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.