In our white paper on the same subject we reference a report from the Community Association Institute which states that in 2016 there were 342,000 communities covering 26.3 million housing units and 69 million residents that were living in communities that were active Homeowners Association (HOA) participants. Therefore, chances are the majority of us at one time in our lives will likely live in a community participating in a HOA. While HOA’s have many benefits to their residents, like any other business there may be a dark side that, if left unmanaged, may cause severe financial problems for the participants in the HOA.
The Las Vegas Example
One of the most recent and widely publicized cases was the fraud involving a construction company, several realtors and a law firm in Las Vegas, Nevada. The owner of the construction company gained control of 11 condominium HOA’s in order to direct business to his company. He enlisted several realtors to find condo’s in HOA communities to purchase using “straw buyers”, using their names and credit to make the purchase. The construction company owner provided the down payment, paid HOA dues and mortgage payments for the “straw buyers”. In management of the properties, they opened approximately 5 different bank accounts through which they laundered approximately $8 million. The “straw buyers” would run for elected positions on the HOA. Some of these “straw buyers” were elected using fraudulent ballots. The “straw buyers”, upon being elected to the Board of the HOA, then directed repair and legal work to our fraudsters.
One of the communities the fraudster targeted already had an attorney firmly in place. When the “straw buyers” showed up to run for the HOA Board election the attorney became suspicious. The attorney began to uncover the scheme and turned it over to the FBI. The FBI uncovered a bribery scheme by our fraudster to rig a board election at one of the HOA communities.
The fraudster pled guilty to mail and wire fraud plus tax evasion and was sentenced to 15 and a half years in federal prison. In addition to prison time the fraudster was fined $13.4 million in restitution. The fraudster’s co-conspirator committed suicide before being charged in the case.
The Property Manager Example
This particular case took place right in our back yard in North Idaho. A property management company suddenly closed its doors when it was discovered that the owner had failed to pay property owners rent and security deposits collected from properties under management. According to the owner of the property management company she had purchased another company that did not come with security deposits, she also had lost approximately $225,000.00 due to embezzlement from previous accountants.
The current accountant at the time of the business closure uncovered between $40,000.00 and $50,000.00 of business income used by the owner to purchase a restaurant in a neighboring State. An additional $25,000.00 to $28,000.00 was embezzled by the owner for another business in general contracting to renovate and “flip” homes.
Of the estimated 150 properties under management, we found 111 cases directly related to this company and attempts at reimbursement by its former clients.
A pair of accounting clerks for a management company in Florida created a fraudulent company that directed $150,000.00 in association dues away from an HOA, into an account they owned. The clerk’s setup a business entity and bank account bearing a similar name to that of the HOA. When the payments would come in, they would be redirected by the clerks to their account instead of the HOA account.
In addition to the $150,000.00, investigators turned up $54,500.00 in wire transfer fraud to one of the suspect’s personal bank accounts. The suspects were charged with Grand Theft and First-Degree Organized Scheme to Defraud.
Investigators recommended that Board Members receive and review monthly financial and bank statements for the organization and ensure they match. If something looks out of place, question it.
No matter where you live, HOA fraud is a possibility. Unless of course, you are living in a community that does not have an HOA. As an HOA resident it is important to hold your elected Board members, or your outsourced third party management company accountable for financial decisions that affect your community.