A Story of the California Housing Racket

January 06, 1994

By Peter Amherst
Copyright © 1994 AHRC News Services

Nestled on the side of the hills just by San Juan Capistrano, California , the Loma Vista development of 196 Spanish -titled homes looks the picture of serenity in the golden glow of the afternoon sun. From a distance, this is the picture of the American dream fulfilled - the neat houses where Americans enjoy the good life of clean air and ocean breezes.

The reality is very different.

Several years ago, some cracks were seen in some of the streets. The homeowner board, on the advice of its manangement company, Marquis, contacted the law firm of Fiore, Nordberg, Walker, Wolfe-Willis et al.

The latter told the board that they had to sue the developer. They also told the board that they would charge on an hourly basis instead of taking it on a contingency, as "that way, the homeowners would get all the money from the suit". It is now 1993 and the future has not turned out as the homeowners hoped and the lawyers predicted.

First, as the legal bills and associated consultant fees cascaded in, the board found that it did not have enough money in its monthly operating account to pay for them.

So, in 1991, in violation of state law, the board took money from the reserve account to pay the bills. This money, which was earmarked for long term maintenance and replacement, could not by state law be diverted to any other use. The board diverted it anyway.

The lawyers, however, came to the rescue - in a way. Richard Fiore, head of the law firm, was also a director of CAI (Community Associations Institute), a trade group of lawyers, accountants and management companies who make a living off homeowner associations. Richard Fiori is also the chairman and a founder of CLAC (California Legislative Action Committee) , the lobbying arm of CAI.

Another lawyer in CAI simply sponsored a bill in Sacramento to make it legal for associations to use reserve funds for construction defect litigation.

The bill was introduced by Assemblyman Dan Hauser and sailed unnoticed and unopposed into law. It also contained a provision to allow associations to levy a special assessment on homeowners to replenish the depleted reserves, and there was NO cap on the amount of the assessment.

For the last 2 years, the board has been spending more and more from the reserves. To date, over $300,000 has been spent on the lawsuit and the reserves are almost gone. The lawyers say that they will need to spend about another $200,000 on the law suit - with no guarantee of any recovery.

As the board does not have enough money either in its operating or reserve account, it will have to raise the money somehow.

Its options are limited. It can raise the regular homeowner assessment of $208 by 20% in 1993 and another 20% in 1994. Such a move would be clearly unpopular with the homeowners. Alte rnatively, it can try to obtain a bank loan, though the success of this is problematic, as there is little or no collateral. The final option is to drop the law suit. That would be over $300,000 down the legal drain.

The problems at Loma Vista are not isolated ones. They are central to the very concept of planned unit developments and homeowner associations.

Developers, anxious to market mass-produced housing at the greatest possible profit, came up with the marketing strategy of packaging suburban housing with the seemingly attractive features of swimming pools, club houses, swaying palm trees at entrances and other glittering enticements.

The concept has not worked.

The idea of a group of homeowners running the development into perpetuity is seriously flawed. In many cases, those who are on the board of homeowners are untrained and ill-equipped to handle the complex legal, economic and social demands of the position.

The governing documents, called the CCR's, are often over a hundred pages in length. Furthermore, they are drafted in tortured legalese, which even lawyers have a hard time deciphering.

Boards then turn for assistance in their problems to management companies and lawyers. This often makes the situation worse as the advice given is not with the best interests of the association at heart. Management companies and lawyers make their money from associations, and their goal is to make as much as possible.

Serious questions have been raised about the practices of some management companies and lawyers. The CAMS scandal in the 1980's , where a management company stole millions of homeowner dollars, is only the most visible example so far. Some observers are concerned that a similar scam is just waiting to happen.

So the homeowners of Loma Vista find themselves mired in an American nightmare. Not only is the lawsuit draining all their money away, but many have been unable to sell their homes or refinance them.

One homeowner complained recently that his mortgage is costing him an extra $200 a month because he cannot refinance. Values of homes have dropped dramatically and potential new buyers are turned off by the high cost of the monthly assessment of $208.00. Wait till they hear about the 40% increase in assessments!

There is an election for a new board on July 7. A slate of homeowners, led by Jim Troutman, is deeply upset by the way the previous board has handled the affairs of the association. It is mounting a challenge to the rest of the incumbents. If Jim's members are successful, they will try to extricate the association from the mess which the previous board has created.

AHRC (The American Homeowners Resource Center) believes that the agony of Loma Vista homeowners will only be cured by a board that has the interests of homeowners genuinely at heart, that follows the CCR's and the state law, that respects the fundamental constitutional rights of homeowners, and does not allow itself to become a pan in the hands of management companies and lawyers who seek only to line their own pockets.

The board election in Loma Vista, set for July 7, is thus a crucial election for all homeowners. Those who ignore it, do so at their on peril.

Notes:

Manager: Marquis Management Company - Patricia Gummeson - President of Marquis and site manager.
Board member: : Jean Carpenter
Association Lawyer: Fiore , Nordberg, Walker, Woolf-Willis
Association ollection lawyers: David Peters - Peters & Freedman
Lawyer representing a homeowner: Edward Danoff (Mr. Danoff reported board member Jean Carpenter used homeowner dues to sue him.)

UPDATE: Jim Troutman's wife, a government auditor, was elected to the Loma Vista Board. The lawyers sued to remove her from the board. The lawsuit spawned several others. Faced with the pressures of the lawsuits and an unjust judge, local legislators and authorities who ignored corruption, Jim committed suicide.See: The death of an extraordinary Man - AHRC News Services