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Don’t Hire That Management Company

At least not till you ask the right questions.  Now that new boards all over the City are taking office, one of the first things many do is fire the old management company and hire a new one.  Does this clean sweep it make sense?  Not necessarily.  But like elected officials from President on down, lots of members want their own loyalists.

But change for change sake can be dangerous, which is why it’s important for you and the building to make sure the new guys are up to the job. Here are some of the questions to ask to see if they are:

1.  Does the new company have a fidelity bond to protect your building in case its employees empty out your bank accounts?  Think I’m being paranoid? There are several boards right now that I’m sure wish they had asked as they face the fallout out from at least one management company whose agent put his hands in building coffers and then went belly up, leaving them potentially without recourse.  Now some banks are going a step further, requiring buildings to increase their own fidelity bond coverage as a condition to lending on apartment purchases.

2.  Does the management company have a brokerage arm?  This can be a double-edged sword.  There are those who believe this will assure the presence of a building specialist who can boost sales prices.   But the relationship can become too close for comfort as owners feel pressured to use the company’s broker for fear that otherwise the management side won’t approve their sales and renovations.

3.  Does the company commingle funds of buildings like apples and oranges?  Run, don’t walk, away. Your building loses FDIC protection for the first $250,000 because the money isn’t broken out from the rest.  And, if the company gets into financial trouble, your building may have a harder time getting its money back if there are competing claims to the same account.

4.  Does the company provide copies of actual bank statements each month as part of its financial report?  Otherwise it’s easy to doctor the numbers, and hard to ferret out the truth, a problem currently being faced by one building where not even the treasurer, a forensic accountant himself, could tell what was going on.

5.  Does the company require the building to put its money in the bank with which it does business?  The result: Your building may not get interest on the account, while the company gets the benefit of having large compensating balances on deposit with its bank.

6. Is the company the right size for your building?  Management firms range from mom and pop to relatively mega-sized entities. It should be large enough to have sufficient critical mass to provide backup support, but not so large that your building is a little fish in a big pond.

7.  Who controls the purse strings?  It’s ok if the company writes checks for everyday bills up to a specified amount, but beyond that dual signatures of your buildings’ officers should be required, and they, not the company, should be in control of cash reserves.

8.  Will the company give you an automatic out on 30 or days’ notice.  You don’t want to be stuck together, especially if the company changes the agent responsible for your building. That’s like getting divorced and being force to marry someone you don’t know.

9. What does the credit/litigation check show?  It’s difficult to ferret out hard financial information because management companies are private firms not required to make public disclosure, but they all have reputations, which your board should check out.  And if you go online and do a litigation search you’ll find out that some companies seem to turn up a lot more than others in lawsuits.  Draw your own conclusions, but reading the cases can be instructive.

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