeowners are equally outraged at the realtors. They perceive the realtors to be making hefty commissions from the buying and selling of homes - especially when home prices have risen so astronomically. Typically, realtors get 6% of the sales price. As an average price home in Orange County, for example, is about $450,000, the commission is about $27,000 on each sale.

Homeowners say that the realtors introduced this bill to protect their own hide. Therefore, homeowners say, AB 2718 should either require the realtors to pay for the preparation of these reports, or limit the fees to those authorized by the Evidence Code.

Homeowners say that homeowner rights have been an endangered species in Sacramento for too long. They point out that when an industry lobby group wants a bill, they get it right away and it sails through the legislature. When CAI lawyers wanted a bill to be able to use reserves to fund construction defect litigation, they got it.

The reality, according to many observers, is that unfunded reserves are the ticking time bomb in homeowner associations. As they age, they will require more repairs and the reserves may not be there. Then there is the potential for massive special assessments - and if you cannot pay, the homeowner associations will take your home away. Seniors who are on fixed income are especially at risk. In 1990, AB 879 was passed allowing reserves to pay lawyers' fees in construction defect cases. In many cases, this has caused the reserves to become even more depleted.

Homeowners promise to let everybody know how each legislator votes on this bill - especially its author, Assemblyman Laird - as elections are coming up soon in November. They believe that every realtor should be on the phone to CAR headquarters demanding that the bill be amended. Homeowners believe that realtors should sell homes - not homeowners.

About AB 2718 - Homeowner Association Financial Disclosure Summary For Realtors
Bill author: Assemblyman John Laird (D-27)
Bill sponsor: California Association of Realtors

To write web letters or call to amend this bill, go to the links below

California Senate Housing Committee - Chair Senator Denise Ducheny

Assembly Member John Laird - California State Assembly

California Association of Realtors - CAR

National Association of Realtors - NAR