Should Your HOA Borrow, Assess, or Wait for Community Repairs?

Big HOA repairs are needed; the reserve fund is not sufficient to cover the expenditures and there are many differing opinions on how to proceed. One board member wants togo for a special assessment to pay for the repair. Another Board member feels that a special assessment is too expensive for the homeowners and wants to investigate borrowing the needed funds.

Special Assessments create a lot of controversy at HOA Board meetings. Many Board Members fear that assessments will be too expensive for Homeowners in the long run and thus should be avoided.

HOA boards often struggle to make big financial decisions for their homeowners without having the appropriate information. One Board member wants to protect the Homeowners from having to pay a large lump sum of money all at once. Another Board member wants to avoid debt at all costs. Others want to defer the repairs to a later time.

Our HOA decision tool can help HOA boards compare options to determine the best option for their community. This article looks at the most common ways for HOAs to pay for community repairs or what happens if the board decides to wait.

Why the Special Assessment Debate Gets So Heated

A special assessment is considered first when large repair bills surface and the HOA’s funds are not adequate to cover needed repairs. The Board assesses and the money comes from the homeowners’ pockets to fix the repair needed by the HOA. A homeowner could be tapped for thousands of dollars on short notice with little or no time to save and then find the money when needed. As a result, a homeowner might have to take a personal loan to pay a special assessment, thus incurring interest.

Special Assessments are not free for HOAs. They are simply paid by different groups of homeowners. Homeowners are forced to finance their portion of the assessment via personal loans (e.g. unsecured credit card debt, variable rate personal loans). The interest paid by the homeowner on the financing of their portion of the assessment would be greater than that which the HOA would pay if the HOA were to finance the repair by borrowing a single loan in the HOA’s name.

The True Cost of an HOA Loan

Alternatively, the HOA might consider a loan for a repair. Borrowing as a community can typically done at a far better rate than the interest that would be incurred by homeowners paying as individuals through personal loans, home equity lines, or even credit cards. Assessments have very “visible cost,” meaning that everyone can see what is being incurred for the repair, as opposed to the interest being incurred over time that is not as obvious.

The Hidden Cost of Waiting on Repairs

Instead of going down the special assessment route or taking on a loan, HOAs consider waiting. Putting off repairs to defer the costs associated with a needed repair seems to bring a temporary relief from having to deal with a problem. It does not require a vote of contentious discussion and votes, does not require immediate payment or financial strain on homeowners, and puts off the unpleasantness of dealing with the needed repair until another time. However, deferring repairs will cost more in the long run:

• Costs tend to rise with time. In three years, the costs for a roof replacement may go up significantly due to inflation and increased labor costs.
• Small problems become big ones. A minor leak for example can turn into water damage, a mold remediation and even insurance claims if the problem is allowed to persist for too long.
• Deteriorating items have a negative impact on property values. The view of the community through the eyes of buyers and appraisers will decrease in value to each homeowner.
• Your liability as a board member can increase the longer you allow a known problem to continue. The HOA may have a very difficult time defending the HOA against any damages or losses that occur when a known problem was not fixed.

Aging infrastructure is not something that can be put off until the next Board meeting. It will eventually require repair, and when it does, the Board will have fewer options for how to pay for it, and they are likely to end up spending more money to fix the problem than they would have if they had addressed it when it was still relatively minor.

What Your Board Actually Needs to Make a Good Decision

A large portion of debates within HOAs regarding repairs and replacements stem from board members that are looking at two different scenarios. There is the board member who is against debt and sees the impending assessment on homeowners as an unacceptable financial burden. The other board member is trying to protect the homes of the HOA members and do what they feel is best to ensure that the homes within the community are protected from future decline.

To make the best decision for your HOA, your board needs to know the following:

• For an assessment: What would be the assessment amount per homeowner and the payment timeline? What would happen to the HOA’s budget if 10-15% of the homeowners were delinquent in their assessments or didn’t pay assessments a tall?
• For an HOA Loan: What would be the monthly debt service per unit for a loan?
• What will be the cost to HOA of deferring the project?

These are questions that need to be answered with hard numbers that tell the board the full cost to the association of each of the alternatives under consideration.

There’s a faster way to get there.

How the HOA Decision Tool Can Change the Conversation

The HOA decision tool was built for the typical HOA situation where a board needs to make a financial decision. In many cases, Boards do not have the time, money or resources to hire a team of advisors to help compare the cost of special assessments versus loans to finance repairs and updates to the common areas of a community. HOA board members can use the HOA decision tool to compare options with real numbers and make the best decision for your HOA.

·     In addition to calculating the true per-unit cost of a special assessment compared o the cost of a loan, for example, the HOA decision tool will include the personal interest that an individual homeowner would pay if they were to finance an assessment personally.

·     In terms of comparing the monthly costs of debt service of a loan to that of monthly assessments, the tool will break down the per-unit cost of each.

·     It will also reveal the long-term effects of delaying repairs to property in your HOA, in real dollars, not just vague warnings of higher costs as time passes.

The HOA decision tool will not make the decision for you, but it will give all the people involved in the decision-making process the same information to make an informed decision.

Sometimes the best answer just needs better data behind it.

Run the Numbers Before Your Next Board Meeting

The longer you wait, the harder and more expensive the problem is likely to be for your HOA. Run your community’s numbers in the capital planning tool to see all your financial options before your next board meeting.  The HOA Decision Tool is:

·     Free to use

·     A time saver as it takes minutes to run and potentially saves your board hours of unfruitful meetings.

See how HOA Loan Services can help your HOA make better financial decisions.