An HOA in debt can cause stress for both the board and homeowners. Debt can result from many things, including poor planning, unpaid bills, or unexpected expenses that exceed the budget. When this happens, the community’s financial stability and reputation are at risk.
Common Reasons for an HOA in Debt
In many ways, condos and homeowners associations work like corporations, dealing with revenue and expenses. When costs pile up while revenue lags, associations can accumulate debt.
Debt doesn’t just happen overnight. It often builds up over a long period, stemming from several common issues. Here are the typical causes of HOA bad debt.
1. Delinquent Dues
When homeowners stop paying their dues, the association’s operating income decreases. Without consistent dues collection, the association will soon struggle to pay bills, fund maintenance, or build reserves.
2. Unexpected Expenses
A sudden roof repair, pipe burst, or structural issue can quickly drain available funds. If the HOA doesn’t have enough in its reserves, it will often have to turn to loans. Another option is to defer maintenance, which can equally worsen debt.
3. Underfunded Reserves
Many communities fail to conduct regular reserve studies, while others don’t follow the recommended contribution plan. Without sufficient reserves, board members will be forced to borrow money or impose special assessments when large projects arise.
4. Poor Financial Management
Inaccurate bookkeeping, lack of audits, or inexperienced board members can all lead to bad financial decisions. The best way to prevent this is to hire a qualified management company or accountant.
5. Legal Costs and Disputes
Legal battles with contractors, homeowners, or developers can quickly become expensive and time-consuming. With attorney’s fees and settlements to consider, an association’s accounts will undoubtedly be depleted, resulting in debt.
The Effects of an HOA in Debt
When an association goes into debt, several consequences can follow. First and foremost, the HOA would have no way of paying vendors or contractors. They will begin to complain about late payments, which will affect the association’s reputation in the industry as a bad payer.
Without sufficient funds, board members will be forced to tap the community’s reserves to cover operating costs. This will deplete its reserve fund, causing problems later on when major repairs or replacements become due.
Furthermore, the HOA board would need to delay or cancel projects due to a lack of funding. Maintenance will be deferred, worsening the condition of the community’s amenities and common spaces.
Debt can also have a significant financial impact on the association and its members. The board will have to increase dues often or by a large sum. Another option is to levy significant special assessments. None of these moves will satisfy homeowners.
What to Do When the HOA is in Debt
Debt can cause significant disruptions to an association’s operations. Not only will it affect the community’s well-being and reputation, but it will also harm homeowners. Property values can quickly plummet, especially since it can take a long time for an HOA to recover.
Fortunately, there are steps board members can take to resolve debt. With an HOA in debt, here are the options community leaders have.
1. Review Financial Statements
The first thing board members should do is review its financial statements. Check the association’s income, expenses, and all outstanding obligations. This will help the board understand the full scope of the debt and determine the next steps.
2. Meet With the Treasurer or Accountant
Next, board members should speak to the treasurer or consult an accountant. A professional can help verify the numbers, explain any discrepancies, and identify cash flow issues.
If the HOA doesn’t have an accountant, it’s best to hire one. An HOA management company typically has accountants or financial specialists on retainer who can help communities dig themselves out of bad debt.
3. Pause Non-Essential Spending
With an HOA in debt, this is the best time to halt non-urgent spending. Postpone unnecessary projects such as cosmetic landscaping or upgrades, at least until the association regains its financial footing. The wise thing to do right now is to focus on safety, maintenance, and essential needs first.
4. Communicate With Homeowners
Transparency is key. Homeowners have a right to know the association’s financial situation and the board’s plans. Make sure board members practice open communication to help build trust and support for the community’s recovery plan.
5. Implement a Payment Plan for Delinquents
Most of the time, debt stems from a high delinquency rate. To minimize delinquent accounts, the board should offer realistic payment plans to owners with overdue balances. This can help the community recover funds without pushing homeowners toward foreclosure.
6. Increase Dues or Levy a Special Assessment
Sometimes, if the debt is severe, the board would have no other choice but to raise dues or impose a special assessment. Board members should explain the rationale for this decision, so homeowners understand where their money is going. This helps rally their support and minimizes disputes.
Of course, the board must follow the procedures outlined in their governing documents. State law will also come into play here. In Texas, there is no limit on how much an HOA can raise dues, but Section 209.0051 requires any discussions or votes on such increases to take place at open meetings.
7. Refinance or Take Out a Loan
Some associations take out loans to pay existing debts or fund capital projects. Boards might favor loans because they allow the community to access funding urgently, but loans also come with downsides. For one thing, loans must be repaid with interest, which might cripple the association further in the long run.
Board members must carefully consider loans as an option. It is best to seek input from financial advisors before making any rash decisions.
8. Improve Collections Process
Sometimes, the problem lies in the association’s collections process. If board members fail to consistently and effectively collect dues or assessments, they are likely to fall into debt.
To counteract this, boards should establish a clear collections policy with firm timelines, late fees, and lien procedures. Strong enforcement of this policy also helps maintain consistency and fairness.
9. Hire a Professional HOA Management Company
An experienced management company can help improve budgeting, collections, and vendor relations. Additionally, their expertise can prevent future missteps that lead to debt.
10. Conduct a Reserve Study Update
A reserve study is an essential tool in financial planning. Updating it will help ensure that the association can plan accurately for future repairs and replacements. This will allow the HOA to avoid relying on emergency loans or special assessments.
How to Prevent Future HOA Debt
As the saying goes, prevention is always better than a cure, and it applies to debt as well. Instead of worrying about resolving debt later on, board members should focus on preventing it. Here are the ways associations can do that.
- Prepare realistic annual budgets that include emergency contingencies.
- Fund reserves regularly according to the reserve study.
- Review contracts and expenses each year for savings opportunities.
- Encourage timely payment by offering online payment options and reminders.
- Schedule annual financial audits to maintain transparency.
A Learning Curve
An HOA in debt doesn’t mean the end of a community’s stability. With careful planning, transparency, and professional guidance, any association can regain its financial health. The important thing is to learn from past mistakes and enforce stronger practices in the future.
Preferred Association Management Company offers exceptional HOA financial services to communities in Central Texas. Call us today at 512-918-8100 or contact us online to learn more!
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