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Should Your Association Consider HOA Loans?

One of the core responsibilities of any homeowners association (HOA) is to provide sound financial management. That way, when an emergency maintenance need or other sudden expense comes up, there is enough money on hand to handle it, without the need to open up a line of credit or take out a loan.

Even in the most fiscally responsible associations, however, major and unexpected expenses can arise that go above and beyond any capital reserves. In these situations, taking out an HOA loan may be the only real way forward.

But what are HOA loans, exactly? How do they work? And what are the pros and cons of this loan type? In this post, we’ll provide insight into all things related to HOA loans.

What Are HOA Loans?

First things first: When we talk about an HOA loan, what precisely are we talking about?

As we mentioned before, fiscal stewardship is a key function of any HOA. There should always be an operating budget sufficient for handling day-to-day expenses, plus a capital reserve fund that can be tapped for unexpected expenses, urgent common area improvements, etc. And, the HOA can also collect a special assessment, raising some additional funding to cover big projects that come up. (Naturally, the association leadership will want to think carefully before leveraging additional dues or fees among HOA members.)

For projects that are simply too big and too expensive, exceeding anything in the reserve fund, associations may need to consider taking out an HOA loan. Basically, taking out an HOA loan means that the bank furnishes the community association with the money it needs to finish its current project, or to complete a project in the future.

Naturally, any time you take out a loan, you have to repay the full amount sooner or later. That’s true of personal loans, and it’s true of your HOA loan, as well. Not only does the HOA have to repay their debt within a certain time frame, but they must also pay interest. Because of this, using a line of credit, in the form of an HOA loan, actually makes the project more expensive than it would be otherwise.

What Are the Alternatives to HOA Loans?

If your HOA needs money for a significant project, then you may feel like you have no choice but to take out an HOA loan.

This isn’t necessarily the case. As we mentioned above, you can avoid opening a line of credit by instead taking up a special assessment. This means asking HOA members to pay a one-time fee, all of which is used to offset the cost of the capital project.

Sometimes, this may be the most financially responsible way forward, especially if you are really wary about having to pay interest on your HOA loan over an extended period of time. With that said, many homeowners will balk at the notion of an assessment, so it will require some real communications finesse to get buy-in. The other thing to keep in mind is that special assessments may not be sufficient for raising the kind of capital you require. It all depends on the nature and the scope of the project.

Considering the Pros and Cons of HOA Loans

As you think about getting a line of credit in the form of an HOA loan, it’s important to weigh the pros and cons. Here are a few specific considerations to bear in mind before you take out an HOA loan.

The Pros of HOA Loans

  1. Quick funding. Taking out a line of credit can happen pretty quickly, meaning you can get the funds you urgently need to fix your common areas, replace the roof on your clubhouse, or whatever else. When it comes to expedience, an HOA loan is tough to beat.
  2. Leave money in the reserve fund. It’s also worth noting that, while it’s nice to have a reserve fund for a rainy day, your association board may not want to deplete the whole thing. You can use HOA loans to augment this funding, leaving some of your financial reserve in place.
  3. Better for homeowners. An HOA loan is typically going to be easier to swallow for homeowners. Even if it means you have to increase dues by a small amount, that is still easier to manage than a one-time assessment. And if you take out a loan that lasts for 15 years but one family only stays in the HOA for seven, then that’s all they have to pay for; the next family that moves in will help pay off the remaining eight years of the HOA loan.
  4. More flexibility for your Board. Finally, note that HOA loans can offer your HOA leadership a lot of flexibility. Not only can you use this line of credit to help with emergency expenses, but you can also use it to pay off insurance premiums, acquire more land, etc. In short, an HOA loan may help your HOA to be more effective.

The Cons of HOA Loans

  1. You can take out loans for the wrong reasons. Using a loan to tackle unexpected infrastructure needs is one thing. Using them to account for a deficit in your HOA dues is something else; this is really just a Band-Aid, ignoring the core issue.
  2. Delinquent homeowners can be a problem. Every HOA has to deal with delinquent homeowners sooner or later… and when that happens, it can make it harder for you to pay off your loan on time.
  3. Managing a loan takes some work. Steps like assessing your credit and beginning the loan application will take some manpower. You may want to have someone with capital planning experience help with this.
  4. Getting a loan means paying interest. Finally, and as we mentioned above, getting a loan requires you to pay interest over time… which ultimately makes it slightly more expensive to complete your construction project, pay your insurance premiums, or whatever else.

When it comes to taking out an HOA loan, there are no easy answers. It’s important for your HOA leadership to consider all the implications of the loan process, and to make a decision that demonstrates real fiscal responsibility on behalf of your entire HOA.

For Capital Planning Experience, Consider Kuester Management Group

Questions about whether you should get a loan on behalf of your HOA? Curious about other options that won’t come with the same credit risk? Make sure you seek the expertise of an experienced HOA management company. At Kuester Management Group, we would love to advise you on the pros and cons of getting a loan. To speak with an experienced association manager, contact us today. We would love to tell you more about HOA management in Charlotte, NC or HOA management in Myrtle Beach.

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Bryan Kuester

Bryan Kuester

Bryan is the CEO of Kuester Management Group. He has over 15 years of managing community associations throughout North and South Carolina.

His specialties include Community Association Management - maintenance, budgeting for operational and reserve funding, long-range planning, covenant enforcement, amenity management, onsite management, large scale management.