When an HOA is in debt for years, it can create serious issues for the community. Homeowners associations are responsible for managing common areas, maintaining property values, and ensuring residents’ good quality of life. However, financial mismanagement or unexpected expenses can push an HOA into long-term debt, affecting operations and causing satisfaction to plummet.
Possible Causes of an HOA in Debt for Years
Homeowners associations don’t just magically fall into debt for years on end. More often than not, some triggers or factors push an HOA into debt. Here are the potential causes for an HOA to be in debt for years.
- Financial Mismanagement. Poor financial management can lead to long-term debt. This might include overspending, failure to collect dues, or poor budgeting. A board without financial expertise can unintentionally dig the HOA into a hole.
- Emergency or Unexpected Costs. Sometimes, HOAs face unplanned expenses, such as major repairs after a storm or legal fees. These costs can push the association into debt if the HOA does not have well-funded reserves.
- Delinquent Homeowners. If many homeowners fail to pay their dues, the HOA can struggle to meet its financial obligations. Over time, unpaid dues will accumulate, and the association can’t keep up with essential services.
- Defaulting on Loans. Some HOAs may take out loans for improvements, such as new amenities or renovations. However, if the HOA fails to repay the loan with its anticipated revenue, the debt can pile up.
- Lack of Reserve Funds. Without sufficient reserves, an HOA will have no cushion for unexpected expenses. This can lead to the board relying on loans or cutting on crucial expenses, thereby putting the association deeper into debt.
Solutions for an HOA in Debt for Years
Countless homeowners associations suffer from long-term debt. Fortunately, there is a way out. The HOA board must act swiftly and carefully to get the association back in the green.
1. Assess the Situation
It is important for the HOA board first to understand the whole situation. Board members must review all the financial records, including unpaid invoices, statements, and loans. This will give them a clear idea of how much the HOA owes. Hiring an accountant or financial advisor from the get-go can significantly help, too.
After assessing the debt amount, the next step is to identify the cause of the debt. Are there a lot of delinquent homeowners in the community? Was it due to emergency repairs that the HOA didn’t have enough funding for? Did previous HOA boards fail to manage the HOA’s funds appropriately?
Once the board pinpoints the cause, it can create a plan to resolve it. Make sure to inform homeowners of the situation as well. After all, they have a right to know what is going on. Furthermore, transparency will help build trust.
2. Create a Debt Repayment Plan
Next, the HOA board should develop a realistic repayment plan. This is perhaps the most difficult part because board members must determine how to pay back the HOA’s debts while keeping operations running.
To create a repayment plan, the board must first prioritize the HOA’s debts. The most urgent debts with the highest interest rates should be prioritized. Unpaid vendors and critical repairs should also be prioritized.
Again, an accountant or financial advisor will be helpful at this point. They have the necessary experience and expertise to help the HOA develop an aggressive yet feasible plan. If the HOA has no budget for professional assistance, the best way to repay debts is to divide them into more manageable portions according to priority.
3. Increase Dues or Levy Special Assessments
Even with a realistic repayment schedule, the HOA will likely need to increase its cash flow to pay its debts. The best way to do this is to raise regular dues or levy special assessments.
Board members should prepare for some pushback from homeowners. Asking for more money is rarely a popular decision. However, it is important to explain to homeowners the HOA’s condition and how the added revenue can help.
Of course, it is essential to check state laws and the governing documents before taking this step. Some associations must secure a vote from the membership to raise dues by a certain percentage or levy large special assessments. A good example is Arizona. According to Section 33-1803 of Arizona law, an HOA can only raise dues by a maximum of 20 percent without membership approval.
4. Cut Costs and Reduce Spending
Another way to increase cash flow is to cut costs or reduce spending. Of course, an HOA can’t completely eliminate all expenses, as that would negatively impact the community.
Board members must first review the HOA’s current expenses to cut costs wisely. They should look for areas where the board can safely reduce expenses without sacrificing vital services. For example, the HOA board can speak to vendors and negotiate a lower price for their contracts.
If the HOA has any upcoming projects planned, the board should identify which ones are essential and which are not. The board should consider delaying non-essential projects to help free up funding.
There are plenty of ways an HOA can save money. Implementing these ideas will allow the board to tap into revenue and use it to repay the association’s debts.
5. Improve Collection of Delinquent Dues
A high delinquency rate can plunge any good HOA into debt. The board should consider enforcing more stringent collection practices to address this issue. The association’s bylaws, in addition to state laws, will inform the board of what possible actions it can take. These can include but are not necessarily limited to charging late fees or interest, suspending privileges, going to small claims court, placing liens, and even foreclosing on homes.
An HOA can also offer payment plans to delinquent homeowners. These plans allow homeowners to settle their unpaid dues more manageably. However, there is a risk of abuse, so payment plans should be offered sparingly.
6. Seek Loans or Financial Assistance
If an HOA has too much debt, it might consider taking out a loan. This may seem counterintuitive, as a loan also comes with strings. However, a loan can give the HOA access to immediate funding, which it can use to cover urgent costs. This will give the board some breathing room.
Since loans must be paid back with interest, it should come as a last resort. If the HOA can’t repay the loan, it will only plunge the association deeper into debt.
How to Prevent Future Debt for an HOA
The best way to ensure long-term financial health is to prevent debt from accumulating again. Board members should develop a clear and comprehensive financial strategy for the HOA. This strategy should include measurable actions and plans for a strong reserve fund, which can protect the HOA from unexpected costs and major repairs.
It is also a good idea to schedule regular audits of the association’s finances. Audits will help the HOA monitor its financial situation and identify discrepancies. In doing so, the board can fight potential fraud and other financial misdeeds.
Finally, budgeting plays a critical role in ensuring the financial health of the HOA. The HOA board should prepare a smart budget and stick to it at all times. This will prevent unnecessary spending.
A Less Stressful Future
An HOA in debt for years can create stress for both board members and homeowners. By taking proactive steps, an HOA board can work out of debt and into financial freedom.
Clark Simson Miller offers expert financial management services to HOAs and condominiums. Call us today at 865.315.7505 or contact us online to learn more!
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