From time to time my HOA (homeowner's association) needs extra money for a project (eg painting fences, fixing roofs, plumbing repair, etc). They typically respond by raising the monthly HOA dues for a short time to cover the expense.

I talked to a banker about possibly getting a loan in the name of the HOA. The bank was willing to give a loan, but they wanted an individual guarantor. It's quite hard to convince someone to be the guarantor. What are some incentives we can give someone for volunteering to be a guarantor? Is there any other way we can raise money without resorting to higher HOA fees?

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    This may not be a popular answer, but taking on a loan doesn't make sense for your corporation (your HOA is a corporation, really). Who will end up paying the interest payments? The homeowners, of course. It makes more financial sense for the HOA to raise the monthly HOA fee for a limited period versus taking on debt. Debt creates risk, and why would the HOA want to increase their exposure? I would warn ANYONE against being the guarantor for a loan to the HOA. This is a horrible idea and a definite way to screw up one's financial healthy. – Mike Apr 14 '10 at 1:56
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    Let me ask you a question as follow-up. Presumably you live in this HOA, right? Why won't you guarantee the loan? What would make you guarantee it? That is what you need to answer. – Mike Apr 16 '10 at 16:37
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    Sounds to me like someone should take control of the financial planning for the HOA and set the fees to an appropriate level. Having to raise fees to cover what sounds like normal items is a bad idea. Get the fees to the correct level and put the amounts collected into appropriate funds to handle these items. Taking out a loan would only cost the HOA more money in the long term and simply isn't the right financial decision. – NotMe Sep 10 '15 at 18:47
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    What's the issue with holding a special assessment for the needed repair, and those homeowners who cannot directly afford it, take out the loan against their equity as needed individually? – user662852 Sep 10 '15 at 20:07

First, one would 'not' want to be the guarantor as it would likely appear as a debt on their credit. In some cases this can be good, but not always. I'd suggest a homeowners meeting. A reverse auction where you say "Would anyone like to get the condo fee waived for 12 months in return for guaranteeing the loan?" If no hands go up, you have an issue. But if even one hand goes up, you have the guarantor. Then you ask if there are any objections. Anyone who objects is welcome to bid fewer, say 10 months. Ideally, you see a dozen hands go up, and you just count down until one one remains. When I lived in a condo the fee was $250. If I were one of the older residents who planned to stay, I'd do it for one or two month's fees.

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As the bank probably told you, a HOA has no assets. Taking out loans like that is the domain of a co-op, which is a different kind of corporation and residents own shares in a corporation that owns the entire property as an asset.

  • A condo association should have a capital reserve. FHA guidelines (and many banks) require the HOA contributing at least 10% to a capital reserve to be used for such purposes. If you find yourself coming up short, fees should be increased to adequately fund the reserve.
  • When a repair that the HOA's reserve cannot cover is necessary, then an assessment is required. Generally, this is the most common option for a situation requiring repairs and/or improvements and is something that is common and understood as part of living in a condominium.
  • If a repair is caused by an event covered by insurance where there's a deductible, for example, you can assess a "loss assessment" to the residents. Because the assessment represents property damage, it would be paid by the individual residents' home insurance policy.

It is probably a bad idea to allow someone to be a guarantor of the loan. These kinds of things may pop up in an annual audit of the books (why is a particular person being paid a monthly fee?) or may be seen as red flags by banks offering mortgages to buyers in the HOA.

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I've never been involved with an HOA, but in organizations that I've been involved in, we had 'building funds', which were a dedicated part of the membership fees devoted to building up money for an event, building maintenance etc. My church when I was a kid had a heat fund in the summertime.

Build up a fund, and spread the projects around... that's the affordable way to do things. But you need good governance, otherwise you end up with some yahoo blowing the money on something frivilous when there is a sparsly attended meeting.

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