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Does Recession Affect The HOA? How And What To Do?

One of the last things any homeowners association needs is a recession. But in what way can a recession affect the HOA? And what can HOA boards do about it?


How Does a Recession Affect the HOA?

A recession is a temporary economic decline marked by a fall in GDP for two consecutive quarters. While it does not always happen, it is still a real possibility. And according to historical data, recessions typically last an average of 10 to 17 months. For homeowners associations, that can translate to many months of financial hardship.

Homeowners associations are not invulnerable to economic dips. But how exactly does a recession affect the HOA?


An Increase in Delinquencies

DelinquenciesFirst of all, recessions usually see an increase in unpaid fees for HOA communities. Homeowners fund homeowners associations through the payment of regular dues. But, during a recession, there is high unemployment and lower economic output.

Many homeowners could suffer pay cuts or even lose their jobs altogether, resulting in a diminished or no steady income. And HOA dues tend to drop from owners’ priority lists when they are too busy saving money for food, heat, and mortgage payments.


An Increase in Vendor Fees

During a recession, raw materials and labor costs typically go up, and inflation is also a contributing factor. Vendors end up charging more for their products and services when this happens. And homeowners associations are forced to either adjust or slash their budgets.


Budget Deficits More Likely

When you combine the first two effects of a recession, HOAs will more likely face budget deficits. Because not enough homeowners pay their dues, the association can’t reach its target funding. And rising vendor fees can throw everything off course, too.

A budget deficit is unfavorable because the HOA can’t pay for all its necessary expenses, such as cleaning, maintenance, and insurance. When these expenses fall behind, the community suffers. For instance, the neighborhood will deteriorate more easily without cleaning and maintenance. All of this will ultimately cause trouble for the HOA.


How to Recession-Proof Your HOA

Homeowners associations can suffer several pitfalls during a recession. As such, it is important to prepare for a recession. The most obvious solution is to increase dues while owners can still pay them. But, if the HOA cannot increase dues easily, boards should take the following steps.


1. Review the Finances

review hoa financesThe first thing any association should do is review its finances. This will allow the board to understand the financial health of the community. Check the association’s bank accounts, reserve funds, and upcoming expenses. Evaluate which expenses or forthcoming projects are essential and which ones are not. Non-urgent costs might need to take a back seat while the economy — and the homeowners — recover.


2. Make Necessary Cuts

Once you have a picture of the association’s finances, you can decide which expenses to cut. Expenses that usually get the boot are those that are expendable or luxury costs, and social events are a good example.

It is also worth looking for cheaper alternatives or vendors for essential costs. If not, consider negotiating a lower price or cutting back on some of the services you get. Hold off on getting that new gym equipment or having a new pool installed.


3. Consider Outside Funding

If your HOA is having difficulty meeting its target budget with just homeowner dues, consider seeking outside funding, such as a bank loan. When taking out a loan, please make sure to find one with low interest. Many banks have programs that specifically cater to homeowners associations. A loan will help your association supplement its budget, protect the reserves, and pay for emergency repairs (if needed).


4. Offer Help

Aside from ensuring the financial health of the HOA, boards should also try to assist struggling homeowners. Due to job loss and a higher cost of living during a recession, many homeowners might need more funds to pay for everything, including HOA dues. Your HOA board might consider offering payment plans to ease their troubles.

Additionally, some organizations offer relief in times of difficulty. Make sure to research local organizations to see what resources are available in your community. Sometimes, the government also steps in to help, which happened during the COVID-19 pandemic when owners struggledwhat happened during the COVID-19 pandemic when owners were struggling to keep up with mortgage and HOA payments. Once you have all the information, spread the word. This way, homeowners know what options are available to them.

If the recession didn’t affect your community as much, consider extending a helping hand to other communities. You can organize a fundraiser or make donations, and this is an excellent way to give back and build camaraderie with other communities.


5. Seek Help

If your HOA board needs to be equipped to handle the effects of a recession, ask for help. Feel free to reach out to your HOA management company. Your HOA manager can help you devise a plan for the recession, cut unnecessary expenses, and even negotiate with vendors.


The Importance of Communication During a Recession

Recessions can be scary, not just for homeowners associations but for all residents. People are facing pay cuts, reduced work hours, and a higher cost of living. Many homeowners feel stressed during this time because they are still determining if they will still have a job the next day. And so an HOA that constantly knocks on their doors, asking for payment, can send them over the edge.

This is why communication matters. Make sure homeowners can reach the HOA board and the manager if they need help. Board members should also actively communicate with homeowners. Explain to them that the recession can affect the association, too, and that it will take everyone’s cooperation and understanding to keep the community afloat. Tell them of any expenses you had to cut back on, including any projects that have been delayed as a result.

Compassion is essential, but that doesn’t mean the association should completely do away with collections. Dues still play a vital role in the financial health of the community. Instead of eliminating rights, consider offering payment plans or early bird discounts.


Can a Recession Affect the HOA? Answered!

A recession can have long-lasting impacts on any homeowners association. Now that you know how to prepare for it, make sure to start your preparations early. Acting too late, when a recession is already in full force, may not yield desirable results.

Condo Manager offers advanced software solutions to HOAs and management companies. Call us today at (800) 626-1267 or contact us online for a free demo!



HOA Audit: What Can It Say About Your HOA’s Financial Health?

An HOA audit is an instrument that can help you measure the financial health of your association. Unfortunately, not all associations take audits seriously — and therein lies the problem.


What Is the Purpose of an HOA Audit?

A homeowners association audit is a comprehensive inspection of an HOA’s financial accounts and reports conducted by a third-party professional. The goal of an audit is to objectively evaluate the association’s finances and assess its financial health. An audit is necessary because it provides assurance that an HOA’s financial statements and reports are complete and accurate.

When an HOA skips an audit, it runs the risk of financial mismanagement. Everything is connected to the audit — from budgeting and spending to accounting and fraud prevention. An audit can also identify minor issues before they worsen. Thus, it is important to include it in your HOA annual checklist.


HOA Audits vs Financial Review: What’s the Difference?

hoa annual auditWhile they may sound like they offer the same things, a financial review and an audit are two different things. A financial review examines the financial records of an association and provides a report that the board can use to make short-term financial decisions.

In comparison, an audit is an extensive inspection of the association’s finances. It involves an in-depth analysis of the financial records, reports, and statements of the HOA, making sure to verify them for accuracy and completeness.

Instead of just examining documents at the surface level, a Certified Public Accountant (CPA) will contact creditors and debtors to confirm the association’s payables and receivables. The CPA will also compare the association’s financial reports with all of its records, including invoices, ledgers, and receipts.

Audits are comprehensive, so associations should prepare the following records and documents for the CPA to review:

  • Financial reports and statements (including the balance sheet, the income statement, the general ledger, etc.)
  • Operating budgets
  • Invoices and bills
  • Receipts
  • Bank statements and records
  • Reserves and reserve schedule
  • Contracts
  • Investments
  • Minutes of board meetings
  • Engineering studies
  • Insurance policies
  • 1099s

Due to the nature of audits, they are understandably more expensive than a financial review. However, compiling and organizing your documents ahead of the audit itself can minimize costs. Additionally, it is a good idea that board members make themselves available when an audit is taking place. This is so any questions or concerns that the CPA has can be addressed immediately.


HOA Audit Requirements

Do all homeowners associations require audits? How often should an HOA be audited? These are some of the most common questions people ask when it comes to HOA audits. The answer, though, is not so universal.

Some states have laws that require HOAs and condominiums to perform audits. Others only require a financial review. For instance, California Civil Code § 5305 stipulates that an association shall prepare a review of the financial statements according to the Generally Accepted Accounting Principles (GAAP) for any fiscal year where the HOA’s gross income is over $75,000. The law also states that a licensee of the California Board of Accountancy must conduct it.

Apart from state law, HOA boards should also refer to their governing documents. The bylaws or CC&Rs will likely contain the audit requirements that the HOA must follow. This includes what kind of examination is necessary (financial review or audit) and the frequency of the examination.

Even if no such requirement exists for your association, it is best to have an audit performed at least once every year. An HOA annual audit can ensure the health and accuracy of your finances.


Should You Get an HOA Financial Audit?

When the law or your governing documents don’t require an audit, it is easy to just dismiss it. But, there are plenty of other reasons to do an audit.


1. Keep Large Assets in Check

Whether you have a large HOA or a small one, an audit can help you keep your finances in order. But, given the cost of an audit, smaller associations may not be able to justify the expense every year. In that case, a small community with fewer assets may only need to perform an audit every few years, opting for a financial review annually instead.

On the other hand, larger communities typically have more assets to manage. More assets mean more room for accounting errors. Thus, for such associations, an annual audit is likely the wiser decision.


2. Promote Transparency

Whether it’s in a corporate setting or an HOA setting, transparency is absolutely essential. After all, homeowners have a right to know where their fees are going. Audits can help promote transparency in the association. It assures homeowners that the HOA is spending money wisely and that there are no discrepancies in its financial operations. Additionally, in many cases, homeowners can call for an audit to take place.


3. Facilitate a Smooth Transition

If an HOA is switching from one management company to another, an audit can help with the transition. New management can get a feel of the association’s current financial standing as well as how the previous company did things. The results of the audit can also inform the plans and decisions of the new company in charge.


How Much Does an HOA Audit Cost?

hoa annual checklistOn average, audits can cost anywhere between $4,000 to $6,000. Given the complexity of a financial audit, though, such a price is understandable. Audits are time-consuming and labor-intensive, but their results are well worth the investment.

Alternatively, for associations that only need to conduct financial reviews, the cost expectation is lower. On average, a financial review can cost somewhere between $1,500 to $2,000.

Financial audits and reviews don’t come cheap, but they are often necessary. As such, associations should budget for them early in the year to make sure it has the means to meet the requirement.


Beneficial for All Parties Involved

Clearly, an HOA audit poses several benefits not only for the association itself but also for the members living in the community. With an audit, members are made aware of the association’s financial health. This not only gives them assurance but also ensures transparency, thereby strengthening the trust between the homeowners and the board. On the side of management, an audit will help board members make well-informed and smarter financial decisions.

To make sure you have a smooth audit process, you need to prepare all of your records and documents ahead of time. Keep them all in one place with the help of Condo Manager. Call us today at (800) 626-1267 or get in touch with us online for more information.



What Are HOA Reserve Funds? When Are They Used?

In a lot of ways, homeowners associations are just like corporations. They operate with a budget, are headed by a set of board members, and manage a reserve fund. But, what are HOA reserve funds anyway?


What Are HOA Reserve Funds?

Simply put, a reserve fund is a savings account. It contains funds that the homeowners association will use to pay for the cost of future repairs and replacements. Homeowners association reserve funds differ from operating funds in terms of use. While both are funded by the homeowners, the operating fund covers the association’s regular expenses, whereas the reserve fund covers major repairs and replacements.

For homeowners associations, having a reserve fund is essential. Without a reserve fund, an HOA would have no way of paying for expensive repairs and replacements in the future. Every asset and structure has a useful life. Once that reaches the end of its useful life, it needs to be replaced or repaired. Otherwise, it could pose a threat to the safety of residents.

In some scenarios, an HOA will turn to the homeowners for immediate funding. If, for example, a particular building needs urgent foundational repairs, the association will resort to levying hefty special assessments to cover the cost. Neither scenario is ideal, as they can put homeowners in a financial bind or place them in imminent danger. With a properly funded reserve account, HOAs can avoid all of this.


What Can HOA Reserve Funds Be Used For?

In general, reserve funds are used to cover the cost of major repairs and replacements in the future. The exact specifics of this will depend on the bylaws or CC&Rs of the community. Some associations allow the board to use the reserves to pay for unexpected costs, i.e. those that do not occur on a regular basis. Others use it exclusively for any assets that require large repairs or replacements. And then there are also associations that set aside reserves to pay for construction projects.


Determining Adequate Reserve Funding for HOA

homeowners association reserve fundsWhen talking about an HOA’s reserves, one question that always seems to pop up is exactly how much to put in the fund.

But, reserve fund accounting for HOA communities is not as easy as simply offering a dollar amount. Homeowners associations have different needs, and even the type of association can influence the possible repairs and replacements it will require in the future. For example, a condo community may need to replace or repair its elevators in the future, but not all single-family communities have elevators.

To know the adequate level of funding for your reserves, it is important to hire a professional to conduct a reserve study. A reserve study will determine the estimated remaining useful life of each asset in your HOA and how much it will cost to repair/replace them. This will give the HOA board an idea of how much the HOA will need to save and how long it has to do so.

Now, a lot of things can change after the completion of a reserve study. This is why it is a good idea to update the study once every few years. Some states even require associations to perform reserve studies, such as California, Virginia, and Colorado. And then there are also a few states that require HOAs to maintain a reserve fund but don’t require reserve studies. Massachusetts and Minnesota are two that come to mind.

Ideally, every homeowners association should have a fully funded reserve account. That means the HOA can cover 100% of the cost of future repairs and replacements. Unfortunately, this is not the reality for most associations. A good rule of thumb, though, is to reach at least 70% of the association’s requiring reserve funding.


Who Pays for the HOA Reserve Fund?

The money used to maintain an association’s reserve fund comes from the homeowners themselves. Reserve contributions are included in the calculations for the upcoming year’s dues. While the HOA board is in charge of this responsibility, board members are not exempt from the contributions. Both board members and regular homeowners have to pay their dues and contribute to the reserves equally.


Borrowing HOA Reserves: Is It Legal?

Generally, an HOA board should not spend the reserve fund for anything other than its intended purpose. But, there are times when an association will find itself in dire need of money to pay for operating expenses. In this case, the board may be able to make an exemption based on state laws and the governing documents.

For instance, California Civil Code Section 5515(a) allows HOA boards to authorize the temporary transfer of funds from the reserve account to the operating account without membership approval. This is only done, though, to meet short-term cash flow needs. However, the board must include notice of intent to transfer funds in a notice of the board meeting. The board must also restore any borrowed funds from the reserve account within one (1) year.


Investing Your HOA Reserve Funds

hoa reservesBecause the money in an HOA’s reserve account tends to sit untouched for long periods of time, many boards consider the possibility of investing the funds. The board generally has the authority to do this, though it is still worth checking state laws and the association’s governing documents.

When considering potential investments, an HOA should go for a plan that offers no risk at all. Keep in mind that the money in the reserves does not belong to the board. As such, it is important to be prudent with the money.

In addition to risk, boards should also take liquidity into account. An HOA should be able to withdraw money from its reserves at a moment’s notice. Thus, it is best not to go for investments that have a lock-in period. The only downside to a risk-free investment plan is that it does not offer high yields. Sometimes, though, a savings account is enough to keep the money safe, at the ready, and still earning interest.


The Need for Professional Help

It is essential for homeowners and condo associations to maintain HOA reserve funds. But, you can’t truly know how much you need in the account if you don’t perform a reserve study. Reserve studies can’t be done by the board alone. They require the assistance of certified professionals, such as accountants and engineers. It also helps to have good HOA management software to keep track of your reserve study and level of funding.

Condo Manager is an all-around HOA management software that both homeowners associations and HOA management companies use. Call us today at (800) 626-1267 or contact us online for a free demo.



How To Read HOA Financial Statements And Understand Them

Every member of a managed community should know how to read HOA financial statements. This knowledge will help owners understand how the association is doing financially and be able to determine whether the board is doing its job well.


HOA Finance 101: How to Read HOA Financial Statements

Homeowners associations operate largely like corporations. There is a Board of Directors that calls the shots and ensures that the organization is running smoothly. The HOA board is also responsible for preparing regular financial statements, though this job can also fall on the HOA manager.

Typically, financial statements come at the end of every month and at the end of the fiscal year. In many states, such as California, the law requires homeowners associations to make these statements available for members to review. Homebuyers can also have access to such reports, as assessing the financial health of the association will help them make a decision on whether or not to buy into the community.


What Are the Benefits of Knowing How to Interpret Financial Reports?

It is important for both board members and homeowners to learn how to read HOA financial statements. For one thing, it is part of the board’s job to do so. Knowing how to interpret financial statements will help the board prepare an accurate annual budget. It will also inform the board’s discussions when it comes to the association’s finances, allowing them to make sound financial decisions.

For homeowners, understanding HOA financial statements will let them stay on top of the association’s financial condition. Homeowners benefit from the community’s financial success, as it has a direct impact on property values. As such, it only makes sense to keep track of its finances. Homeowners also have a right to know where their money is going. After all, owners pay regular dues for the purpose of maintaining the community.

Beyond all else, knowing how to read financial statements will help both boards and owners in preventing fraud. If only one person understands these reports, then it would be easy for that person to cook the books and steal money from the HOA. Learning how to read financial statements will allow owners to spot any signs of fraudulent activity.


A Guide on How to Understand HOA Financial Statements

Unfortunately, not everyone in an HOA community knows what the numbers mean in financial reports. But, once one knows about the basics, it is actually relatively easy to learn how to read HOA financial statements.


Balance Sheet

understanding hoa financial statementsThe balance sheet shows a snapshot of the association’s financial condition. It presents the HOA’s assets, liabilities, and equity — all in one neat report. It is called a balance sheet because the association’s total assets should equal its total liabilities and equity.

Through the use of financial strength ratios (such as working capital and debt-to-equity), an owner can determine whether the HOA can meet its obligations. These ratios, along with several others, give owners an idea of the association’s financial stability. While the balance sheet is an integral part of any HOA’s financial package, it usually requires the accompaniment of other reports to fully understand the association’s financial health.


Income Statement

The income statement is a detailed view of the association’s income compared against its expenses. It essentially shows whether or not the HOA was able to meet its financial obligations with the funds it has accumulated over a set period of time. The income statement consists of the HOA’s revenues, expenses, and reserve contributions. Totaling all of these numbers will arrive at a net profit or loss for the association.

Though it is not an HOA’s main goal to earn a profit, a net loss would indicate that the community had more expenses than revenue streams in the past period. This means the board either did not practice smart spending or failed to prepare an accurate projected budget. Sometimes, it could point to an underlying financial issue such as fraud or embezzlement.

Owners should look for overly inflated expenses or redundancies to spot fraudulent activity. For instance, it would not make sense to spend five figures on office supplies. Members should remember that it is okay to question the board’s spending and that such a practice is healthy and helps keep the board in check.


Cash Flow Statement

The cash flow statement consists of three parts: operating activities, investing activities, and financing activities. Analyzing the cash flow statement will allow boards and owners to understand how the association is handling its money.

Under operating activities, owners will find the association’s cash sourced and spent on business-related items. This could mean dues from owners, fines, salaries, and other operating expenses. Under investing activities, owners will find items that are considered investments, such as assets or equipment. Any reserves invested should also be presented here. Finally, under financing activities, owners will find cash sourced from investors such as banks.


Accounts Receivable Report

how to understand HOA financial statementsThe accounts receivable report tells boards and owners how much is owed to the association. It is a summary of all the money the association expects to receive. It could include dues from homeowners, rental income from a facility, etc. This could also come in the form of an aging report, which shows how long each account has remained unpaid.

The HOA should maintain a fairly reasonable AR report. It should not have too many receivables, especially overdue receivables, as that would mean the board is not putting a lot of time into collection efforts.


Accounts Payable Report

The accounts payable is similar to the accounts receivable report but in reverse. Instead of showing amounts owed to the HOA, this report shows the amounts the HOA owes. As with the AR report, it may also show how long each account has remained unpaid. Too many payables would indicate that the association is not paying its debts on time or that there is not enough money to settle the balances.


A Form of Protection

Boards and homeowners alike must learn how to read HOA financial statements. In doing so, they can interpret the reports accurately and make smarter financial decisions. It is also a way to protect the association from fraudulent acts. When it comes down to it, understanding financial statements should not be a job left only to one person.

Homeowners associations can significantly make financial statement preparation easier with the help of HOA software. Call Condo Manager today at (800) 626-1267 to learn more or contact us online for a free demo.



The Importance Of An Updated And Accurate HOA Balance Sheet

The HOA balance sheet is an important financial tool in any given homeowners or condo association. Making sure you prepare this report accurately is essential to the financial health of your community.


What Is an HOA Balance Sheet?

The balance sheet is one of several financial statements or reports that organizations use to assess their fiscal condition. Homeowners associations are no exception. The HOA balance sheet shows you the assets and liabilities of the association. It is a quick way of getting a picture of your association’s overall financial strength.

The homeowners association balance sheet consists of three parts and follows a simple formula:

Assets = Liabilities + Equity

An association’s assets are anything that has monetary value. This includes cash accounts, reserve funds, accounts receivable, prepaid insurance, long-term investments, and land. An association’s liabilities are the amounts your association owes. This includes accounts payable, utilities, prepaid assessments, rental fees, and long-term loans. Finally, an association’s equity is what is left after subtracting your liabilities from your assets.

When your HOA has positive equity, it means your association is in good financial condition and has enough money to cover its debts. On the other hand, negative equity signals that your association isn’t doing so well. It means more money is going out of the association than coming in. Thus, you need to start reevaluating your association’s finances.


The Importance of HOA Balance Sheet Accuracy

Homeowners associations must regularly prepare financial statements, including HOA balance sheets, to assess its finances. Most of the time, HOA boards lack the qualifications or expertise to do this themselves and, thus, require the help of a Certified Public Accountant (CPA) or management company.

Additionally, in some states, it is mandatory for HOAs to prepare such statements and distribute them to their membership. For instance, in California, Civil Code Section 5305 requires that a copy of the financial statement review be distributed to members within 120 days following the end of the fiscal year.

But, the importance of an accurate HOA balance sheet goes beyond the requirements of the state or your governing documents. As previously stated, the balance sheet provides you with a snapshot of your association’s financial health. It allows you to see whether or not the HOA is in stable condition, at least in the sense of its finances. With the balance sheet, you can determine if your association has enough money to pay for its obligations and debts.

Accuracy is key when preparing financial statements. With erroneous numbers, you can’t aptly find out what your financial standing is. This could lead to the misconception that your association has more money or fewer debts than it actually has. Operating under an incorrect notion gives you a false sense of security. You might spend more money than you have, resulting in even greater debts.

While you can generally update your balance sheet any time you like, it is good practice to do so at the end of every month. This allows you to keep a tight leash on your finances and make adjustments when necessary.


The Role of HOA Management Software

Although you can rely on manual accounting processes, the advent of management software has made it infinitely more efficient and convenient to stay on top of your HOA’s finances. Here are just some of the ways HOA software can help with balance sheet preparation.


Quick and Convenient

Far too many associations waste time fumbling with financial reports when they could be focusing on maintaining the community and keeping residents satisfied. HOA software largely automates accounting processes, allowing your board to save time. Relying on software is also more convenient since you don’t have to worry about confusing financial terms and calculations. With software, you can generate an HOA balance sheet with the simple click of a button whenever you like.


Easy Access and Storage

Is your homeowners association running out of room to physically file reports? Space is a big issue for many associations, especially with the countless documents and records you need to maintain. With architectural review forms, violation records, and insurance policies to keep, the addition of financial reports can make it extra hard to find room. Plus, there is also the issue of rifling through years and years’ worth of documents when you’re in search of a particular one.

Not with HOA software, though. Because HOA software uses servers to store data (whether in the cloud or on-site), space is a non-issue. If you ever run out of digital space, you can always purchase an upgrade. That’s not as easy to do with physical space.

Management software also lets you search for records in a more efficient manner. Apart from that, you can also make copies of your data and store backups somewhere else. This not only takes care of access but also security and loss issues.


Accuracy and Security

The numbers on a balance sheet don’t just magically appear out of thin air. You record financial transactions in your general ledger, which you then use as a reference when preparing your HOA balance sheet. During this process, though, you can commit mistakes and end up with an inaccurate report — and you already know how dangerous it can be to work under a financial misconception.

HOA software automatically pulls its numbers from financial records to generate reports, thus, minimizing human errors. Of course, since you will still need to manually input invoices and other financial transactions at times, there is still some room for mistakes. Overall, though, HOA software can prepare more accurate balance sheets. In addition to better accuracy, HOA software also helps prevent fraud since it is harder to fake the numbers.


A Helping Hand

The HOA balance sheet is integral for homeowners associations to evaluate their financial state. Thus, it is essential to have an accurate balance sheet that you regularly update. Unfortunately, this is not always achievable when left in the hands of inexperienced board members. An HOA management software, though, can assist with this and with many others.

If your homeowners or condo association needs reliable and comprehensive software, choose Condo Manager. Give us a call today at 800-626-1267 or contact us online for a free demo.



Frequently Asked Questions On HOA Loans

When faced with unexpected expenses or necessary repairs, not all homeowners have funded reserves or the capacity to levy special assessments. Instead, they will take out a loan. HOA loans require adequate planning and understanding the intricacies of association loans can increase your chances of approval as well as help you get the best rates.


Everything You Need to Know About HOA Loans


What Is an HOA loan?

An HOA loan is when you receive a sum of money from a bank, creditor, or financial institution in exchange for future repayment of the total amount loaned — called the principal — plus interest. The interest, which is a percentage of the loan, is the fee charged by the creditor for being able to use their money.


What Is the Purpose of HOA Loans?

hoa projects and repair | homeowner association loansOne of the most common reasons for taking out a loan is for financing HOA projects or repairs. These could be capital improvement projects that have been long in the making or repairs due to unexpected or emergency situations.

In both cases, the HOA may not have enough funds to pay for the anticipated expenses. HOAs will then take out a loan so that the homeowners won’t have to pay for the entire cost upfront. With a loan, the HOA can spread the total amount over the span of a year or more.


How Do HOA Loans Work?

Compared to personal loans, these loans are issued to the HOA as a non-profit corporation. Thus, creditors do not need to review the finances of individual homeowners.  Since associations do not own any property, loans are collateralized through the HOA’s right to assess.

Banks may require HOAs to itemize loan repayments in their annual budget as a sign of loan commitment or levy a special assessment in the amount of the loan plus interest to serve as collateral. In case an HOA is unable to make the loan repayments, the bank may ask for the right to collect from individual homeowners.


What Are the Different Types of HOA Loans?


1. Line of Credit

A line of credit is a flexible type of HOA loan where there is a preset borrowing limit. The HOA can borrow as much as they need until the preset limit is reached. The bank will only charge interest on the actual amount borrowed. Since the interest rate is variable, monthly loan payments are not fixed. A line of credit loan has quick-term periods; it can typically last from a year up to 5 years.

A line of credit is an interest-only loan. The HOA is only required to pay interest while repairs or construction are ongoing. Loan repayments start upon completion of the project or when the credit limit has been reached.

A line of credit loan is ideal for HOAs who have short-term funding gaps. It can bridge the gap until the time when the HOA can come up with sufficient funds. For instance, the HOA may take out a line of credit to repair property damage caused by a natural disaster.

Since repairs are urgent, the association can use the loan to pay for expenses while they are waiting for their insurance payout, which they will then use to repay the loan. A line of credit can also bridge the gap between homeowner assessments and the actual amount needed for repairs.


2. Standard Term HOA Loan

In a standard term loan, HOAs receive the entire loaned amount from their creditor. This is ideal for large-scale repairs or land acquisition. The term period can range from 5 to 15 years. The interest rate is locked so the association pays the same amount each month. Since the loaned amount can be high, HOAs can lower monthly payments by choosing a longer-term period. However, they will end up paying more due to interest charges.


3. Short-Term HOA Loan

low interest rate | types of hoa loansThis type of HOA loan is the same as a standard term loan, but with a shorter-term period. These loans can last from 3 to 10 years.

HOAs will have higher monthly loan payments but can become debt-free much quicker. You also pay less interest.


4. Line of Credit with Conversion

HOAs can also opt for a line of credit with conversion. This HOA loan has two phases. In the first phase, the loan exists as a line of credit. You will only pay interest on the actual amount borrowed.

At the end of 12 months or upon completion of the project, the loan is converted to a standard term HOA loan. The bank establishes HOA loan rates and the association will then start repaying the principal plus interest until the end of the term period.


What Are the Pros of HOA Loans?

An HOA loan is a long-term financial commitment, but it provides associations with the funds they need to complete necessary or emergency repairs. It is especially helpful for HOAs who have depleted reserves or those who are unable to levy special assessments. Even for HOAs who levy a special assessment, the amount is often not enough to cover all the anticipated expenses.

HOAs can benefit from the fast completion of projects but at the same time, have the payments spread over time. Even if the HOA incurs a debt, they can restore the quality of life of homeowners prior to the damage. Meanwhile, capital improvement projects can increase property values and attract potential homebuyers to the community.


What Are the Cons of HOA Loans?

Perhaps, the main con of HOA loans is the increased financial burden on homeowners. Even though the increase is significantly less than what they would have paid with a special assessment, homeowners will still have higher monthly assessment dues.

If your homeowners become delinquent, the HOA will have a hard time paying back the loan. Incurring debt may also be disadvantageous if your HOA board lacks experience when dealing with loan repayments and capital planning. These scenarios can put your HOA in a precarious financial situation.


Can Condo Associations Take Out Loans?

Both HOAs and COAs can apply for loans. However, it’s important to consult your governing documents to see if HOA loans are allowed. If so, what are the requirements or stipulations? For instance, most HOAs will require approval from the majority of the homeowners before the board can take out a loan.

HOAs should also check their state laws regarding HOA loans. For instance, some states prohibit HOAs to borrow from their reserves or use the reserve fund as collateral for the loan. It’s best to consult an HOA attorney to ensure that everything is okay from a legal standpoint.


How Do I Qualify for an HOA Loan?

HOA loan requirements will depend on the financial institution you are borrowing from. However, in order to assess your HOA’s credit risk, they may ask for the following:

  • Delinquency Rate and Total Amount of Delinquencies: If an HOA has a high delinquency rate, the bank may question your ability to make loan payments.
  • Total Number of Units and Percentage of Owners vs. Renters
  • Reserve Study: Banks may require an HOA reserve study completed in the last 2 years.
  • Current Amount in Reserves: Banks prefer HOAs with funded reserves so even if homeowners do not pay their dues, the HOA can still make loan repayments.
  • Scope of Repairs and Estimated Cost of Repairs
  • Capacity of HOA Board for Loan Management
  • Homeowners’ Support for Borrowing
  • Monthly Assessment Dues: Banks may be less likely to approve HOAs with already high assessment dues. If loan payments are further added, there is a higher chance of delinquencies.
  • Professional Team of Contractors: Banks will also assess the skills and capabilities of the team you are planning to hire for repairs or construction.


Are HOAs Eligible for PPP?

Paycheck Protection Program | association loansThe Payment Protection Program (PPP) is a federal loan to help keep small businesses afloat, particularly in difficult times such as the coronavirus pandemic.

HOAs may apply for a PPP loan as long as funding is still available and the association meets the requirements.


How Do I Plan for an HOA Loan?

HOAs often underestimate the amount of planning required when applying for a loan. Adequate planning is a must if you want to increase your chances of approval. Do not wait until the last minute before consulting your bank. Talk to them early on so that you know which requirements to prepare. Many banks will even work with you throughout the process.

Another way to plan for an HOA loan is to establish the scope of repair and identify your team of professionals. The bank will use this information to determine the size of your loan and your credit risk. Choosing a highly-qualified team of professionals to conduct repairs can increase your chances of loan approval.

HOAs may also choose to levy a special assessment ahead of an HOA loan. The funds raised can be used to resupply your reserve account. This shows the bank that the HOA has several options for repaying the loan. Levying a special assessment can also help you flush out delinquent homeowners.


Are HOA Loans Right for Your Association?

After reading the FAQs about HOA loans, you have a better understanding of what is an HOA loan, how they work, and how to increase your chances of approval. Based on the information, you can also gauge if taking out a loan is reasonable for your HOA. If the HOA foresees any difficulties, it may be worth sticking to other funding options such as increased assessments or a special assessment. Ultimately, the decision will depend on your association’s needs and capabilities.

If you have additional questions about HOA loans and other financial requirements, feel free to contact the Condo Manager team today! Call us at (800)-626-1267, email us at sales@condomanagerusa.com, or contact us online to learn more about our HOA software solutions.




How To Prevent Homeowners Association Fraud

Homeowners association fraud or embezzlement can happen anytime, anywhere, and anyone — even to the closest, tight-knit communities. If you want to safeguard the financial health of your community, consider these strategies to prevent HOA fraud.


Most Common Types of HOA Fraud to Look Out For

HOAs are run by a handful of people, known as the board of directors. They handle the day-to-day operations of the association, including the management of funds. If there are no checks and balances set in place, it can be very easy for a dishonest board member to commit fraud. However, HOA fraud isn’t exclusive to board members. Managers, employees, and volunteer homeowners can also commit fraud if the HOA has lax rules and standards.

What is HOA fraud? Fraud is a deliberate act of deception for the purpose of personal or financial gain. If you don’t want your community to become an unwitting victim, here are the most common types of HOA fraud that you need to look out for.


HOA Embezzlement

Homeowners association embezzlement is a form of theft. It involves a person taking property that was entrusted in his/her care by the association and using it for him/herself. HOA embezzlement comes in different forms. It can be a board member issuing checks made out to their name, collecting dues and payments but pocketing the funds, or altering financial documents.


HOA Mismanagement of Funds

Mismanagement or misappropriation of funds in a specific type of embezzlement. It involves a person taking HOA funds and using them for his or her personal benefit.


HOA Kickbacks

hoa kickback | hoa embezzlementKickbacks are payments or gifts that a vendor gives to a board member in exchange for hiring their company. It is also HOA fraud when a board member receives a portion of the contract money.


HOA Election Fraud

Election fraud can have many forms. The board can skip the annual elections or postpone it indefinitely to keep their positions. Individuals may also rig the election results to produce their desired outcome or forge proxy signatures to collect votes.



Best Ways to Prevent HOA Fraud

HOA fraud can occur due to a lack of oversight. If you want to prevent HOA fraud, it’s important to establish checks and balances. These will make board members, managers, and employees accountable for their actions, thereby reducing the potential for fraud or embezzlement.


1. All Checks Should Be Made Out to the HOA

Sometimes, for the sake of convenience, the board may issue checks to themselves or to certain individuals. However, this makes it easy for a dishonest member to commit fraud.

To prevent check fraud, ensure that all checks are made out to the HOA. You should also limit access to the checks to prevent unauthorized persons from issuing checks out to themselves.


2. Require Double Signatures for Checks

Another way to avoid check fraud is to require signatures from two members of the board. While this strategy may not be as efficient, especially when there are emergency situations, it helps prevent HOA fraud.

An option would be to set up this rule for transactions that exceed $500. The HOA can safeguard its bank accounts without hampering the essential day-to-day operations.


3. Do Not Let Management Sign Checks for Themselves

HOA management makes life easier for board members. Your manager handles HOA operations, including financial transactions that may occur throughout the day.

However, to discourage potential fraud from your management, do not let them issue checks for their own services. They can still issue checks for third parties. But if they perform maintenance work or other services, have a board member review the invoices and issue the checks.


4. Have Board Review Financial Documents

The HOA treasurer shouldn’t be left to do all the financial tasks. One way to safeguard the HOA is to have the board (or at least two members) independently review financial documents each month. This will make it harder to alter bank statements, inflate budgets, or duplicate reimbursements.

Regularly monitoring financial documents will also make it easier to spot anomalies or errors. Whether it’s an honest mistake or a sign of HOA fraud, the board can address the issue quickly.


5. Delegate Financial Responsibilities

Having just one person in charge of finances — whether it’s the treasurer or the manager — makes it very easy to commit fraud. As such, consider delegating the financial responsibilities to different members of the board.

You can have one person in charge of making the deposits while another is in charge of reconciling bank statements. This is a good example of introducing checks and balances in your HOA.


6. Require Board Approval for New Vendors

homeowners association fraudHOAs should be suspicious if a board member is pushing for a new, more expensive vendor even if the current one has been providing quality service. He or she may be receiving a kickback in exchange for the vendor contract.

Also, watch out for board members who recommend a company that is unqualified for the job. There may also be a kickback or the company may not even exist at all. Make sure that the board of directors is aware of vendor changes. You also need to properly vet new vendors to ensure that they are qualified professionals and that their prices are reasonable.


7. Make Sure HOA Is Insured for Fraud

To protect the financial status of your HOA, make sure that you are insured for fraud. Crime and fidelity insurance coverage will cover financial losses due to fraud or embezzlement.

You should also have directors and officers (D&O) insurance. This can protect board members from personal liability in case an employee or manager commits HOA fraud. Just because you have insurance, though, doesn’t mean that you should be complacent. In many cases, the payout can take a very long time and the HOA is left to deal with rising expenses.


8. Establish an HOA Election Committee

The board is responsible for scheduling and announcing the HOA elections. However, beyond that, the board should not be involved in the election process. Create an election committee that is comprised of homeowners who are guaranteed to be fair and impartial. They will be the ones to handle the election process to prevent HOA corruption or fraud.


Examples of HOA Fraud

Most HOA board members, managers, and employees are hard-working and good-intentioned people. However, this doesn’t mean that associations should be lax or complacent. We are all human and under dire or unfavorable circumstances, it’s possible that an individual might feel compelled to commit HOA fraud. To overstate the importance of vigilance, here are some examples of HOA embezzlement cases:


Case #1

A woman, who served as the secretary of her Florida HOA, was charged with grand theft after taking over $300,000 from HOA funds. The woman withdrew $121,390 from the HOA’s bank accounts and had written checks to herself and her husband for $97,045. She admitted that she used the stolen funds to pay for her mortgage and other bills.


Case #2

A man was indicted for money laundering and embezzlement after stealing more than $450,000 from a Virginia HOA over the course of four years. The man served as the association’s finance manager. The HOA discovered his theft through an HOA audit, which uncovered evidence of his wrongdoings.


Case #3

In New Jersey, a property manager was sentenced to six years in prison after embezzling over $400,000 from the condominium complex that he managed. The judge also ordered the woman to make full restitution to the HOA. She was caught after HOA residents notified residents of their delinquent dues despite having paid the fees.


Always Be On the Lookout for Signs of HOA Embezzlement or Fraud

hoa corruptionMost HOAs don’t know that there has been fraud or embezzlement until it’s too late. By then, your association may have already lost a large sum of money. It could take years to recover these stolen funds — if they can be recovered at all.

This puts the HOA in a precarious financial situation. Add to that, bad press can also turn off new homebuyers and cause property values to drop.

To protect the financial well-being of your community, consider implementing these strategies we recommended. These additional steps may take more time and effort but oversight and vigilance are crucial for preventing HOA fraud in your community.

HOA fraud can go undetected if your finances are a mess. If you need help with financial management, feel free to contact the Condo Manager team today! Call us at (800) 626-1267, email us at sales@condomanagerusa.com, or contact us online to learn more about our HOA software solutions.




What Are HOA Reserve Funds? And What Is It For?

It is important for any homeowners association to have HOA reserve funds and to understand the purpose of this separate account. In doing so, an HOA can avoid financial ruin and minimize the need for special assessments.


What Are HOA Reserve Funds?

Reserve funds, also known as reserve accounts or HOA cash reserves, are money a homeowners association sets aside to cover the future cost of major repairs and replacements related to common areas. It differs from an HOA’s operating fund, which is primarily used to pay for recurring expenses such as accounting fees, insurance premiums, legal fees, day-to-day maintenance, and the like.

A good analogy for operating funds and reserve funds is that the former is like a checking account and the latter is like a savings account. You use your checking account to pay for everyday expenses, such as groceries, utility bills, and rent. In contrast, you rarely tap into your savings account because it is money you have set aside for unexpected or major costs.

What is a reserve expense? A reserve expense is something you use reserve funds to pay for. This typically refers to the cost of repairing or replacing existing components. Replacing the roof of the community clubhouse and repaving roads are examples of reserve expenses.


What Can HOA Reserve Funds Be Used For?

hoa cash reservesBy design, reserve funds are supposed to cover unexpected expenses. These expenses are usually substantial in kind.

The association dedicates a portion of the monthly homeowner dues to the reserves every year. This way, when a major expense comes up, the association does not need to take from the operating fund, levy special assessments against homeowners, or take out an HOA loan. Instead, it simply needs to tap into the HOA reserves account.

It is worth mentioning that not all reserve expenses are unanticipated. Some of these expenses are just deferred or do not come up often.

For instance, it would be downright silly to have the pool retiled every year. You might need 10 to 20 years between each retiling, so that kind of major expense would need to use the association reserves. The board will simply need to set aside money every year so that when the time does come to have the pool retiled, you can pay for the cost without worrying about sourcing the funds.


How Do You Account for Reserve Funds?

How much should HOA reserves be? This is a common question that often comes to mind when discussing reserve funds. Unfortunately, when it comes to HOA reserve fund accounting, there is no single correct answer. The exact dollar amount you should have in your reserve fund depends on a number of factors, such as the size of your HOA and what type of common elements you have.

In general, to qualify as a fully-funded reserve, you should have an amount that can cover all of the expenses you can reasonably predict. Typically, your association’s governing documents will have provisions concerning the adequacy of your reserves. Other times, the board sets the HOA reserve funding percent requirement. A good HOA reserves rule of thumb, though, is to have your reserves at least 70 percent funded at any given time.

How much money can an HOA have in reserve? While there is no limit per se, all associations eventually need to use reserve funding to cover major expenditures. Therefore, it is nearly impossible to accumulate so much money in the reserves without tapping into them.


HOA Reserve Fund Laws

Depending on where your association is located, there may be certain laws concerning reserve funds that apply to you. It is vital to check your state laws to ensure you remain compliant. Failure to abide by these laws can result in legal trouble for your HOA.


Funding Requirements

Although it is the board’s responsibility to determine how much money to have in the reserves, the law may also have a say in the issue. A few states have specific requirements when it comes to reserve funding. For instance, Ohio law mandates that associations must allocate at least 10 percent of the budget to the reserves, though members can waive this through a majority vote. Other states simply have statutory guidelines, leaving the details to the association board.

How much should condo reserves be? Condo laws concerning reserve requirements tend to be more specific, such as in the case of Florida. According to Florida law, associations must budget for building painting, roof replacement, pavement resurfacing, and any other expenditure that exceeds $10,000. The board must calculate the cost of each item based on estimates for its remaining useful life and cost.


HOA Reserve Study Requirements

A homeowner association reserve study evaluates the HOA’s major components to roughly calculate the cost of repairing or replacing them when they eventually reach the end of their estimated useful life. Reserve studies help HOAs determine the right reserve level, but hiring a company to conduct such a study does cost money.

How often should an HOA do a reserve study? Some states have specific laws requiring reserve studies and even dictating how frequently an association should have it done. Virginia law, for instance, mandates that HOAs must conduct reserve studies at least once every five years.

You can find reserve study requirements by state here.


Reserve Report Requirements

An HOA board must always remain transparent with its membership, especially when it comes to money. Members need to know where their contributions are going. While it is part of the board’s duty to disclose financial reports, there are states that go so far as to mandate it.

Homeowners associations in California, for one, need to create and distribute a detailed reserve report to all of its owners. According to California law, the board must use the most recent reserve study to produce this report. This report should consist of the estimated remaining life of every major component as well as its estimated useful life and estimated replacement cost. It should also include an estimated reserve amount required to maintain, repair, or replace the components.


Is It Possible to Invest Your HOA Reserves?

hoa reserves accountIn a word, yes. You can invest your reserves, and many HOA boards do this as a way to earn more income for the association. But, you must exercise caution.

Remember that your duty as a board member is to maintain the community — and that includes its assets. Every decision you make should be within the association’s best interests.

Therefore, you must choose your HOA’s investments wisely. Go for an investment that offers growth but will not put the principal amount in jeopardy. It is generally ideal to stay away from riskier investments. Though these offer more growth, there is also a higher chance of loss. In choosing this route, you might incite anger from the community and even invite potential lawsuits.

When using your reserve fund to invest, it is always best to follow the provisions outlined in your governing documents. Not all associations have an investment philosophy written in their CC&Rs, though. In that case, turn to an accountant, an attorney, or an HOA management company for advice.


An HOA Board’s Duty

Just as you would save money for life’s major undertakings, your association should save money for large expenditures down the road. Healthy associations have well-financed HOA reserve funds. It is up to your board to make sure you meet the optimal level of funding for your reserves.

Reserve accounts have a distinct purpose, so you must not use them to cover operating expenses. Easily keep your reserve fund separate from your operating fund with the help of Condo Manager. Call us today at (800) 626-1267 or contact us online to schedule a free demo of our software.



How Can Collecting HOA Online Payments Help?

Collecting homeowners association payments is a very time-consuming process. Each month, the HOA has to issue invoices, collect fees, process checks, and then deposit them to the bank. If you want more efficient operations, here’s how HOA online payments can help your association.


7 Great Benefits of HOA Online Payments

HOA fees are the financial lifeline of any association. It pays for maintenance and repairs, utilities, vendor services, management fees, salaries, insurance premiums, reserve contributions, and contingency funds. HOA fees ensure that your community runs smoothly and seamlessly.

Collecting HOA fees is harder than it looks, though — especially if your primary modes of payment are cash and checks. Homeowners don’t always pay on time and for those that do, you have to spend time processing their payments and depositing them to the bank. All that time you spend on collecting fees each month could be better spent on more important HOA matters.

It’s time for your community to embrace online HOA payments and here are seven reasons why.


1. More Convenient for Homeowners

Almost everyone is busy with their day-to-day lives. Most homeowners simply do not have the time to visit the management office or the bank to pay their HOA dues. Having an online payment system will make it easier for homeowners to settle their outstanding balances. They can pay HOA dues online from the comforts of their own home and at any time of the day or night.


2. Lower Delinquency Rates

As more homeowners pay HOA fees online, associations can see a significant decrease in their delinquency rates. You can save a lot of valuable time because there are fewer late HOA payments to follow up on. The HOA can also reduce attorney fees and other legal expenses that arise from having to deal with delinquency cases.


3. Reduce Operating Expenses

less HOA operating expense | online hoa paymentsAre you under the impression that having online HOA payments leads to more expenses for the association? It can actually help you save more money!

The average cost of processing a single check is $1.22. By switching to online payments, HOAs can save on labor costs, office supplies, postage fees, fuel costs, and other expenses that come with manual payment processing.


4. Reduce HOA’s Carbon Footprint

HOA online payments can help associations become more eco-friendly. Since the payment process is done digitally, you use less paper and ink. There’s also no need to keep driving to the bank just to deposit checks. All checks are also destroyed after 90 days, which only contributes to landfill waste. As such, online payments can help the HOA reduce its carbon footprint and do its part in saving the environment.


5. More Efficient HOA Operations

HOA online payments help eliminate a lot of time-consuming administrative tasks such as manually collecting payments, sorting through the mail, recording each payment details in your books, and driving to the bank to deposit checks. Instead, board members and managers can devote their time to other tasks that are essential to HOA operations.


6. Easy and Accurate Payment Tracking

Having an online system will make it easier to see whenever homeowners pay HOA fees. You’ll be able to keep track of all financial transactions, as well as monitor the amount coming in and out of your bank accounts. If your website is integrated with HOA software, you may also be able to create financial reports for these monthly online payments.


7. Attract More Homebuyers

online homebuyers | online hoa paymentIn this digital age, an online payment system is expected. If potential homebuyers see that you are still using cash and checks, it will create an impression that your community is outdated and unable to keep up with the times.

Today’s consumers place a lot of importance on modern conveniences when choosing a home to purchase. Thus, an online payment system helps convey that your HOA is up-to-date and properly managed.


How to Choose an Online Payment System for Your HOA

If you’re ready to give your homeowners a way to pay HOA online, it’s time to choose an online payment system for your HOA. There are plenty of available options out there so it’s important a provider that meets your specific needs and budget. For starters, here are some important things to consider.

  • Transaction Fees: Make sure that your online payment system does not have any hidden charges. Some payment systems may have monthly charges while others will charge a nominal fee per transaction.
  • HOA Software Integration: Choose an online payment system that is compatible with your HOA software. This ensures that you’re able to seamlessly transfer payment data or details from the system to your software. Thus, less work and potential headaches for you.
  • Homeowner Accounts: For even more convenience, you can set up password-protected accounts that allow homeowners to pay online, view their payment history, and save payment details. You can even include other features such as easy access to governing documents for better compliance to homeowner association rules — which includes HOA fees and assessments.
  • Multiple Accounts: HOA management companies should choose an online payments system that is able to handle multiple accounts. You can set up payment channels for each HOA that you are managing and have the payments go to the correct bank accounts.


Getting Started on HOA Online Payments

Most associations understand the importance and convenience of HOA online payments but have yet to make the transition due to concerns about costs or available options. By now, though, you’re more familiar with online payments and how they can help your HOA. Since there are many available options, take the time to analyze each payment system to find the most suited for your community.

 Looking to get started with HOA online payments? Do not hesitate to reach out to the Condo Manager team today! Our HOA software comes with digital payment integration for easy and hassle-free online payments. Call us at (800) 626-1267 or email us at sales@condomanagerusa.com for a free demo.