Navigating the HOA loan process alone can a be risky business
A friend of mine relocated from Michigan to Florida. Since he’d done his own landscaping for decades, he decided to continue this pursuit at his new home. He spent thousands of dollars and countless hours planting greenery. He was very pleased with his work – initially. His investment of time and money ultimately proved fruitless. After a few months, he had to replace all the plants and shrubs.
What my friend failed to realize was that the soil, moisture and temperatures were more than a little different between the two locations. His knowledge of Northern horticulture gave him a false sense of confidence in his ability to tackle landscaping in the South. I have seen HOAs make similar mistakes when it comes to finances. These errors are not so much about over-confidence as they are a matter of “you don’t know what you don’t know.”
Many clients have confessed to me that their Board Members incorrectly assumed they had the financial know-how to secure a loan for their community. As they learned the hard way, experience with home, auto or commercial loans does not transfer to expertise with HOA loans. If your board has never actually been involved in an HOA financing process, there could be significant and expensive missteps.
Here are a few common oversights in the HOA loan process:
Unlike a car or home, HOA loans require a lot more lead time and leg-work. For instance, steps need to be taken to insure buy-in from the community and potential legal risks must be evaluated to insulate the board from future litigation.
Once internal hurdles have been addressed, the process of finding a suitable lender, ensuring that terms are competitive and then navigating the application, documentation and legal process can take considerable time. It is not uncommon for the entire process to take several months or even longer.
Can the board commit the time and resources necessary to manage all these things on their own?
There can be a steep learning curve when it comes to the HOA loan process. These types of financial transactions are very specialized and highly nuanced. Even though board members have likely entered into personal mortgages or even business-related loans, HOA borrowing is unique in that there are multiple parties involved, a lack of traditional collateral, and inimitable legal conditions. Plus, there are personal fiduciary responsibilities to consider.
When board members make poor financial decisions with their personal investments, it is unfortunate. However, when a fiduciary makes an uninformed choice for the association, it impacts the entire community, and in certain circumstances be held liable.
Are board members willing to become experts in HOA loans? Are they comfortable with potentially falling short if challenged on their fiduciary responsibilities?
Limited Pool of Lenders
Financial institutions make loan decisions based on risk. To some lenders, HOAs can be risky borrowers which is why they choose to not participate in the HOA loan market at all.
There is just a small pool of lenders across the U.S. who specialize in HOA loans. They are well equipped to assess the true risk involved, and as result, they offer much better interest rates and terms. I’ve had several clients seek out my services after they received multiple loan rejections from their local bank or well-known financial institutions.
Does your board understand how to find and connect with the lenders who specialize in HOA loans?
Arch Capital Solutions acts as an advocate for your HOA. We have relationships with lenders throughout the country 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.