HOA taking out a loan

The HOA is better off making a "special assessment" to pay for a project. The HOA is ONLY funded by it's members by it's members. So if they take out a loan the dues most likely have to raise to compensate for the new loan payment. Which maybe will require a special assessment or a special dues increase. All of this process should be in your documentation on how to do it.

Loans aren't willy nilly given out to HOA's either. Your HOA has to have some kind of "credit history". Badly managed HOA isn't necessarily going to cut the mustard in being granted a loan. The bank may only loan so much as the HOA has to prove it can pay it's bill's. Have any of the board members even approached the banks to address this issue?

The effect isn't on the "selling" of the homes. The effect is that refinancing will go up and less loan options available. Meaning that FHA, Fannie, and Freddie will go bye-bye as a mortgage option for many. They have a PUD/HUD form with 25 questions that are asked whenever making a loan about the health of the HOA the HOA fills out. They see certain red flags they may raise interest or drop offering their loan programs. Which means less of a resource to purchase homes. Potential buyers have to find another loan program instead to purchase.

So may want to point out a few of these things to the HOA before they make the final decision. Always bring your documents to each and every meeting and reference them. It will educate everyone.

It is not blatant information. They assume 100% dues compliance and then deduct for things like the real collection rate. Like how many are paying on a regular basis? How many liens or foreclosurs? That indicates the real collections. Plus they factor in existing lawsuits. Whatever the debt load of the HOA Which is non collection.

Sorry if I am thick here, but as far as I can see, the only debt load they look for is the non-collection, and not the liability of an outstanding loan. Is that correct?

Oh, and as far as the bank review, your question on what the bank looks for is precisely one of the many questions you and your colleagues need to ask.

As a practical matter, I would think the bank will look at both - they want to see how well the association meets its current obligations and collect delinquencies, because if they approve the loan, they want to be confident the loan payments will be made in full and on time.

If you're convinced this is a bad idea, why not offer to do the legwork in the loan. You can work with o e of your colleagues who seems to be hung up on getting the loan so there's no question of bias. That may even prompt the pro loan board member to change his/her tune.

I agree. I think the homeowners will vote it down, but it's hard to tell.

The real problem is that this project is being touted as a cheap way to deal with a more expensive underlying problem. Of course in reality, it is not cheaper -- it just delays some costs, which will result in a more expensive project overall.

I hope our owners are savvy enough to see that, but most of them don't care. And they are largely ignorant of what's going on at the Board level, particularly which members advocate for loose spending vs responsible long-term spending. It's fun to fantasize about them booting off certain board members for certain actions, but I don't think they care enough to do that.

I may have to stand by and hope the owners see this for what it is and burn it down in the vote.

In one HOA (700 homes) it took a concentrated effort of about 20 of us to get some people off the BOD. We went door to door collecting proxies, we set up information tables on street corners/at the pool, we held street get togethers, we retained a lawyer (an owner who did it on the cheap for us), etc.

It took us two election cycles to bring about major change. The first go around we put 2 on the BOD of 7. Enough to assure the Pres did not get re-elected as Pres. He still had some allies on the BOD so votes were close. The next Annual Meeting we got 2 more on the BOD both replacing people that went along with the old Pres. The old Pres did get re-elected to the BOD but our faction then had control of 5 to 2 on most issues so he was powerless. He stayed on one more year then resigned.

It was a lot of work to pull of what we did. Bytching on an Internet chat does not make it happen.

Funny story. The Pres and his wife separated. She stayed living in the house. They both showed up at an Annual Meeting, both claiming the right to vote as they were both on the deed. They were told to take their issue outside and decided which one get the vote. They both left. Neither voted.

DW

Typically, a loan will be paid back by a Special Assessment not via a dues increase. Also typically owners must approve any Special Assessments. What do your docs say?

In one HOA I belonged to a multi million dollar loan was arranged and would be paid back via a 5 year Special Assessment. The BOD did a great job in presenting the needs for the loan. It required 75% of the owners to approve and about 90% said yes. A few disgruntled owners got together and sued the association. The judge said the HOA did it properly and the suit was quickly dismissed.

I have poured through the docs and there is no language about loans to the HOA.

Their plan is to repay the loan with a SA, payable next year. The complex will probably qualify for a loan. We do have less than 50% owner occupied, a reserve that's only at about 25% of the budget and a recent history of large special assessments, plus another one next year. But all accounts are current and there are no foreclosures or liens.

The SA only needs 51% of owners to approve. So not a high bar.

DW,

Question #1 - Does an HOA loan affect the ability of homeowners to sell their units?

Technically, the answer is that any "negative" financial information can negatively affect a sale IF a broker or banker would think to ask about HOA debt. Practically, I can't recall being pushed to discuss HOA debt w a buyer's bank. I've been asked (as president) about special assessments, which triggered my disclosing of the HOA loan.

A loan IS a special assessment on the HOA operational budget. It needs repayment and, without raising dues immediately, will be paid from operating cash flow or be paid using cash that, otherwise, would be deposited in Reserve Funds. That loan will siphon cash flow away from your organization, crimp savings and hurt dues payers, especially if there's time to build cash reserves using the budgeting process.

Above all, a new HOA board that pushes to obtain a loan is functionally incompetent and this reflects a lack of experience. The "pain" of an HOA loan comes when the HOA budget is paying the monthly payment (which can hurt Reserve deposits) and then another calamity strikes the HOA, creating the need for either a deeper debt load or special assessment to cover the new expense.

Inexperienced HOA boards demand progress and action immediately when 95% of the time, expediency isn't the greatest need and there's a fundamental misunderstanding of a community's ability to cover large expenses.

What is the "foolish" project?

When prospective buyers apply for a mortgage under the circumstances you describe, I think that what you describe is a distinction without a difference.