Real Estate Insight

Exposing the Multi-Million Dollar Rip Off

Anyone who knows me, knows that I have a hard time remaining quiet when I encounter things that are unethical, immoral or just unfair. For years I’ve sat quietly and watched the biggest legal real estate industry rip off flourish. Sadly, it’s not a rare occurrence. In fact, it happens every day; thousands of times every year. Each time it happens, my blood boils, but I do nothing about it. A current transaction has prompted me to finally speak out and expose the rip off. What is it?

Fees Charged by Management Companies For Condominium Association Documents.

Were you expecting something bigger or more ground breaking? Before you dismiss this article as a post by a crazy person with too much time, read this post and then decide. As I started writing this post, I wondered if the use of “rip off” was too harsh. After looking up the definition, I realized no other word or term could be a more accurate description of this issue.

Dictionary.com defines “rip off” as “exploitation of those who cannot prevent or counter it“.

The Multi-Million Dollar Rip Off

This rip off is neither small or new, and if you’ve ever owned or plan to own a condominium, it affects you. How? Every time a condominium is sold or re-sold, the purchase contract calls for the Seller to furnish the Buyer with a set of the condominium documents of that condominium association. These documents include the financial statements, minutes of Board of Director and Homeowner Association meetings, Reserve analysis, House Rules, etc., and serve as part of the disclosures that Sellers have to make to the prospective Buyer. Furnishing these documents to the Buyer is an important contingency of the sale and are not of public record. Except for rare exceptions, the Seller of a condo can only get these documents from the association’s managing agent/company. This is where the exploitation by management companies takes place.

Condominium Association Managers’ Fiduciary Duties

On average, a set of these documents costs the Seller $300. Most people, including myself, would agree that $300 is insignificant compared to the price of the condo being sold. That’s exactly what management companies want you to think. But $300 is still $300. Would you take $300 out of your wallet and throw it into the wind? If my question is ridiculous, so are the charges for the condo docs.

By law, management companies have a fiduciary to every condominium association they manage. The law also imposes an “obligation of good faith” in the performance of their duties. Knowing this, take a look at what that insignificant $300 charge looks like to the management companies.

Revenue of Condo Doc Fees

To be fair, I gave the management companies the benefit of the doubt by only counting 90% of the total sales and using $300 for the cost of each set of docs. Even using such low numbers, the revenue collected in the last 5 years totaled more than $9.3 million dollars. ALL of this revenue goes to the management company and allowed as “reasonable fees for administrative costs.”

Reasonable Fees For Administrative Costs

Recent legislation was enacted to address this issue. A bill was passed that limited the amount that can be charged to $1.00 per page for “reasonable admin costs”. So how well did legislation help? Let’s look at two current transactions I’m involved with.

Transaction #1: Condo docs were ordered and the management company charged $327.00. Within half an hour, the full set of documents were transmitted by email to us and we had to print the full set of 500+ pages. We live in an age where everything is now in digital format. It probably took the management company 5 minutes to locate the electronic files on their computer and email them to us. For that, the charge was $327. I wonder if this is what our legislators had in mind when they wrote “reasonable fees for admin costs.” The figures used in the chart above to illustrate the cost to produce these documents were based on EVERY page being printed to paper. Over half of all documents ordered today are delivered in digital format eliminating cost of reproduction.

Transaction #2: Buyer spent hours locating most of the documents through several means to save some money. He was fortunate that the condo association he was buying into made most of their documents available to anyone on-line. I say fortunate because this is the FIRST time in 20 years that I’d heard of this. But he still needed to order one document, not available on-line, from the management company. This document is required by all lenders. It’s called the lender’s questionnaire and some lenders have their own form. It’s a two page form with about 20 questions. This Buyer’s lender has their own form. The management company’s policy is not to complete lender’s forms and only make available their form. We ordered their form. This two page document was emailed within a few hours. It was incomplete, inaccurate and useless. The charge for these two pages: $78.00. It was obvious that the document had been previously filled out. If it had just been completed, there wouldn’t have been the inaccuracies. The document was only inaccurate because it contained old information. In this case, the charge of $78 was to locate a previously completed form on their computer and email it to us. I’m guessing it took a few hours because the person wanted to finish lunch first.

The Biggest Profit Center

The revenue generated by management companies for supplying these docs create the only legal means of attaining returns on investment that exceed 1000% that I know of. This legal license to print money is, by definition, a rip off! Owners of condos have no choice but to pay these prices. With the exception of the one association mentioned above, an owner has no option but to pay what amounts to extortion. How accurate are my claims here? In the 80′s and 90′s, I owned my own management company. I used to charge $50 for the same set of docs and I felt guilty doing it. I knew exactly what it cost and how much money I was making on it. All of the numbers here are real. The number of condo sales and the price to order the docs are public knowledge. If you doubt any of this, make an unannounced visit to any management company. You’ll see at the front desk stacks of large manila envelopes containing condo docs waiting to be picked up. Each one you see represents $300 of revenue and took no more than half an hour to compile.

The travesty is that this rip off is legal and tolerated. Where’s the fiduciary duty and obligation of good faith required by law? Are revenues in excess of $9 million dollars in 5 years with returns on investment topping 1000% a year considered acting in the best interests of the people they serve? You decide.

Elliot Lau