What's the fiduciary responsibility of HOA board members?

New board member? Or thinking of becoming a board member for your condo or co-op's Homeowners Association (HOA)? Before you decide to do so, you need to have a solid grasp of what an HOA board is and what it takes to be an HOA board member.

An HOA board is a board of directors elected by the unit owners of your condo or co-op. The members of this board have three main responsibilities:

  1. Repair, operate, replace, and maintain the building's common areas. These are the areas of the building that everyone can use, such as the lobby, hallways and the lounge, or gym.
  2. Comply and enforce governing documents and regulations. HOA board members will enforce penalties on unit owners who don't comply with the HOA's governing documents and regulations.
  3. Manage budgets and other fiscal responsibilities. HOA board members are also responsible for budgeting and planning for general maintenance like boiler and HVAC repair. It also includes planning and budgeting for capital improvements like updating the building’s facade, replacing the roof and repainting the lobby.

As you can see, board members have a lot of power as well as responsibilities. (Cue Peter Parker). What's the fiduciary responsibility of HOA board members? It is to serve your HOA community, by governing and making the right decisions for your community.

HOA board's fiduciary duties

As decision-makers for the building community, boards have the fiduciary duty to make responsible decisions on behalf of unit owners. Their duties can be broken down into three basic components.

Duty of care

To fulfill their duty of care, HOA board members need to make informed decisions, which means you may have to do research before voting or acting on a matter. For instance, let's say there's a meeting about finding a unit owner for late payment of dues. Before you can vote or act on the issue, you need to analyze:

  • All the details of the situation. Talk to the homeowner to gain a better understanding of what happened. Work with the unit owner to understand their dilemma and why they're not making their payments on time. If you think they can fix their issues, you might be able to avoid charging late fees (if you and the board so wishes). If however, the problem persists and the board begins considering foreclosure, there’s another step that can be taken first. While of course, hopefully it never gets to this point - you can warn them with a lien. (This is a legal claim that can stop them from refinancing or selling their home.) And lastly, the most serious measure - using the lien to force foreclosure.
  • Your HOA's Declaration of Covenants, Conditions, and Restrictions (CC&Rs), which lists out the rules of your HOA community. This document describes the limitations and requirements of what each homeowner can do with their property.

CC&Rs typically include requirements and restrictions on how unit owners:

  • Keep pets
  • Maintain their property
  • Dispose of garbage and recycling
  • Use the hallways

HOA members need to act reasonably and prudently to meet their duty of care. To do this, they need to avoid capricious or arbitrary actions and use solid business judgment to vote and act. For example, you can't fine a unit owner for painting their walls purple just because you think it looks tacky. You can only fine them for doing so if it's a violation of CC&R rules.

Duty to act within the scope of authority

HOA board members must always act within their scope, which means they have to perform their obligations, but can't overstep their boundaries unless they have the authority to do so.

Your HOA's authority comes from state laws, its articles of incorporation and bylaws, and your development's CC&Rs. As such, you need to review these documents before you vote or act on issues. For example, if these documents don't grant your HOA board the authority to adopt new regulations or rules, any new pet restrictions will probably be invalid.

Duty of loyalty

HOA board members also have a duty of loyalty, which requires them to act fairly and in good faith for the benefit of the HOA community as a whole.

This duty also requires HOA to avoid acting or voting if there is a conflict of interest, HOA members should avoid acting or voting. For instance, if you're selecting vendors to refurbish your building's lobby, you shouldn't give contracts to family members just because they're related to you.

As an HOA board member, you also have the responsibility to protect members' confidentiality. This means you can't share information about unit owners that they gave to you in private. So if a unit owner tells you that they're selling their business to pay off their HOA dues, you can't tell your family or friends about this.

Fiduciary responsibilities when making financial decisions

What else is covered by the fiduciary responsibility of HOA board members? As an HOA board member, fiduciary responsibilities affect all of your responsibilities, whether you're fixing the building's common areas, enforcing governing regulations or managing fiscal responsibilities.

It's particularly important to act responsibly and prudently when making financial decisions for your community. Remember, unit owners are paying to ensure that their building is running the way it should. Whether you're the HOA treasurer or play another role, you need to carry out the following HOA board financial responsibilities to meet your fiduciary duty.

1. Make payments easy

Your HOA regulations and rules will determine how often unit owners have to pay their dues. Choose a method of payment collection that's convenient for everyone, whether it's through the internet or in person. Some HOAs hire a management company to help with this.

2. Keep accurate records

HOA board members must be good stewards of association funds, so you must keep proper records at all times. Consider hiring an accountant or accounting firm to help you.

3. Know what you can use dues for

Because HOAs are non-profit organizations, you can only use dues to benefit the community. Funds collected from residents should be allocated towards community insurance, maintenance, contingency funds, and your HOA reserve.

You can also allocate dues for hiring a property management company to help you with the following:

  • Maintenance
  • Bookkeeping
  • Collecting dues
  • Enforcing violations

4. Be transparent with your community

Board members must be as transparent as possible. This is one of your most important duties since residents are paying for their building to be maintained. The more transparent your community is, the more confident the unit owners will be about your leadership.

Here's what you should do to maintain transparency:

  • Keep minutes of your meetings so you have a clear audit trail of who said what and what happened in each meeting.
  • Send timely updates to your residents using their preferred method of communication (i.e., email, SMS, mailboxes, etc.)

These updates can include news on the following:

  • Maintenance issues
  • Increase in common charges or maintenance fees
  • Solutions to problems in the building
  • Community events

Be proactive about preventing fraud by checking your HOA financial reports and bank statements regularly. If you see anything strange, talk to your manager or fellow board members.

You should also make financial statements available to all of the unit owners in your community. Most HOAs present these financial statements or reports from the year prior at the start of the new year. Remember to redact any confidential or sensitive information from your reports before sharing them. For example: If you see credit card numbers and full names on the reports, use black rectangles to cover up that sensitive information before sharing the reports with your community.

5. Prepare realistic budgets

As an HOA board member, you need to prepare a budget for the next year to fulfill your fiduciary duty. To discharge all of your duties, you need to do more than just estimate the cost of future repairs and maintenance. You need to analyze historical data and do research on market trends so you can determine how much to charge unit owners in dues.

6. Plan reserve funds

Maintenance expenses are usually drawn from your HOA's operating fund. For contingencies and replacements, you should use your HOA's reserve funds.

Your reserve funds should always be at the right level so you can cover all emergency and future costs. If you don't have enough reserve funds, you may have to charge unit owners special assessments costs, which can hurt your reputation. If you don't have the time, money, or expertise to determine the right reserve fund level, consider hiring a property management company to conduct an HOA reserve study.

Stay on top of your HOA responsibilities

Becoming a board member for your condo or co-op's HOA might look easy on paper – you go to meetings, listen to presentations, and vote on issues. However, it's much more complicated than that. As an HOA board member, you have to follow the best practices for HOA and co-op boards.

Again, what's the fiduciary responsibility of HOA board members? Specifically, you have the fiduciary duty to make fair and reasonable decisions for your building community, which consists of:

  • The duty of care to make informed decisions on behalf of unit owners
  • The duty to act within your scope of authority
  • The duty of loyalty, or the duty to act in good faith for the benefit of your community at all times

Most HOA boards find it challenging to fulfill these duties alone, particularly when it comes to making financial decisions. That's where Daisy comes in. Daisy is a tech-driven, full service, custom-centric property management company. We work with board members to make their lives easier. We help with financial planning for budgets, reserve funds etc. Board meetings are captured digitally, and with our dashboard and app, both residents and board members gain the necessary transparency to feel confident the building is being managed well. That's only the tip of the iceberg, learn more about Daisy here.