Recognizing Dysfunction in Your HOA: A Short Story

Do income statements, balance sheets, and budgets cause your eyes to glaze over? If so, you are not alone, mainly when these words are used in a homeowner’s association (HOA) or condo association's board meeting.

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Most unit owners like to know that stuff is getting done but are not interested in understanding how the sausage is made or what context went into a board decision. We recently attended a meeting where the HOA board only had one item on the agenda. Their association needed to replace their elevators and roofs. Both items were failing and well beyond their estimated life. The board president wanted to discuss how best to pay for these repairs.

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Making matters worse, the association opposed a special assessment that would have raised the money needed for these replacements. As the meeting opened, a non-board member homeowner began speaking to the group. He knew the president intended to explore obtaining a loan to finance the replacements. The man began by voicing outrage that the board would consider borrowing money. He rattled off a lot of misinformation to support his position. He opposed owners having to guarantee debt personally. He opposed lenders placing liens on individual homes. He opposed having to get lender approval before buying or selling a home. And most of all, he hated paying interest on borrowed money and felt it was a bad idea.

Before the president could regain control of the meeting, his hopes of facilitating a useful discussion were over. It didn’t matter that owners were not personally liable for HOA loans. Liens are not placed on individual owner’s homes. Buyers and sellers are not required to contact lenders before homes are bought and sold (or after, for that matter). The angry unit owner had drained all of the energy from the meeting. There was no appetite for rebuttal or facts.

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The Loudest Voice in the Room

The loudest voice in the room can dominate member meetings. Accurate information is unquestionably valuable. However, that voice can be toxic when spewing misinformation. In his HOA’s case, the board postponed replacing failing roofs and elevators to an unnamed day in the future. This decision resulted in insurance renewal risk, market value stress, and safety considerations.

The meeting agenda was specific and straightforward. The board wanted to explore an HOA loan and offer the unit owners the option of participating in the loan or funding their pro-rata share through a special assessment.

This homeowner not only misunderstood HOA loans, but he also had a flawed approach to finance. He argued that he wanted to revisit the special assessment since he had adequate cash on hand. He was now willing to write a check for his pro-rata share rather than paying 7% interest on a loan.

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Not Seeing the Full Picture

However, he should have also considered the alternative use of his cash. In other words, by writing a check today, he would no longer have use of his cash. If we assume his cash was only earning 5%, the loan approach would have only cost him 2% (the net difference), not the 7% he vehemently opposed. Parting with his cash also closes the door on future potential investment alternatives.

If he wants to sell his unit soon, he also bet a buyer will understand that he’s written this check and will reimburse him. Alternatively, a loan would have allowed a seller to transfer the remaining loan liability to the new owner.

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Social Value of a Loan

Aside from the financial advantages of a loan, there is also an intrinsic social value. Perhaps our bombastic homeowner had plenty of cash and wanted to fund his share of the assessment regardless of the facts.

In reality, that may not have been the case with all other owners. Some neighbors are likely unable or unwilling to fund their share of a special assessment. They may need to apply for a home equity loan requiring their personal guarantee and a lien on their home or obtain other types of personal financing. An HOA loan relieves them of this burden.

While an HOA loan may not be the perfect solution for all of an association’s financial situations, these instruments can be highly efficient and valuable in some instances. Contact HOA Loan Services and let an HOA loan specialist help you evaluate the pros and cons of using an HOA loan. Most reputable professionals will help with the evaluation at no cost.