Voting HOAs established a new community as a municipal corporation. Voting in an HOA is based on property ownership, By the 1970s, only property owners were eligible to vote, while renters are prohibited from directly
voting for the unit. They could, however, deal directly with their
landlords under their lease contract, since that is the party who has responsibility to them. In the 1973 book
Federally Assisted Communities: New Dimensions in Urban Development, author Hugh Mields, Jr. raised questions about the
constitutionality of having an association that had the authority of a municipal government, despite being private in nature. Additionally, voting representation is equal to the proportion of ownership, not to the number of people. The majority of property owners may be
absentee landlords, whose values or incentives may not be aligned with the tenants'. However, some HOAs limit owners of multiple properties to one or two votes regardless of the number of lots owned, so absentee owners do not end up controlling the HOA to the detriment of residents who only own a single lot or two contiguous lots as a current or future residence or vacation home. In some HOAs, the
developer may have multiple votes for each lot it retains, but the homeowners are limited to only one vote per lot owned. This has been justified on the grounds that it allows residents to avoid decision costs until major questions about the development process already have been answered and that as the
residual claimant, the developer has the incentive to maximize the value of the property.
Restrictions HOAs have been criticized for having excessively restrictive rules and regulations on how homeowners may conduct themselves and use their property. Some of the restrictions commonly put into place by HOAs are limiting the length of
grass, number of cars on a property, what animals you can have on your property, the maximum volume for playing music at certain times of day, what signs you can display on your property, and what plants you can plant. Homeowners have challenged political speech restrictions in associations that federal or state constitutional guarantees as rights, claiming that certain private associations are
de facto municipal governments and should therefore be subject to the same legal restrictions. In 2002, the
11th Circuit Court of Appeals, in
Loren v. Sasser, declined to extend
Shelley beyond racial discrimination and disallowed a challenge to an association's prohibition of
"for sale" signs. In
Loren, the court ruled that outside the
racial covenant context, it would not view judicial enforcement of a private contract as state action, but as private action, and accordingly would disallow any First Amendment relief. In the
Twin Rivers case, a group of homeowners collectively called The Committee for a Better Twin Rivers sued the association, for a mandatory
injunction permitting homeowners to post political signs and strike down the political signage restrictions by the association as unconstitutional. The appeals court held the restrictions on political signs unconstitutional and void, but the appeals court was reversed when the
New Jersey Supreme Court overturned the appellate court's decision in 2007 and reinstated the decision of the
trial court.
Financial risk for homeowners In some
U.S. states (such as
Texas) an HOA can
foreclose a member's house without any judicial procedure in order to collect special assessments, fees and fines, or otherwise place an enforceable lien on the property which, upon the property's sale, allows the HOA to collect otherwise unpaid assessments. In 2010, the case was settled and the soldier regained ownership of the home. The
Servicemembers Civil Relief Act may have been his defense; however, a
gag order prevents details from being known. Other states, like
Florida, require a
judicial hearing. Foreclosure without a judicial hearing can occur when a "power of sale clause" exists in a mortgage or deed of trust. A self-published report by a professor at the
University of Washington disputes the claim that HOAs protect property values, stating, based on a survey of Harris County, Texas (which had an unusual legal regime regarding foreclosures): "Although HOA foreclosures are ostensibly motivated by efforts to improve property values, neither foreclosure activity nor HOAs appear linked with the above average home price growth." HOA boards can also collect special assessments from its members in addition to set fees, sometimes without the homeowners' direct vote on the matter, though most states place restrictions on an association's ability to do so. Special assessments often require a homeowner-vote if the amount exceeds a prescribed limit established in the association's by-laws. In
California, for example, a special assessment can be imposed by a board, without a membership vote, only when the total assessment is five percent or less of the association's annual budget. Therefore, in the case of a 25-unit association with a $100,000 annual operating budget, the board could only impose a $5,000 assessment on the entire population ($5,000 divided by 25 units equals $200 per unit). A larger assessment would require a majority vote of the members. In some exceptional cases, particularly in matters of
public health or safety, the amount of special assessments may be at the board's discretion. If, for example there is a ruptured sewer line, the Board could vote a substantial assessment immediately, arguing that the matter affects public health and safety. In practice, however, most boards prefer that owners have a chance to voice opinions and vote on assessments. Increasingly, HOAs handle large amounts of money. Embezzlement from associations has occurred occasionally, as a result of dishonest board members or community managers, with losses up to millions of dollars. Again, California's Davis–Stirling Act, which was designed to protect owners, requires that boards carry appropriate liability insurance to indemnify the association from any wrongdoing. The large budgets and expertise required to run such groups are a part of the arguments behind mandating manager certification (through Community Association Institute, state real estate boards, or other agencies). In 2006, the AARP voiced concern that HOAs pose a risk to the financial welfare of their members. They have proposed that a homeowners "Bill of Rights" be adopted by all 50 states to protect seniors from rogue HOAs. However, many HOAs introduce regular accounting
audits to mitigate homeowners'
financial risks. In the framework of such an inspection, an independent third-party
CPA (Certified Public Accountant) conducts a comprehensive analysis of an association's financial records and accounting procedures, to determine whether they are accurate, legitimate and compliant with
Generally Accepted Accounting Principles (GAAP) or other reporting frameworks. Upon completion of the planned auditing procedures, a CPA issues an official
report that states an opinion regarding the organization's financial health. In the US, auditing requirements vary from state to state, as well as from HOA to HOA. Some associations are obliged to audit their financial statements on an annual basis or once every few years. For others, it is enough to conduct a review, a compilation or an agreed-upon procedures engagement. The HOA's budget, size and terms prescribed in covenants and bylaws often act as decisive factors when determining whether an audit is obligatory for a particular board. An audit at the end of each
fiscal year is deemed to be a
good rule of thumb. However, the need for an unscheduled examination can arise in cases of major changes, like a transition to a new board or management company, implementation of a large-scale improvement project, receipt of a significant sum of money under unusual circumstances, suspicion of fraud or embezzlement, or other misconduct.
Auditing process The auditing process for HOAs can be divided into four stages: ;Planning: An HOA board makes an initial inquiry to an accounting specialist about the need to conduct an audit. A consultation is held to negotiate the objectives, time frame, report deadlines, and cost of the examination. ;Risk assessment:A CPA determines what obstacles can float up when testing the association's accounting procedures and preparing financial statements, gauges the significance of potential problems, and finds ways to overcome them. To collect the necessary information and evaluate an HOA's financial performance, the auditor interviews board members at their office, monitors the main day-to-day operations, tests their security, and performs
analytical procedures. The auditee must provide the CPA with the most recent audit report, copies of annual tax returns, current and ensuing year's budget, board minutes, covenants, bylaws, and other internal documents. The CPA tests internal controls for incoming and outgoing transactions, the maintenance of a
reserve fund, the appropriateness of financing of major contracts and improvement projects, the proper disposal of funds acquired in legal cases and under other extraordinary circumstances, and the availability and accuracy of journal entries of receipts and
disbursements. These issues are given the most attention, since they have the strongest influence on an HOA's financial health. Also, an auditor reaches out to third-party organizations to verify the HOA's transactions on both sides: :* Account confirmations are requested from banks to check whether the association's operational and reserve accounts contain the claimed sums. :* The same is done for loans. A CPA verifies loan balances, interest rates, repayment terms and other important details. :* The HOA's
attorney is contacted to check whether the association is involved in any legal cases. ;Fieldwork: The auditor conducts a profound analysis to establish relationships between the association's
income statement and
balance sheet. The previous year's results are compared with the current results. Since it is impossible to cover all of an HOA's transactions in an audit, a CPA selects a sample of transactions and scrutinizes details. For example, they can use a sample of outgoing transactions to verify
invoices and make sure all the funds were spent as intended and properly documented. Also, an auditor can verify bank statements, reconciliations, payroll records, canceled checks, loan statements, approved contracts and leases, proof of real estate and equipment ownership, records on capital assets, supplies and inventories. If the HOA's actual financial performance deviates from the planned indicators, the auditee must provide evidence that fluctuations are not due to the board's negligence or misconduct. ;Reporting: An audit report states the CPA's opinion on the HOA's financial health and its compliance with accounting documents and with generally accepted standards. There are three types of audit reports: :* Unqualified opinion: in all respects, the HOA's financial statements are accurate, legitimate, reflect the actual activity of the association and comply with GAAP. :* Qualified opinion: minor misrepresentations or deviations from GAAP were found in the HOA's accounting papers. This does not significantly influence its overall financial performance, and mistakes are easy to correct. :* Adverse opinion: accounting violations that point to fraud or the board's blatant negligence were detected. :One more option is a disclaimer of opinion, a document compiled when a CPA is unable to issue an audit report due to conflicting interests with an HOA, non-provision of the requested financial documents, or significant uncertainty in the association's accounting operations. :Improvement recommendations in an audit report can be used to fix the board's past mistakes, establish internal discipline, and adopt more effective accounting practices. Also, audited financial statements serve as evidence of the board's
good faith and sound strategies when reporting to unit owners, investors, potential real estate buyers, tenants and other interested parties. ;Repeat audits: The need for a repeat audit may arise if the board has received an adverse opinion and wants to restore its good name in the eyes of
shareholders and investors. After issues revealed in the initial audit are fixed, a repeat examination is conducted according to the standard scenario.
Other Some scholars and officials of the
AARP have charged that, in a variety of ways, HOAs suppress the rights of their residents. Due to
court decisions, describing HOAs as a kind of private entity, HOA boards of directors are not bound by constitutional restrictions on
governments—although they are
de facto a level of government. Corporation and HOA laws provide a limited role for HOA homeowners. Unless either statutory law or the corporation's governing documents reserve a particular issue or action for approval by the members, corporation laws provide that the activities and affairs of a corporation shall be conducted and "all corporate powers shall be exercised" by or under the direction of the board of directors. Many boards are operated outside of their state's non-profit corporation laws. Knowledge of corporate laws and state statutes is essential to properly managing an HOA. Once notified by a homeowner, attorney or other government official that an HOA organization is not meeting the state's statutes, the board has the responsibility to correct their governance. Certain states, such as
Texas, permit misdemeanor charges to be filed against a non-compliant board and permit
lawsuits to be filed against the board and the HOA. In some instances, a known failure to rectify the board's governance to meet the state's statutes can open the board's members to personal liability as most insurance policies indemnifying the board members against legal action do not cover willful misconduct. ==Board misconduct==