Thanks to Gary Feltner, you can read about how his homeowner’s association and others were being subjected to a little scam he was able to put the stopper on. Just shows you what one person can do independently!
Alleged Extortion by Property Management Companies
Due to my real estate investments (buying/selling) I’ve uncovered an extortion trend performed by several Property Management (PM) companies in the Austin, TX area. The companies I describe also manage Home Owner’s Associations (HOA). This is important because they are extorting money from the HOA members WITHOUT jurisdiction and without board of directors even knowing.
The fee which I am talking about is called a “Resale Certificate” and/or “Transfer Fees”. The Texas statute which governs this document and issuance is the Texas Property Code Chapter 207. This particular code simply says if a buyer is buying a house which is governed by a Property Management Association (aka HOA), then the HOA is obligated to provide 15 items of information related to that HOA. It goes on to say that an HOA can charge a reasonable fee to assemble, copy and deliver such document.
What has happened is that PMs at one time charged $50.00 to create a “Resale Certificate”; however, today this charge ranges between $300.00-$700.00 or more.
How the Extortion Scheme Works
Here is the scheme which can occur when an HOA hires a PM to help manage the HOA.
1. When you sell a home that is part of an HOA in the state of Texas, Texas Property Code Chapter 207 requires an HOA to provide disclosure. This disclosure/information is called a “resale certificate”.
a. By law, the HOA is responsible.
b. By law, the HOA is liable.
c. By law, the HOA can charge a reasonable fee to assemble, copy and deliver a “Resale Certificate”.
2. What kind of money are we talking about? PMs are charging between $300.00-$700.00 to provide this document to the new owner. If you consider the number of sales that occur a year in an HOA subdivision, this adds up to SEVERAL THOUSANDS of DOLLARS per year.
3. How does this kind of fee get out of control? Most of the contracts which PM’s provide to HOA only state they will take care of the issuance of a “Resale Certificate” but do not disclose what they charge. PM’s wrongfully ASSUME they have the authority to: ESTABLISH A FEE, CHARGE A FEE, COLLECT THE FEE FOR THEIR OWN ACCOUNT and RAISE THE FEE (for any reason) to a CAPTIVE audience/homeowner. When I say CAPTIVE, I mean the homeowner is FORCED to pay that fee at closing or the title company won’t process the sale. The owner can’t shop around for this service; there is no competition (supply/demand) to help stabilize that fee. When one considers this scheme FORCES a seller/or buyer to pay for a fee which has absolutely no control by anyone EXCEPT the PM who is collecting those feed for their own account, is simply EXTORTION.
4. How are they getting away with it? It’s simple!! First, the average home buyer or seller doesn’t understand what a resale certificate even is. They assume it’s a legitimate fee which occurs at closing and is governed by some entity (Texas Real Estate Commission) or perhaps regulated by the free-market (supply/demand). Unfortunately it’s neither because it is a fee hidden from the HOA and charged to the seller or new owner with NO control and oversight by the HOA. The PM has the title company send the checks DIRECTLY to the PM so the HOA never has any idea what is being charged to the people they represent.
What Needs to Happen
Obviously there needs to be contractual disclosure by the PM as to what they charge. This or any fee they intend on charging needs to be disclosed in the contract between the HOA and PM. The fee should not be changed unless the PM provides adequate notice and reason to the HOA.
Accountability is a HUGE piece of the puzzle. The HOA MUST financially account for this money because they are legally responsible per Texas Property Code. Meaning ALL checks written and issued by the title company MUST be made out to the HOA and NOT the PM. The PM can in turn bill the HOA for their services.
1. It allows HOA to financially account and track this money they’re legally responsible for. It also allows for continuous monitoring of the PM charges.
2. If you do the math, there is substantial compensation made from those fees and there are 1099 Federal Tax requirements which say an HOA must report this compensation to the IRS. Currently this is NOT happening.
What Kind of Money are the PMs Making Off this Extortion?
What a PM charges an HOA is a monthly fee which is per house per month. A fee that is typical is $6.00/month per house (or property). In this example, let’s consider a 400 house subdivision!
Typical fees collected monthly
The equation is simple, 400 homes * $6.00/home = $2400.00/month is what the PM will charge an HOA to help manage the common areas of the subdivision.
Fees collected by Resale Certificates
Now for the “Resale Certificates”. Before we get into the calculation, we must first make an educated assumption on how often the average homeowner moves. Well based on statistics, a family moves on average once every five years. For our equation, we will be a little conservative and consider a family moves every 6 years.
Per Wiki: About 40 million people move annually in the US. Nearly 3/4 of the US population moves an average of once every 5 years. Many things contribute to these statistics:
(400 homes / 6 yearly rotation period) / 12 months per year) * $400.00 per resale certificate. The total month calculation is $2,222.22/month
Look at the profit; a PM almost DOUBLES their monthly income by extorting money from HOA members.
In Summary: Why is this Wrong???
1. Because there is no disclosure or accountability and people are FORCED to pay this fee at closing, extortion exists and is illegal!
2. Fees are ridiculously high. A resale certificate takes 15 minutes to email the “pre-drafted” document via PDF file to the title company. Charging anything over $100.00 absolutely ludicrous.
3. This should be considered compensation and requires 1099 Federal Tax disclosure, “What the PM is paid by the HOA”.