guest blog by Deborah Goonan
Some readers may be under the impression that embezzlement of HOA funds only happens to Homeowners’ Associations (HOAs) with hundreds or thousands of units and elaborate amenities that translate to big operating budgets. I’ve talked to some people that think these cases are limited to certain parts of the country such as the Sunbelt states or major cities.
Nothing could be further from the truth. Even modest HOA communities in small towns are at risk for theft of funds by rogue Board members, community managers, or Developers.
Take Skyview Estates, for example. Skyview is a relatively small townhouse community of a few dozen homes located in Richland, PA, a town with a population of less than 1600. The nearest city is Johnstown, PA, with a population of about 20,000. There are no amenities such as a pool, and houses are located on one street named after the company that developed the community.
Three members of the family owned business, Julz Development Group LLC, were recently arrested for stealing nearly $80,000 in HOA assessments over a period of five years. Dennis Michaels, his wife Julie Michaels, and daughter Juliana Zamias constructed Skyview Estates beginning in 2006. As is typical of HOAs, the developer controlled its Board of Directors during construction. Homeowners elected a Board of volunteer owners beginning in 2013, and that’s when Board President, David Mishler, discovered that money was missing. The Board authorized a forensic audit, which resulted in charges being filed against Juliana Zamias and her parents. The audit found that numerous checks were written for “cash” and money was transferred to personal accounts with no explanation.
Active real estate listings for homes in Skyview Estates, priced between $130,000 – $160,000, note HOA fees of $125 per month, to cover lawn maintenance and snow removal. For an HOA of less than 50 homes, $80,000 probably exceeds the amount of assessments it collects in an entire year.
As is often the case, theft of HOA funds can occur for several years before it is discovered, and those perpetrating the crime are usually considered to be trustworthy. (See Characteristics of Embezzlers, linked below)
The management and political structure of HOAs provides ample opportunity for mishandling of funds, because only a few individuals have access to the collective assessments of the community. In the case of Skyview, it was the Developers. But even after the developer turns over control to volunteer homeowners, it is all too common for the Board of Directors to place control of the money in the hands of one Officer or a hired Community Manager. In some cases, two or more people can work together to defraud homeowners, a little bit at a time, over many months or years.
In Pennsylvania, where Skyview Estates is located, the penalty for embezzlement of cash or property worth more than $2000 is a fine of up to $15,000, up to 7 years in prison, or both. (18 Penn. Con. Stat. § 3903.)
However, most local law enforcement agencies lack adequate funding and training to fully investigate white-collar crime. That means quite often, even after discovered and prosecuted, those who steal from HOA coffers end up with light sentences. Although convicted individuals may be required to provide restitution, the HOA is often unable to fully recover the loss. Even if the HOA carries a valid fidelity insurance policy to cover loss from theft, there is usually a deductible and a subsequent increase in insurance premiums. Sometimes insurance companies drop coverage altogether, leaving the neighborhood completely unprotected.
By contrast, embezzlement of more than $1000 from the federal government or a federal agency results in a fine of $250,000, up to 10 years in prison, or both. For amounts under $1000, the fine can be up to $100,000, up to a year in prison, or both. (USCA §641)
Small communities provide big opportunities for embezzlers, mainly because everyone knows and trusts the individual or individuals with access to HOA bank accounts. And with relatively little accountability, even after being caught, it is no wonder we read several reports of HOA embezzlement on a weekly basis.