There are signs and whispers around your community that all is not well in your HOA.
Your next door neighbor is saying she heard from one of the board members that the reserve fund is almost gone. You notice that the pool has been closed for several months with no indication of when it will open again. Landscaping has not been kept up on. That big roofing project on the recreation building has been postponed indefinitely.
Then, you finally attend a meeting with the board of directors and they let the cat out of the bag. The HOA is nearly broke. Amid the uproar of angry and confused comments and interrogations, two questions are at the forefront:
How did this happen? And how can this problem be fixed?
How an HOA can fail financially
Hard times can fall on the HOA due to an economic downturn, such as we saw in 2008 or in the more recent COVID pandemic, too many foreclosures, or even embezzlement or fraud. While there are many reasons for an HOA to go broke, the most typical reason is a mismanagement of funds.
An HOA is a non-profit organization whose job is not to make money but to maintain and govern a community. However, an HOA still needs money to run. When the money coming in to the HOA is less than what the HOA needs to operate, and when this imbalance continues for too long, the HOA will slowly, but surely run out of money.
There can be any number of complications that result in a lack of funds, too many emergency repairs, homeowners not paying dues, etc. But it is the BOD’s job to manage and budget funds and adhere to the budget. While extenuating circumstances can and do occur, in most cases, the signs and symptoms of dwindling funds are apparent for months or years before the HOA hits rock bottom.
In a very simplified nutshell, HOAs go broke when the funds coming in are less than the expenses going out. Overspending, not keeping enough in the reserve fund and spending money before dues have been collected are the most common reasons for a diminishing account. For this reason, it is crucial that the BOD always prioritize the management of funds, creating and sticking to a budget and ensuring that dues are collected in a timely manner.
The cash flow solution
The difficult reality is that a well-managed HOA should never reach the point where funds run out. Rather than reaching and scrambling for a last minute solution when the funds have run dry, it is essential that an HOA always practice proper management of finances. This means annual budgeting, strategic planning, consistently adding to the reserve funds and borrowing carefully. This also means maintaining transparency, honesty with community members and frugality in all financial decisions.
In some occurrences an HOA can file for bankruptcy but this is rarely the case. Bankruptcy is not a viable option for most HOAs because of three main reasons. First, bankruptcy is usually declared to nullify outstanding debts to creditors. HOAs don’t typically have this type of debt. Second, the reserve fund is typically drawn on when expenses exceed revenue, although this is not how a reserve fund should be used. And lastly, in an HOA all homeowners are accountable and liable. This means that property assets can become practical answers to the HOA’s debt.
The result of an HOA running out of money is that ultimately community member’s homes are on the line.
If your HOA is falling on hard times, don’t put off your problems until it’s too late. Consult with a community law attorney ASAP and find out what your options are.
We offer legal assistance in all matters of condominium association law, homeowners and community association law, real estate litigations and transactions, residential and commercial closings, and insurance law.
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If an hoa has no money why would they borrow a million to redue the pool?
My elderly mom’s driveway and patio has fallen at least a full foot from the slab and the Hoa claims it will not fix because they are out of money. This Hoa is over 30 years old? Where is the money? I’m my elderly mother falls can we sue?
Our HOA broad earlier this announced because of community fires the current policy was not going to be renewed and to board was forced to look elsewhere for coverage. The only policy that could be obtained was one that was 5x as expensive a d the one we had before. The board has tried 3x to have the homeowners pass a special assessment to pay and relieve the funds, but some are fighting this option. Are there any other options? If we don’t do this the board has said it could send the community into recievership.
Question ? If an HOA president spends money autocratically with no advisement to the membership on cosmetic landscaping and not on securing the safety of the common elements of the property and the structures is this an ‘Abuse of Power ‘ if the expenditures for cosmetic landscaping deleted the funds necessary to correct county code violations is this a criminal violation as related to ‘Abuse of Power ‘. ?
Who pays for the legal services to sue an HOA that has run out of money and will not allow us to vote in a board of directors because they are not being paid to hold the meeting due to lack of funds? None of us are going to be willing to foot the bill as we are at the lowest income level of people who can buy a home. Our HOA is only $250 a year in a neighborhood with less than 60 houses. Our HOA was unable to collect fees from at least 10 Home owners, which is what they are blaming as the reason we have run out of money. Yet we can not pursue the lien process to collect without a board. Is it appropriate to take up a collection from the neighborhood?
Can residents sue their Management Company for mismanagement and negligence of their duties? Is it managements responsibility to force a board to do urgent capital improvements when funds are available – case in point urgent need to replace roofs for at least 3+ years? Now necessitating a loan to insure Capital Reserve has funds available.
I’ve been in a community for 26 years. In 2021 the well 400/500 ft from my house was shut down and my home was connected to another well 7 tenths of a mile away. Myself and a few other neighbors at the end of the water line have been discriminated against and have been without water at all for days and dirty water, I’ve tried every avenue with my board and since it’s only a few homeowners without water they don’t care , Is legal action my only recourse? Dep violations hid from the community