Waiting for the HOA FBI investigation fallout

Over the past few weeks there have been a number of local media reports about FBI investigation concerning homeowners associations, individual board of directors (who allegedly were serving on more than one association board), management companies, a construction company and legal firms. The FBI's investigation is to determine if these parties were involved in any inappropriate or unlawful acts concerning the initiation of construction defect lawsuits at their association communities.

Newspaper and TV reports say the FBI received complaints about three years ago that there had been voter fraud in the elections of HOA directors who had relationships with a local legal firm, management company and construction company, which coordinated and initiated lawsuits against the associations' developers. Reports show the FBI may broaden its investigation to include more companies.

There is much speculation. Right now, there is an investigation and in our system of government people are innocent until proven guilty. No one has been arrested. It is important for all of us to wait for the facts and especially the state Legislature to see if any of the allegations are true prior to enacting more laws, as was suggested by Sen. Mike Schneider, D-Las Vegas.

I felt this column should address some of the issues involving construction defect lawsuits. Over the years, there have been a number of construction defect lawsuits. Enough cases were initiated to cause the Legislature to become involved and to make changes in the laws during the last two sessions. Here are examples of three different construction defect cases, none of which are involved in the present investigation.

It is important to note that there were a number of construction defect lawsuits that were initiated by associations because of pressure that was brought upon them from individual homeowners who were not on the boards. Concerned homeowners came to their respective board meetings with allegations of construction defects in their homes. These concerned homeowners had already contacted legal counsel. In one case, the association board delayed any action for a number of months as the board wanted to see more definitive evidence that major problems existed.

In another case, the association board responded to the demands of a number of homeowners who wanted to initiate a construction defect lawsuit by bringing the vote to the membership (which is required by state law). When the homeowners, at large, rejected the initiation of a lawsuit, the individual homeowners, with their legal counsel, not only sued the developer but also sued the association.

In a third case, an association board initiated a construction defect law suit against a developer because of severe issues pertaining to the common area, including the erosion of land upon which sat homeowners' backyards. The association had instructed legal counsel that the lawsuit was not to be expanded and that the attorney was not to send letters to the homeowners in an effort to initiate another construction defect lawsuit for the individual town homes. The board's instruction to legal counsel was ignored as legal counsel sent letters to the homeowners in an effort to initiate another lawsuit. In these cases, none of the homeowners/board members were part of the FBI investigation.

There have been questions raised as to why some of the same legal firms have been involved in construction defect lawsuits. First, they have been involved because that is their specialty. Second, within the professional circles of community management, these firms had successful track records in winning cases. Many of the attorneys in these law firms have established reputations within Southern Nevada and are also well known to enough homeowners, through direct mailers, television and real estate classes.

My first point is that not all construction defect lawsuits are originally started by association boards. Many times they are sparked by individual homeowners who have legitimate construction issues and bring them to the table at their board meetings.

Do all construction problems within a community require initiating a lawsuit? Not necessarily. State law requires that the association give the developer a chance to correct any problems before a lawsuit vote by the membership is taken. There are a number of developers with excellent reputations that stand behind their products.

In one case, the vote to initiate a construction defect lawsuit was rejected by the homeowners after the developer and his insurance company promised to work with the association to make corrections. In the end, they made good on their word and the problem was solved without a court case. Many developers have excellent customer service departments to assist homeowners in a timely fashion with their maintenance and warranty issues.

Some of the media reports concentrated on the negative side of construction defect lawsuits, stating that the values of homes declined and that homeowners could not obtain loans for the buying or refinancing of their homes. Still, it is important to remember that if some associations had not initiated construction defect lawsuits homeowners would not be able to sell their homes at market values. Homeowners who sell their homes are required by law to disclose any known defects within their homes. If homeowners have roofs that continually leaked and mold growing in their homes, or if an underground slab leaks due to faulty construction, they have disclose these issues to potential buyers.

In addition, the cost to correct these construction defects would have placed such a great financial burden upon the average homeowner and the average association that it would have taken years of initiating special assessments for thousand of dollars per homeowner to even begin to correct their legitimate construction problems.

Yes, it is true that construction defect attorneys receive a percentage of the award. Well, personal injury attorneys also receive awards. Does that mean we stop utilizing their services? It should be noted that there have been associations who decided to assess their members to finance the construction defect lawsuit so that the total award was deposited into the association's account. The attorneys were paid for each process of the lawsuit.

In most cases, when an award is given to the association, legal counsel and the expert witnesses are first paid with the balance deposited into the association's account. Generally speaking, the management company would open two accounts. One would be an operating account in order to pay for the construction work and another would be a money market to earn interest from which money is transferred to the construction operating account as needed.

How are construction companies selected? Not every construction company wants to work on a reconstruction project of an existing community, and not every construction company has enough resources or insurance bonds to accept a reconstruction project. Many of the legal firms would provide a list of companies that had experienced in renovation projects to the association boards. Other associations engaged in contracts with professional consulting maintenance companies that provided the specifications and interviewed construction companies. These consulting companies then assisted the associations in drafting the contracts and then monitored every aspect of the construction work, phase by phase. The construction companies were not paid if the consulting companies had issues with the quality of their work. Associations paid the consulting company a fee for this service. Most boards and management companies do not have the construction knowledge to perform the supervising of the technical reconstruction work. Many management companies were familiar with some of these contractors because of their work with insurance claims where, as an example, fire and water had damaged and destroyed real property. For those management companies they had a first-hand knowledge of the contractor's work performance.

If your association is involved in a construction defect lawsuit and has been awarded funds for the reconstruction project, it is highly recommended that you contact a professional consulting company that can oversee the entire project from the interviewing of the contractors to reviewing the final phase of the rebuilding of the community.

Management companies and association boards have a legal obligation to first work with the developer to correct defects. It is important to start this communication and negotiation on positive terms. Whenever possible, early detection of problems could save much money. Initiating any lawsuit should always be the last alternative.

Barbara Holland, certified property manager, broker and supervisory certified association manager, is president and owner of H&L Realty and Management Co. Questions may be sent to Association Q. & A., P.O. Box 7440, Las Vegas, NV 89125. Her fax number is 385-3759 or she can be reached by e-mail at support@hlrealty.com.