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Subject: HOA taking out a loan
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DW11
(FL)

Posts:10


07/26/2020 4:57 AM  
Our board has turned over recently and the new crew intends to take a loan out to do a foolish project. I am clearly opposing this but I am outvoted.

The new board members have very little experience and were not aware that Fannie Mae and Freddie Mac have rules about underwriting mortgages in complexes where the HOA Reserve is not healthy, etc.

I assume they have similar rules about HOAs who are in debt, but I have not yet been able to point to anything specific.

So my question is: does an HOA loan affect the ability of homeowners to sell their units? IE will the FMs make a loan when the complex has a reserve (say 25% of budget) but also has an outstanding capital improvement loan?

TIA
MelissaP1
(Alabama)

Posts:9446


07/26/2020 5:05 AM  
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.

Former HOA President
DW11
(FL)

Posts:10


07/26/2020 5:33 AM  
Their plan is to take out a loan now and levy the special assessment next year - in addition to a separate special assessment that has already been approved. And no, no one has approached a bank yet. (I know... it's absurd.)

I am so frustrated by these poor decisions and lack of foresight. I campaigned for a decade for a higher reserve to avoid SAs and was always outvoted. Now we have low-ish reserve, several high-dollar aging infrastructure projects that must be funded and not enough money to do it. I am frankly at the end of my rope watching the complex suffer from poor financial decisions.

Anyway, I have been trying to educate them as best I can with primary documents. The PUD/HUD form -- both the limited and the full version -- seeks info on the state of the reserve and delinquencies in dues, but I don't see anything on the form that looks for HOA debt. Am I missing it?





MelissaP1
(Alabama)

Posts:9446


07/26/2020 5:43 AM  
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.

Former HOA President
AugustinD


Posts:3683


07/26/2020 7:44 AM  
Posted By DW11 on 07/26/2020 4:57 AM
So my question is: does an HOA loan affect the ability of homeowners to sell their units?
A HOA loan resulting in an increase in the monthly assessment of $35 at today's 30 year interest rate of say 3.9% reduces the amount of mortgage for which a loan applicant can qualify by about:

1% for a $400,000 home

2.5% for a $200,000 home

In this culture of borrow and borrow more, an assessment increase will tend to drive home prices down. It will be harder for people to get the selling price for which they had hoped prior to the assessment increase.
DW11
(FL)

Posts:10


07/26/2020 10:09 AM  
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?
SheliaH
(Indiana)

Posts:3358


07/26/2020 10:12 AM  
The PUD form is a good start, but it may be best to let the numbers support or sink the project. The special assessment probably has to be approved by the homeowners anyway, so Why not suggest a special homeowners meeting to discuss this project? What is the oroject, is it really necessary now and how does the propose to finance the project. The thought of a special assessment alone should be enough for people to say "WTF???" and demand answers and real numbers about the association's finances.

if your colleagues can't present the numbers and make their case, you won't have to worry about the loan because these folks may find they're risking recall if they march down this road. You might want to talk to a few neighbors and urge them to attend a few meeting to hear this nonsense for themselves - that may be the spark you need.
SheliaH
(Indiana)

Posts:3358


07/26/2020 10:22 AM  
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.
MarkW18


Posts:1290


07/26/2020 10:33 AM  
To the OP,

First, Melissa and Augustin are clueless. I don't believe they have ever underwritten a loan, much less within a HOA. I would like either to provide substantiated evidence that HOA are supposed to make sure a borrower can secure the highest mortgage loan available. Should the HOA provide a letter of recommendation for the borrower to any lending institution on the face of the earth.

You would be surprised at how little FM or FM actually look at the overall financial health of a HOA. They look at rental, they look at percentage of delinquencies and they look at litigation. If the HOA is involved in a lawsuit, then they most likely will ask for an explanation, which would be best done by legal counsel.

As far as a HOA loan, different story. They will require collateral and a vehicle in which the loan will be paid back. They will require the SA be approved prior to funding. Also remember, SBA won't lend to communities under 25 units and they are the most financially strapped.

I couldn't answer the OP because what ever concern they have is outlined in the vaguest terms. I would need to see financial and reserve studies. Loans, done in the proper manner for the proper project or asset are justified. If you feel the board is not qualified, then you have an obligation to educate the membership or move. If the membership doesn't care, its not a place I would want to live any longer.

Best of luck
DW11
(FL)

Posts:10


07/26/2020 10:40 AM  
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.
MarkW18


Posts:1290


07/26/2020 10:59 AM  
This very well may be a political issue and will require the help of others. No one person is going to change a whole community's mind. This is kind of like amending governing documents. I have worked on a number of restated governing documents for HOA's over the years. I would only do them if they had a legitimate plan to get them passed. Otherise, it could be $10K foolishly down the drain.

In 2009, I ran for a board position and the HOA attorney and HOA management didn't want me on the board. It later turned out they were conducting a secret lawsuit that cost the association $250K in cash. The HOA attorney cancelled the election citing quorum issue. The attorney thought people were born yesterday and wouldn't challenge them.

In 6 months a group restated the Bylaws, and on the recommendation of www.davis-stirling.com, eliminated quorum, proxies and cumulative voting. We gathered a group of 12 people going door-to-door. This was a political campaign. We needed 162 yes votes, but got 240. Prior to that, the most ballot collected had been 39.

The point is, whether you are trying to defeat a SA or put in a good board, one person cannot do it, iot does require a team.
JohnC46
(South Carolina)

Posts:9678


07/26/2020 12:31 PM  
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.
DW11
(FL)

Posts:10


07/26/2020 12:52 PM  
I do think this is somewhat political. Ours is a very small beach community and most owners live out of state. The resort used to be exclusively second home owners but after the housing bust, it's now a mix of owner occupied and second homes. The owner occupied units typically bought at the top of their ability and don't have a lot of cash on hand. The second home owners are well off and want to upgrade the resort rather than maintain it. So the divide is real.

It's the owner occupied units who have banded together around this lipstick-on-a-pig fix. They have the majority on the board but are the minority in the complex overall.

The question is whether the second home owners are paying enough attention and if they care enough to cast a vote. I may have to call around but darn it, that feels like hammering in the wedge and I hate that. I'm old school and prefer to keep things friendly (though the truth is the one member advocating most for this fix has been downright nasty.) It's a small, small resort; there are less than 60 units.


JohnC46
(South Carolina)

Posts:9678


07/26/2020 1:07 PM  
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.
DW11
(FL)

Posts:10


07/26/2020 1:12 PM  
Oh, and ps, I disagree about venting on the internet. On the contrary, outlining the problem for strangers helps me frame it better in my own mind, and the input often helps me consider other points of view that my peers may not have articulated for themselves.

Plus, venting it out here helps me be collected in front of the community, which is definitely a plus!
DW11
(FL)

Posts:10


07/26/2020 1:33 PM  
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.

GeorgeS21
(Florida)

Posts:2902


07/26/2020 2:11 PM  
To the OP.

You get to chose what and who you listen to, but I almost always include in my decision whether the comments come with unnecessary, opinion-based nastiness towards others - in this short thread, you have already seen that from one member of the forum.

It's not the first time this has happened.
KellyM3
(North Carolina)

Posts:1529


07/26/2020 2:47 PM  
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?

AugustinD


Posts:3683


07/26/2020 3:31 PM  
Posted By MarkW18 on 07/26/2020 10:33 AM

First, Melissa and Augustin are clueless.
I am sorry you still are incapable of doing the math for a mortgage loan.
AugustinD


Posts:3683


07/26/2020 3:34 PM  
Posted By JohnC46 on 07/26/2020 1:07 PM
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.
When prospective buyers apply for a mortgage under the circumstances you describe, I think that what you describe is a distinction without a difference.
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