The Financial Realities of HOAs October 13, 2021
Every homeowners association (HOA) has its own history, attributes and challenges, but all share common characteristics.
To lead these communities properly, association board members, together with the professionals who support them, must manage their associations using established business principles. That’s the only way associations can ensure that the interests of homeowners are respected and preserved. This means:
* Collecting homeowner assessments to ensure that services and amenities are funded—and that sufficient funds are set aside for major replacements and repair
* Providing services and amenities that preserve the character and attributes of the community
* Meeting the established expectations of homeowners and non-owner residents
* Taking all appropriate measures to protect property values
Homeowners who serve on an association board are ethically and legally obligated to protect the community’s financial health. They must adhere to the association’s governing documents and abide by all applicable laws. Perhaps the most difficult aspect of association governance is balancing the preferences of individual residents and the collective interests of all owners. This can be a challenge, especially when prudent business principles dictate difficult decisions based on what’s best for the community at large.
There are a few fundamental principles that guide the HOA concept:
* Association homeowners choose where to live and, by choosing to live in a common-interest community, accept a legal responsibility to abide by established policies and meet their financial obligations to the association and their neighbors.
* They have the right to elect their community leaders and to use the democratic process to determine policies that will govern their communities and protect their investments.
* They have the right to take full advantage of the community’s services and amenities.
Association Finances and Assessments
Association board members have no greater responsibility than fulfilling their fiduciary responsibilities to the association. Leaders must establish and enforce policies to ensure that funds are collected and available to meet current and long-term obligations.
Associations rely largely—many exclusively—on homeowner assessments to pay their bills, which can include services like landscaping, security or professional management; maintenance for sidewalks, streets and building exteriors; utilities like street lighting, water or gas; and mandatory expenses like insurance and taxes. For condominiums and cooperatives, assessments cover expenses incurred collectively by all residents, such as building maintenance and repair. Assessments also fund amenities like pools, tennis courts, playgrounds, clubhouses and social activities. High-end amenities can include golf courses and clubs, marinas, hiking trails and even stables and air fields.
Just like for-profit businesses, association boards work diligently to develop realistic annual budgets. Often with the help of association management professionals and accountants, association boards base their budgets on projected expenses and anticipated income. For most, it’s zero-based budgeting. Short of contributing to a reserve fund for anticipated, long-term repair and replacement, few associations have money sitting around “just in case.”
Prudent fiscal policy is essential—not only to the association at large, but also to individual homeowners whose assessments fund essential services and promised amenities.
Importantly, an association’s financial obligations do not change when some owners don’t pay their assessments. Common grounds must still be maintained. Trash must be collected. Insurance premiums must be paid. Grass must be cut in the summer. Snow must be plowed in the winter.
Homeowners who refuse to pay their assessments—as they contractually agree to do when they purchase their homes in an association—are cheating their neighbors, their community and themselves. That isn’t fair to homeowners who do meet their financial obligations to the association. When homeowners are delinquent on their assessments, their neighbors must make up the difference or the association must curtail services and amenities. That affects everyone in the community, perhaps even leading to a decline in property values.
Procedures for collecting overdue assessments differ from one community association to the next depending on established procedures, governing documents and local and state statutes. In addition to being reasonable and consistent, we recommend the following procedures for collecting delinquent assessments:
* Begin collection actions early while the outstanding amount is manageable.
* Take an incremental approach. Start with friendly reminders or personal contact, and then follow up with stronger reminders, making sure to provide as much information as possible.
* Consider allowing owners to negotiate payment plans.
* Follow due-process procedures, giving delinquent owners ample notice and an opportunity to be heard.
* Comply with the Fair Debt Collection Practices Act throughout the process.