How do we know if our HOA loan proposal is competitive?
A few years ago, I taught a finance course at a local college. One of my students was about to buy his first car and needed a loan. His father advised him to go to their “family bank”, where they’d been loyal customers for a long time. The dad said that the son simply needed to fill out a loan application and leverage the family’s good name.
When he shared this with me, I suggested he approach more than one lender before signing any loan agreements. A few days later, he greeted me with a big, ‘thank you.’ Apparently, his family’s bank did not offer him great loan terms. He was thankful that he had a plan B. HOA banking relationships are no different.
Banks are unique
Your primary bank may indeed be a strong competitive lender. However, the only way to truly test this notion is to seek more than one proposal. Your incumbent bank may be putting an offer on the table simply to retain your HOA’s depository relationship. Whereas an institution that specializes in HOA loans may create an aggressive deal that could save your members considerable money over the course of the loan repayment.
Terms can vary
We just worked with a 50-unit complex that needed to borrow $2.5 million. Had the board accepted their local bank’s proposal, each homeowner would have spent an additional $3,400 over the 20-year term. Their primary bank had offered a loan with an interest rate of 6.00% vs. the 5.50% loan that was proposed by another lender.
It is not at all uncommon to see 1% to 2% difference between proposals. You owe it to your fellow members to conduct due diligence with respect to any loan to be sure you are getting the best terms possible.
Interest rate isn’t everything
It may be tempting to focus solely on a loan’s interest rate. But often times there are other fees and term to be considered. One lender may propose bank and legal fees that more than offset any interest rate differentials. Alternatively, a bank’s interest rate may be marginally higher than another proposal but they are able to get a loan closed quickly. Prepayment penalties, re-amortization conditions and compensating balance requirements are all factors that need to be considered when evaluating loan proposals.
Arch Capital Solutions acts an advocate for your HOA. We have relationships with lenders who specialize in HOA loans.
In many states, the board may actually have a fiduciary duty to make financial decisions that are in the best interest of their members. Arch Capital Solutions can satisfy those fiduciary duties acting as the HOA’s financial advisor. We help HOAs obtain financing and choose the best proposal from multiple lenders.