Self-Managed HOA? Answer These Five Questions Before You Decide Anything

Thinking about hiring a manager for your small California HOA? First make sure your board can answer five questions about elections, balcony inspections, reserves, taxes and the fidelity bond.

Every few weeks I get a call from someone on the board of a small association. Four units, six units, sometimes twelve. The conversation starts the same way. "We've been running it ourselves for years. Somebody on the board thinks we should hire a management company. Somebody else thinks that's a waste of money. What do you think?"

My honest answer is that they're arguing about the wrong thing.

Whether you pay a manager is a budget question. The question underneath it is whether your association is actually doing what California law requires of it. A lot of small self-managed HOAs are run by good, careful people who have simply never been told what the Davis-Stirling Act expects. Nothing goes wrong for years. Then an owner gets upset about a special assessment, or a buyer's lender asks for documents, or an insurance carrier reviews the file, and the gaps show up all at once.

So before the budget debate, I ask every small board five questions. You don't need to answer them from memory. You need to be able to put a document on the table for each one. If you can, self-management may be working just fine, and I'll tell you so. If you can't, you've found your real project.

Question one: when was your last election, and who ran it?

This is where small associations drift the furthest from the rules, usually without knowing it.

California requires directors to be elected, not appointed by agreement, and the election has to follow a process. The association needs written election rules (Civil Code 5105). Voting is by secret ballot, using the two-envelope system, with ballots going out at least 30 days before the voting deadline (Civil Code 5115). An independent inspector of elections oversees it (Civil Code 5110). And director elections have to happen at least once every four years, whatever your bylaws say.

In a four-unit building, the real-world version is often three neighbors deciding over coffee that the same two people will keep doing it because nobody else wants the job. It feels efficient. The trouble is that every decision the board makes afterward rests on whether that board was properly seated. When an owner wants to fight an assessment or a rule change, the first thing their attorney asks for is the election record. If there isn't one, the board's authority is the weakest point in the whole association.

How to check this week: find your written election rules, the notice and ballots from the last election, and the name of whoever served as inspector. If any of the three is missing, the next election should be run properly from start to finish, even if it's uncontested.

Question two: have you done your balcony inspection?

This one has a hard deadline, and a lot of boards believe it moved when it didn't.

SB 326, now Civil Code 5551, applies to associations with buildings of three or more units. If your buildings have what the law calls exterior elevated elements (balconies, decks, stairways, walkways and their railings, supported by wood or wood-based products and more than six feet above the ground), the association must have them inspected by a licensed architect or structural engineer. The inspector looks at a statistically significant sample, reports on the load-bearing components and the waterproofing around them, and the findings feed into your reserve study. The first inspection was due January 1, 2025. After that it repeats at least every nine years.

Here's the confusion. In 2024 the Legislature extended the deadline for a similar inspection law that covers apartment buildings. A lot of HOA boards heard "the balcony deadline moved to 2026" and assumed it meant them. It didn't. The HOA deadline under Civil Code 5551 was not extended.

If your inspector finds something that poses an immediate threat to safety, the law requires the association to restrict access right away and notify the local code enforcement agency. That's exactly the kind of finding you'd rather hear about from your own engineer than from a tenant's injury claim.

How to check this week: do you have an inspection report dated before January 1, 2025, signed by a licensed architect or structural engineer? If not, get one scheduled. You're already late, and late is still far better than never.

Question three: when was your last reserve study, and are you funding it?

Civil Code 5550 requires the board to have a reserve study done at least once every three years, including a visual inspection of the major components the association has to repair or replace, and to review it every year in between. Roofs, paint, paving, decks, plumbing, anything with a remaining useful life under 30 years.

Having a reserve study and following it are two different things, and small associations are famous for the first without the second. The study tells you how much you should be setting aside each month. The budget is where the board decides whether to actually do it, and raising dues on your own neighbors is the least popular vote any board takes.

The number to watch is percent funded. It's already in your annual budget report, on the Assessment and Reserve Funding Disclosure Summary that California requires you to send owners every year (Civil Code 5570). The law doesn't set a pass mark, but the rule of thumb in the industry is simple. Above about 70% funded, you're in good shape. Below about 30%, you're one bad roof or one round of deck repairs away from a special assessment. In a six-unit building, a new roof split six ways can mean five figures per owner, and nobody on the board will enjoy being the one to send that letter.

How to check this week: find the date of your last full study and the percent funded figure on your most recent disclosure. If the study is older than three years, or the percent funded is falling year over year, that's the conversation for your next meeting.

Question four: who files your taxes, and on what form?

I hear some version of this constantly. "We're a nonprofit. We don't have to file."

That's wrong, and it's one of the more expensive misunderstandings a small board can have. An HOA is usually not a tax-exempt charity. It's an association that the tax code treats in a particular way, and it still files. The typical set looks like this. A federal return, usually Form 1120-H, which most associations elect each year because it keeps member dues out of taxable income. A California return, Form 100, or Form 199 for associations that have applied for and received exempt status from the Franchise Tax Board. And a Statement of Information with the Secretary of State, which for a common interest development is the SI-CID, filed every two years.

Miss the California filings long enough and an incorporated association can be suspended. A suspended corporation can lose the ability to enforce its contracts or defend itself in court, which is a terrible discovery to make in the middle of a dispute with a contractor or an owner.

How to check this week: ask who prepared last year's returns and get copies. If nobody on the board knows, assume nothing was filed and have a CPA who works with associations look at it. Back filings are almost always fixable. They're cheaper the earlier you catch them.

Question five: do you carry a fidelity bond?

Civil Code 5806 requires the association to carry fidelity coverage, sometimes called crime or employee dishonesty coverage, for the directors, officers and employees who handle association money, and for a managing agent if you have one. Unless your governing documents require more, the coverage has to be at least your reserves plus three months of assessments. It also has to cover computer fraud and funds transfer fraud.

That last requirement matters more every year. Small associations are a favorite target for wire fraud because the treasurer is a volunteer, the bank account is small enough that nobody watches it daily, and one convincing email that looks like it came from the board president or a vendor can move the whole reserve balance. If that happens without the right coverage, the money is gone.

How to check this week: pull the association's insurance policies and look for a fidelity or crime policy. Compare the limit to your current reserve balance plus three months of dues. If nobody on the board knows what a fidelity bond is, the honest answer is probably that you don't have one.

While you have the policies out

One more thing worth checking, because it protects the people reading this. California gives volunteer directors a measure of protection from personal liability, but only if the association carries general liability and directors and officers insurance at minimum levels. For an association of 100 or fewer units, that's at least $500,000 of each (Civil Code 5800). Many small associations have a master property policy and assume it covers everything. It usually doesn't cover the board.

How to read your answers

If you answered all five without flinching, with a document for each one, keep managing yourselves. You're doing better than a lot of professionally managed communities, and you don't need me to tell you otherwise.

If you missed one or two, that's a cleanup project, not a crisis. Put each one on the next agenda with a name and a date next to it. Most of these are one phone call and one check to fix.

If you missed three or more, get help before someone else forces the issue. The two usual someones are an owner with an attorney and an insurance carrier deciding at renewal time.

Getting help doesn't have to mean handing over the keys. Full-service management makes sense for some associations, but plenty of small ones do well with a narrower arrangement. Someone runs the elections properly, keeps the reserve study and the inspections on schedule, makes sure the filings and insurance are in order, and the board keeps doing everything else itself. For a four to twelve unit building, that's often the right size.

Common questions

Is a small HOA required to hire a management company? No. California doesn't require professional management at any size. It requires the association to follow Davis-Stirling, whoever does the work.

Does the balcony law apply to our townhomes? It applies to associations with buildings of three or more units and to elevated elements supported by wood more than six feet above the ground. If your units are side-by-side with no elevated wood decks or balconies, it may not apply. Have an architect or engineer confirm it rather than guessing.

Can a board member be the inspector of elections? No. The inspector has to be independent. Depending on your situation that can be an outside professional, or in some cases a member who isn't on the board, isn't a candidate, and isn't related to one. Your election rules should say who qualifies.

We're behind on everything. Where do we start? Start with insurance and the balcony inspection, because those are about money and safety right now. Then the tax filings. Then fix the election process and get a current reserve study, which together set you up for every decision after that.

The five questions and a free 10-point self-assessment for small boards are at townhomepros.com. If you'd rather talk it through, give us a call. I'm happy to tell you honestly whether you need help at all.

This article and video are for general educational purposes only and are not legal, tax, or financial advice. Tony Self is a licensed California real estate broker (DRE #01906720) with Harcourts Hunter Mason Realty and a trained community association manager, not an attorney or a CPA, and reading this does not create a client relationship. Davis-Stirling requirements change often. Confirm your association's obligations with a qualified HOA attorney and a CPA who works with associations.

Sources

Civil Code 5100: Election frequency: https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?sectionNum=5100.&lawCode=CIV

Civil Code 5105: Election rules: https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?sectionNum=5105.&lawCode=CIV

Civil Code 5110: Inspector of elections: https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?sectionNum=5110.&lawCode=CIV

Civil Code 5115: Secret ballot: https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?sectionNum=5115.&lawCode=CIV

Civil Code 5550: Reserve study: https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?sectionNum=5550.&lawCode=CIV

Civil Code 5551: Exterior elevated elements (SB 326): https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?sectionNum=5551.&lawCode=CIV

Civil Code 5570: Assessment and Reserve Funding Disclosure Summary: https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?sectionNum=5570.&lawCode=CIV

Civil Code 5800: Volunteer director liability and insurance: https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?sectionNum=5800.&lawCode=CIV

Civil Code 5806: Fidelity bond: https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?sectionNum=5806.&lawCode=CIV

IRS: About Form 1120-H: https://www.irs.gov/forms-pubs/about-form-1120-h

California Secretary of State: Statements of Information: https://www.sos.ca.gov/business-programs/business-entities/statements