There is often a question of ethics and fairness when an HOA profits from HOA dues. Since a homeowners association exists to maintain the community, its primary goal should not be to earn a profit. It is not a for-profit organization. However, many often wonder if it is legal and what an HOA can do with so-called profits when inadvertently faced with them.
Should the HOA Earn Profits From HOA Dues?
An HOA’s purpose is to maintain the community and preserve property values, not to earn a profit. In many states, most HOAs are structured as nonprofit organizations. This means that profits should not be the goal.
At its core, an HOA is different from a traditional business. Businesses operate to earn a profit and maximize earnings. In comparison, an HOA exists to maintain common areas and manage the community. Its ultimate objective is to protect property values. After all, this is one of the key benefits and qualities that attract potential homeowners.
Therefore, profit-making is not typically a part of the mission of an HOA. Instead, an HOA’s primary focus is to collect enough funds from homeowners to cover the expenses required to run the community. A big part of its job is to budget its funds correctly, manage its finances, and ensure financial stability well into the future.
For these reasons, an HOA should not aim to earn profits from HOA dues.
Can HOA Make a Profit From Dues?
In an HOA, dues typically cover expenses that maintain the community’s common areas. This can include various materials, labor, and services. These dues fund landscaping, pool maintenance, security, and other shared expenses. An HOA can also set aside funds, known as reserves, for future repairs.
The HOA board is responsible for budget planning. Based on this calculation, board members anticipate the expenses for the upcoming year and determine how much the HOA will need to collect from homeowners. With so many variables, though, boards can make a mistake sometimes. The board can overshoot or undershoot the budget.
Because of this, the HOA may end up with surplus funds every once in a while. Surplus funds occur when collections exceed the expenses of the HOA. While this is an ideal scenario, the HOA board should manage these excess funds properly. Without a clear purpose, homeowners may question the board’s financial practices.
Although an HOA can have leftover funds, the HOA should not aim to profit from dues. Surplus funds should be managed carefully to serve the community’s best interests. If an HOA frequently has excess funds, it may collect dues that are too expensive or skimps too much on expenses.
Can the HOA Board Profit From HOA Dues?
The HOA board serves as a volunteer group of homeowners who work to improve the community. Board members don’t receive compensation for their time or efforts. This is because they are volunteers. As such, their roles are meant to be in public service rather than in a paid position.
For this reason, board members should never make personal profits from HOA dues. In fact, this practice is frowned upon and a direct violation of ethical guidelines. When this happens, the board violates its fiduciary duty, which can result in personal liability.
Board members have a legal obligation to act in the best interests of the community. When a board member misuses funds or tries to profit from dues, they directly violate this obligation. Such board members can face legal consequences, including lawsuits and damages. Transparency is a must; a key aspect of that is never using dues for personal gain.
Can the HOA Profit From Fines and Foreclosures?
Homeowners associations often impose fines for rule violations. An HOA can even take legal action or foreclose on a member’s home in severe cases. The purpose of fines and foreclosures is to deter violations, encourage on-time payments, and uphold community standards. However, using fines and foreclosures as a source of profit is generally seen as unethical and exploitative.
Fines should be reasonable and proportional to the violation. They should act as a deterrent, not as a way for the HOA to earn extra cash. Similarly, foreclosures should serve as a last resort when an HOA is trying to collect unpaid dues. They should not serve as a means to earn revenue.
If an HOA consistently relies on fines or foreclosures for money, it can be a sign that the board is poorly managing the HOA’s finances.
What to Do With Excess Funds
Surplus funds arise when an HOA collects more dues than it spends in a year. While this may happen sometimes, an HOA should have a plan to deal with regular surplus funds.
Here are the things an HOA board should consider when handling excess funds.
Check State Laws
State laws may guide how an HOA should deal with surplus funds. Some states have specific rules about retaining, crediting, or refunding excess funds. For instance, Colorado Common Interest Ownership Act Section 38-33.3-314 dictates that excess funds must be refunded to members unless the governing documents say otherwise. Another thing Colorado HOAs can do is offset future recurring fees using the surplus.
Check Governing Documents
The HOA’s governing documents, specifically its bylaws or CC&Rs, may dictate how to handle surplus funds. Some governing documents specify what boards can do, while others are vague. And then some documents are completely silent. In such cases, the HOA board should consider amending to create a standard.
Credit to the Following Year’s Expenses
One common approach is to apply excess funds to the following year’s budget. This effectively lowers the dues for the next year, relieving some of the financial burden from homeowners. It is important to clarify this to homeowners and let them know that the lower fees are due to excess funds from the previous year. This way, homeowners won’t complain when they see an increase in dues the year after.
Deposit Into the Reserve Fund
The reserve fund covers future repairs and maintenance of common areas. If the reserve fund needs bolstering, an HOA can consider depositing the surplus funds into the reserve fund. This will get the HOA to its required funding level much quicker.
Refund to Members
Sometimes, the HOA may choose to refund excess funds to homeowners. Most of the time, homeowners prefer this option the best, especially if they are short on funds. Just make sure to document the refund appropriately.
All Things Said
An HOA’s goal should never be to generate profits from HOA dues. Homeowners are an HOA’s primary source of revenue, and using them to earn a profit is tantamount to unethical and unfair behavior. The HOA is not a business, so it should prioritize the financial welfare of the association and the community members.
Clark Simson Miller offers expert management services to HOAs and condo communities, including HOA financial management. Call us today at 865.315.7505 or contact us online to learn more!
RELATED ARTICLES:
- HOA Fee Discounts: Should They Be Given?
- What Are The Best Ways To Allocate HOA Insurance Deductibles?
- HOA In Debt For Years: What Can Be Done?