BAD OVERSIGHT: WHEN BOARDS GET BURNED BY IGNORING RED FLAGS

A board hires a professional — be it a manager, attorney or accountant — to do what a professional does: manage the property, interpret the law or balance the books. It appoints a treasurer to do what a treasurer does: handle the money. And then its members are surprised when things don't get done. But what are board members doing while these accidents are happening? Playing golf?

There's no question that giving proper oversight can be time-consuming, especially for a board of volunteers who are not full-time real estate experts. Nonetheless, it's critical to watch out for the red flags that signal, "Pay attention! Potential problems ahead!"

Budgeting Breakdowns

The biggest red flag is the payment (or lack thereof) of monthly bills. If these are not being paid on time that could indicate back office sloppiness, seat-of-the-pants management, or, in the worst-case scenario, criminal activity.

Take the Manhattan building that neglected to pay its payroll taxes. When the board confronted the manager, he essentially said, "Nobody told me to." More specifically, he blamed the accountant for not reminding him. Reminding him! It's the building manager's job to pay the bills on time! But this one claimed, "We merely issued the paychecks."

His nonchalant responses spurred the board to review its records. The directors found that the manager had missed routine payments to the insurance carrier, been late in paying quarterly real estate taxes, paid the superintendent's salary erratically (missing one month, then paying him double the next), and paid an invoice for another building's job with the co-op's funds!

But the board members weren't blameless. No — because they had not supervised the building manager properly. They offered a number of excuses: He had won awards and was knowledgeable, charming and informative. Obviously, it would have been a red flag if he hadn't been giving the board's treasurer all the bank statements, invoices and copies of cancelled checks, but the manager was diligently doing so. The treasurer simply wasn't looking closely at them. "If the treasurer had been reviewing the monthly management statements," observes forensic accountant Mindy Eisenberg Stark, "he should have noticed that there was no disbursement for payroll taxes."

Contractor Concerns

Hiring contractors and doing repair work is simple in theory: Get three bids, check the references and choose a company. But if your manager says three bids are unnecessary because he knows someone good, watch out: That's a red flag. For instance, there was a Manhattan co-op that had a serious rat infestation. The manager brought in an exterminator, but the board neglected to ask for prices or to bid it competitively. After $5,000 in extermination fees had blown a hole in the budget, the board woke up.

"You should always get multiple bids for a job that expensive," says attorney James Samson, a partner at Samson Fink & Dubow. "You should also be sure that at least two of the bids are not people suggested by the manager. Then someone has to confirm the number of visits being made and that the contractor is doing what he says he's doing."

Beware, too, of managers who "take the initiative" on big purchases using your money. Samson recalls a managing agent who went ahead and replaced a boiler because, he claimed, "it was an emergency." The board was furious, arguing that some experts had said there were alternatives to replacing it. The agent had already paid for it, however. He was fired and the board did what it should have done from the start: limit the amount a manager can spend without board approval.

"You can also have a clause in the contract that all repairs need to be approved by the board," says attorney Theresa Racht, a partner at Racht & Taffae, "and that any fees incurred without approval will be paid for by the manager."