Recently a property management company was charged with wire fraud for its actions in managing a San Diego, California association. The property manager was directed to obtain bids for a construction project. According to the criminal indictment, the property manager concealed all of the lowest bids. Because of this, his affiliated company turned out to have the lowest bid on the project.
According to the indictment, the property manager’s actions get worse. During the construction, the property manager discovered asbestos that needed to be removed. He negotiated a change order from his Association Board – and an increased amount for the project – for this asbestos removal. He then concealed the presence of asbestos from the people doing the job. That way, the property manager collected all of the extra asbestos removal fee, while the construction workers removed the asbestos without following the proper procedures.
The property management company and its principal have been charged with four counts of federal wire fraud. This indictment carries a maximum penalty of twenty years in prison and a $250,000.00 fine. In addition, the indictment seeks the recovery of $247,000.00, the cost of the construction project.
This is merely an indictment. The property manager should be considered innocent until proven guilty, and the government will need to prove many of the items mentioned above in order to get a conviction. This situation does serve as a reminder that Association Boards need to maintain oversight over their property managers. We can take a few specific warnings from this situation:
- Beware of conflicts of interests. Since the property managers are usually the gatekeepers for all sorts of services, ranging from landscaping and construction to accounting and even legal services, the potential for conflicts of interest is present. If there is a relationship between the property manager and the service to be provided, that relationship needs to be disclosed.
- Where conflicts of interest exist, the Board needs to take more of a role in the bidding process. It is not improper for the Board to receive bids, and award contracts, to companies that are related to or subsidiaries of the property manager. In those cases, however, the Board should consider receiving and reviewing all the bids itself. That protects the Board from conflicts of interest, and puts both the Board and the property manager in a better, more transparent position with residents.
- Be wary of managers who promise lower costs when you use their affiliated services. Some companies have attorneys, accountants, cleaning people, roofers, etc., on their staff. They claim that they will save an association money by using only one company for all of these needs. Boards need to be careful that they are getting independent opinions from these providers. For example, if the property manager’s affiliated roofing company says that it can save money by using a new technique, the Board may want to compare this with an independent roofing company, instead of blindly following the property manager’s suggestion.
- For unusual projects, or big expenditures, the Board needs to know what is going on. I am not suggesting that the Board start to manage construction projects. That usually ends in disaster. But the Board should be aware of project milestones and any changes to the contract. That way the Association is not subjected to lots of change and cost overruns.
I’ve had the pleasure of working with many hard-working and conscientious property managers over the years. I know that the property managers I work with are very conscious of conflicts of interest, and go out of their way to point them out and allow the Board to make their own decisions. Unfortunately, there are managers who do not. Recognizing these kinds of conflicts, and developing a proactive policy will help protect the Board and the property manager from unforeseen conflicts or any appearance of impropriety.