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Wednesday, 11 July 2007 00:00

Homeowner hassles: As developments evolve, many homeowner associations find themselves woefully unprepared for the future

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Last week was more than the season for fireworks and cookouts. As second-home owners descended on the mountains to kick back in their vacation abodes, it also marked the high point for homeowners association annual meetings, timed to coincide with when the most members would be in town.

“There are hundreds of them going on all over the place right now,” Bruce Totty, a property manager for homeowner associations, said last week.

While some meetings were a cozy reunion for neighbors, at others emotions ran high, with homeowners fuming over the new fence height policy, the failed plan to put in speed bumps, or the $10 increase in dues to pay for a new entrance gate.

“You think of it, they are fighting about it,” Totty said. Contention can be as simple as whether a dead tree near the gazebo should be cut or left. But homeowners associations are a necessary evil, managing both the important and not so important issues of the day that go with the territory of living in a private community.

“Everyone has their own self-interests they are trying to serve. Basically, we try to keep it balanced,” said Totty. As the broker and manager of Select Homes, a property management firm in Haywood County, Totty is hired by homeowners associations to help them manage their affairs, which sometimes include mediation. Some disputes get so heated, however, they land in court.

One homeowners association landed in litigation over snow plowing. An argument over whether dues should pay for plowing is not unusual, with seasonal and year-round homeowners often in opposing camps. But this argument was over the particular manner and technique that should be used for plowing.

Homeowners associations can be a microcosm of small-town politics.

“A lot of it has to do with personalities. Some folks have nothing better to do than fuss and fight,” said Bill Cannon, a Waynesville attorney who specializes in homeowners associations.

Homeowners can easily get disgruntled with their association board. Perhaps they don’t like the gate code being changed every few months for security. They don’t like the new contractor doing the landscaping, or think there should be a reservation system to use the picnic pavilion.

There are plenty of party lines in homeowners associations. For example, the values of part-time homeowners and year-round residents don’t always coincide. Snow plowing is something seasonal homeowners are reluctant to pay for out of dues. They’d rather see the money go toward an entrance gate.

“Out-of-towners are more concerned with security. They want gates and outside lights,” Totty said. “A local, he doesn’t want to deal with it. He doesn’t want to have to explain to friends how to get in.”

Another source of disagreement is between younger and older residents, Totty said. Some retirees don’t appreciate families with teen-agers that drive through the subdivision with music blaring, or kids who leave toys in the front yard.

“Another constant fight is whether you can rent,” Totty said.

Some homeowners don’t like renters and launch a campaign to ban renting in the subdivision.

 

What a headache

Running a homeowners association can be taxing for the volunteers who take on the role of board members. It’s like being mayor, police chief, tax collector and finance officer of a small town all at the same time.

“It’s hard. It’s very, very hard,” Totty said. “Even for the small ones it’s hard.”

That was the reaction of Joanne Stropp when she took over as president of Sugar Valley Springs homeowners association in Haywood County.

“I said for this I quit a paying job?” said Stropp. Stropp has two large filing cabinet drawers in her house dedicated to the homeowners’ files. The records were a mess when she inherited them. It took months to verify who had paid their dues and who was behind before she could begin collecting from those in arrears.

It’s a common problem for homeowners associations, a natural result of untrained volunteers running a small enterprise.

“There’s a lot of money that goes through these homeowners associations, hundreds of thousands,” Cannon said.

While there’s only been one known case of embezzlement against a homeowners association officer in Haywood County, there are plenty of suspected ones. In one subdivision, the suspicion that dues were disappearing under the watch of the president was so strong the homeowners staged a recall election. In other scenarios, a new president takes over to find the books in shambles. They are left wondering whether it was a case of gross incompetence or something more.

“If you start handling large sums of money, require two signatures on checks,” Cannon recommended.

Totty said that large amounts of cash in the hands of volunteers with no checks and balances can be dangerous. On the flip side, there are very competent volunteer board members. Retired bankers, attorneys, accountants and all sorts of professionals can be found among the ranks of homeowners association boards.

“It gives retired people something to do,” Totty said.

Some homeowners associations find they aren’t up to the task, or simply don’t like the dirty work of policing their neighbors. That’s where Totty comes in. She helps homeowners associations manage their affairs, from contracting road repairs, hiring the landscaper for common areas, collecting dues and harassing those who don’t pay — and, of course, serving as mediator.

Totty reports to the homeowners association board, acting at their direction and whim. The level of policing Totty does largely depends on what she calls “the mood of the association.”

As the number of subdivisions increases and more lots in existing subdivisions get built on, Totty sees more demand for services like hers.

“It is going to be a huge business,” Totty said.

 

Fees

A plight common to most associations is the homeowners who don’t pay their dues. Thousands of liens are filed by homeowners associations in WNC every year against neighbors who haven’t paid up.

“Some of it is oversight. Some are neighbors who get mad at other neighbors and don’t pay their fees. Some of it is disagreement with a policy: ‘Until the board does something about people’s dogs running around, I’m not going to pay,’” Totty said.

Cannon said some people “just don’t care.” Indifference among homeowners can be a major challenge.

Most charge a late fee for not paying. Some also charge interest. One homeowners association charges a $50 a month late fee. Steep, yes, but very few delinquents, Totty said.

Somewhat less compelling, developments with amenities can revoke common area privileges of those who don’t pay dues.

“You don’t pay your dues, I’m sorry, you can’t use the tennis courts,” Totty said.

Associations have the legal authority to file a lien against the homeowner. The ultimate power is forcing a foreclosure against the homeowner’s lot or house to collect the money.

 

Off to a good — or bad — start

Feisty or inconsiderate neighbors aside, there’s one thing that can make or break a homeowners association more than anything else: the governing rules that spell out how they operate.

“If you can form it at the inception and have a good strong foundation, you start out right and you continue through with a continuity,” said Gary Albrecht with Evergreen Realty. “You don’t want to just let it have a life of its own.”

Homeowners have no control over how their association is set up, however. The developer sets up the association before any homeowners are in the picture. The developer decides what the dues will be, what they can or can’t be used for, how much power the board has to make decisions on behalf of the homeowners — even what the architectural covenants or speed limits are.

Buyers become members of an association and begin paying dues immediately upon closing. But at first, there aren’t enough residents to hold elections or make even basic decisions. So in the early years of a new subdivision, the developer manages the affairs unilaterally by collecting the dues and fees and deciding how to spend them.

The developer keeps that control as long as he pleases before turning the affairs and decisions over to the homeowners. “It’s a lot like feudalism at first. It’s like the lord of the manor,” Cannon said.

While developers are supposed to pay dues for the lots still in their ownership, often they don’t. They could also use homeowners fees to help cover their own expenses, and leave the association with no reserves when they finally turn things over.

When homeowners do take the reins, they often find the governing rules are woefully inadequate, but there’s no mechanism for changing them. In some subdivisions, the governing rules don’t specify how dues and fees can be used. Are they just for road repairs, or can they be used for a new entrance sign and landscaping? If so, is that something that requires a vote of all homeowners, or just the board?

The lack of decent governing rules isn’t a problem in the development’s early years when roads are still new and few lots have homes.

“Then these subdivisions become small towns. People are rubbing up against each other going ‘what do we do, what do we do?’” Cannon said.

That’s what happened to Joanne Stropp a few years ago over a dog running loose in her subdivision, Sugar Valley Springs. There were no rules on dogs in their covenants, so she had to rely on old-fashioned neighborly good will to convince the dog’s owner not to let it run. It wasn’t easy.

“Those things do create hard feelings between neighbors,” said Stropp.

Associations without the power to amend their covenants can quickly become outdated.

“We used to say you could top trees, now we know topping trees is a bad thing. We used to say no satellite dishes, now they have the itty bitty kind that everyone uses,” said Haywood County attorney Jack Kirsten, who also works with homeowners associations.

More importantly, though, associations need the power to increase fees. Developers often set the annual fees artificially low at the outset as a selling point for the lots. The homeowners need a mechanism to raise the levy, and sometimes to assess a one-time fee when major repairs are needed but reserves are lacking.

Cannon said most homeowners associations don’t have enough in reserve to cover big repair bills if something happened to the roads.

“They need to be putting large sums of money aside,” Cannon said.

It’s not possible, however, if the governing rules don’t allow it, leaving a subdivision helpless to control its own destiny. Homeowners of Sugar Valley Springs in Haywood County are struggling with a sloppy set of homeowners rules left by the developer. The main road into the subdivision was somehow left out of the association. The homeowners along it don’t have to pay dues, but the road doesn’t get taken care of either.

“That road is a no man’s land,” said Stropp, the homeowners president.

Two developers building neighboring subdivisions higher up the mountain are using the road to access their developments, but have yet to contribute to its upkeep either. A third developer recently started using the road as well for access to yet a third neighboring subdivision. He approached Stropp first, however, and asked her whose road it was and how he could contribute to its upkeep.

That got the ball rolling toward what Stropp hopes will be a resolution, although it could require some negotiating finesse. The plan is to get all three developers of the neighboring subdivisions, plus the Sugar Valley homeowners, plus the people who live along the road but currently aren’t in the subdivision to sign onto a road users agreement, Stropp said.

Stropp said some homeowners are happy to do their part and recognize their communal responsibility. For example, one seasonal homeowner along the “no man’s road” had been paying road fees along with his dues every year by mistake. When Stropp discovered the error, she watched for the next time he came into town.

“I hiked over to their house and we sat on their porch and I told them what had happened. I said, ‘We need to talk about making restitution.’ The guy looked at me and said ‘No. No restitution.’ I said ‘I really appreciate that kind of attitude, but in good conscious the least we should do is allow you to apply it to your dues next year.’ He said consider that my contribution,” Stropp said, recounting the episode.

 

Quorum

A bad set of governing rules can paralyze a homeowners association, Totty said. One of the worst foul-ups is in the seemingly benign voting procedures — namely, how many homeowners have to participate in a vote for the vote to be valid.

A vote isn’t valid without a quorum of the homeowners present for the vote. What constitutes a quorum can be anything — from as little as 10 percent to 100 percent of the homeowners. A low quorum like 10 percent is convenient for those in charge, but can open the door for an abuse of power.

“Some say that lets a small group of people call a meeting and do a lot of damage,” Cannon said. They could spend the association’s money on tennis courts, signing a contract with a builder that can’t be broken by a future vote. But a quorum too high renders the association powerless to deal with simple issues, like ordering new name plates for the mailboxes.

Shadow Woods, one of the larger subdivisions in Haywood County, hasn’t managed to turn out a quorum for its annual meeting in a few years. The governing rules require two-thirds of the members to participate in a vote for it to count. With roughly 175 members, that means turning out 120 people. Since many members only own lots and no house yet, it’s hard to get them interested.

“We haven’t been able to do anything for some time,” said Mary Stewart, the homeowners president. That includes electing new officers. The sitting board members got tired of serving, however, so this year, some of the old board members simply handed off their roles to new board members, valid election or not.

There are several things Stewart thinks the community needs to address and hopes they can achieve a quorum at the annual meeting this fall. Shadow Woods is an older subdivision and therefore lacks covenants found in many later developments.

There are no architectural standards, for example. The subdivision doesn’t have an entrance gate. There’s no impact fee for new construction, which puts more wear and tear on the road. There’s no punishment, such as fines, for those who don’t comply with the homeowners rules. Stewart would like to put these to a vote and give homeowners a chance to decide.

Members can send in a proxy instead of showing up in person, so this year, Stewart is launching a proxy committee to beat the bushes for proxies and hopefully achieve a quorum.

Cannon recommends a quorum never be set at more than 50 percent when creating an association. The worst mistake is requiring a 100 percent agreement. The threshold makes it impossible to ever make changes.

“Let’s say someone paints their house purple and you don’t want it to happen again,” Totty said. One homeowner objects, and it blocks the vote.

Or, if the dues aren’t enough to cover the cost of direly needed road repairs, one homeowner can object and dues can’t be increased.

“It majorly compounds the issue,” Totty said.

 

Don’t leave us like this

Despite the problems homeowners associations face, it’s far better than not having one at all. Today, state law requires developers to establish a homeowners association for subdivisions of 20 lots or more before the first lot is sold, but the law has only been in place since 1999. Some older subdivisions have no homeowners association.

“Apparently little thought was given to how things would work when the developer was no longer intimately involved,” said Cannon.

Homeowners are left with no mechanism to collect fees for road repairs, let alone manage common areas or regulate house colors.

“A lot of developers, not in bad faith but not knowing any better, just walk away and everyone is left there looking at each other,” said Kirsten.

Kirsten recalled one large subdivision without a homeowners association that reached a crisis when their roads started crumbling. Some of the homeowners launched a campaign to raise repair money. But the honor system didn’t work. They turned to the county for help, but the county couldn’t force the homeowners to pay for the needed road work either.

So they turned to the state for help, where a bill was passed allowing counties to create “road tax districts,” levying compulsory fees in private communities that lacked a homeowners association, Kirsten said.

Today’s law requiring homeowners associations only applies to subdivisions with 20 lots or more, leaving small subdivisions vulnerable to major problems down the road. That’s why Jackson County is considering a local law with a lower threshold — developments of only eight lots or more would require a homeowners association. And those with less than eight lots would require a binding road maintenance contract among homeowners to provide a mechanism for the collection of road repair fees.

 

Says who

Another issue that associations face is how much power the board holds — what they can decide on their own and when they should hold a vote of homeowners.

At Sunset Cove in Haywood County, the board can’t spend more than $1,000 without putting it to a vote of the homeowners, said Albrecht, one of 25 homeowners there. Others give the board unilateral control over all financial decisions.

Homeowner boards have all sorts of little decisions to make: the gazebo needs a new roof or a dead tree over the road has to be cut. Other decisions are more major — such as whether two neighboring homeowners association should merge. Cannon said philosophies differ on what the board should do unilaterally.

“I tend to say most major decisions should be made by the membership,” Cannon said. “It’s a balancing act. You don’t want a board that can’t take care of business when things arise.”

For example, the homeowners board in Shadow Woods recently voted to increase fees by $25 a year to maintain roadside ditches. Each home or lot owners is supposed to maintain their own ditch, but that wasn’t happening. It was just a matter of time until backed up ditches started eroding pavement along the road shoulder. So the board decided to add ditch maintenance to the road fees — a vote they felt wasn’t necessary to take to the homeowners, especially since they can never get a quorum.

Some associations don’t even have the power to charge late fees when a homeowner doesn’t pay their dues, an unfortunate oversight by the developer when setting up the association.

Others give the board great powers. In one subdivision, a homeowner constructing a barn hired contractors who tore up the roads. Thanks to liberal governing rules, the board could fine the individual homeowner for the necessary repairs, Totty said.

Although some homeowners boards might act like a dictatorship, the ability to impose mandatory fees and make decisions that affect people’s daily lives lends more to a democracy, which is why homeowners by law get to vote on their officers every year. State law even requires homeowners associations to publish the names and contact information for the board members.

“So much can be avoided if the board makes an effort to communicate with members,” Cannon said.

Sometimes homeowners get upset for the opposite reason — for a board that’s too passive and doesn’t take enough action. That was the case in Campbell Mountain Estates in Haywood County. Homeowners were upset with cracked pavement along the roads’ shoulders. They blamed the developer for not installing ditches along the road properly. The developer was still building the second half of the subdivision, but the existing board didn’t try to make him fix it.

One of the homeowners, Steve Solesbee, campaigned on the issue for association president last year and won. Once elected, Solesbee appealed to the financial backer of the subdivision who lived in Florida. Solesbee told him the remaining lots for sale wouldn’t bring as much due to the crumbling road shoulders.

“I had to convince him that he was not getting the best return on his money,” Solesbee said of his pitch. “Once I got him up here walking the ground he agreed there were things that needed to be done.”

Solesbee also got the homeowners board to be more active, such as hold monthly meetings.

“The neighborhood needed a jump start, a new spark,” said Solesbee.

Solesbee also made the developer pay his share of dues on unsold lots.

“I was able to negotiate a very fair payment for association fees from the developer,” Solesbee said.

The structure of homeowners associations seems as varied as the number of developments in the mountains.

“Each subdivision is different,” Totty said. So much so, she has to re-read the governing rules, restrictions and by-laws of each homeowners association before heading off to their meetings to remember which set of nuances she’s operating under that day.

Nonetheless, homeowners associations have strikingly similar problems that play out again and again across Western North Carolina’s private neighborhoods.

The work of a homeowners association to solve those problems — or in some cases compound them — often has a bigger impact on people’s daily lives than the laws and policies of the county or state where they live, Kirsten said.

“It has a great deal of effect on their lives, either good or bad,” said Kirsten.

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