HOA Loans vs Special Assessments: Who Shoulders the Burden?

A board’s fiduciary duty is arguably one of the most important responsibilities to handle. Supporting the financial well-being of an entire community of people is a hard job to do, and often, there are no easy answers.

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In fact, some decisions that seem wildly different are actually more similar than most HOA boards realize. For example, when it comes to funding capital expenses for a community, many balk at the idea of acquiring an HOA loan, opting instead to issue a massive special assessment.

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But those two options financially end about the same way: with the community paying a sizeable sum of money over time. The big difference is one (the special assessment) places an undue burden on your HOA membership, and almost always results in the community struggling as homeowners are forced to sell their property in droves or go into arrears.

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Sadly, it’s the decision about 30% of boards choose when seeking funding.

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The Burden of Borrowing

Money makes everything stressful. Borrowing money, even more so. It’s smart to pause and consider the longer-term ramifications that borrowing a large sum of money can have in your HOA. But too often, that thought process takes an unhelpful turn. When seeking funding, many HOA boards heavily weigh HOA Loan interest as a con, but they fail to consider the cons of the alternative.

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Interest is an important factor to think about. You should know how much your loan will really cost you! But the stigma surrounding interest–this idea that you’re paying someone money to pay someone else money–-it can be a little deceptive. Everything comes with a cost, and paying that cost doesn’t mean you’re failing to fulfill your fiduciary duty to the community.

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In reality, the choice to impose high assessments and force homeowners to take out personal or home equity loans to support those special assessments can be considered a breach of fiduciary duty.

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The Power of the HOA

With an HOA loan, the community has buying power due to the size of the loan. The community can negotiate a lower interest rate and a better payment schedule than each homeowner can negotiate individually. The HOA is a business, not an individual, so there is no impact on the HOA’s credit score or loss of home equity when the HOA carries the loan. Also, it’s just easier for a homeowner to add a little more to their monthly payment each month than to try to come up with a big lump sum.

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Asking homeowners to personally take on unfavorable loans to prevent the association from going into debt places an undue burden on them. Except in situations where an emergency is unfolding, boards must not place a financial burden on homeowners just to avoid that burden falling to the community. And when you consider the way loans are structured and how much more cost-effective HOA loans are (lower interest rates, longer payback plans), and the fact that they do not affect credit reporting or equity, choosing the more volatile of the two options calls the board’s decision-making into question.

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Fiduciary duty is critical, but so is the expectation that boards operate with the community’s best interests in mind, and that includes individual success and financial safety.

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Everything Comes with a Price

When it comes down to making the decision of which entity should borrow–the association or the homeowners directly–loan interest cannot be the only consideration on the table, but too often that is the case. When looking at the necessity of an HOA loan, your community’s holistic financial burden is only one aspect of the decision you should be making.

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If your community is considering an HOA loan, but balking at the idea of paying interest rates, contact us today. We would love the opportunity to put your mind at ease and explain why an HOA loan could be the answer you’re looking for.

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