Best time to borrow money for HOA repairs?

A homeowner association approached us recently for advice on an interesting issue. Their association needed to undertake an extensive and expensive repair project. They all agreed that the project was necessary. However, there was disagreement on the timing and financing. One group wanted to enter into an HOA loan for repairs. Another party wanted a long-term dues increase. 

The more vocal homeowners urged the board to delay debt. They wanted to increase dues over the next five years. At the end of the five years, they argued that the association would have enough reserve funds to reduce the amount of their loan request. Another faction of homeowners felt that the association would be wiser to secure an HOA loan with a 10-year maturity as soon as possible. They wanted to use the loan proceeds to begin the work immediately.

Both groups made excellent points. However, the more compelling argument favored borrowing immediately so that repairs could begin as soon as possible. 

If your association is facing a similar situation, you may want to use this outline as a framework for discussion.

The Cost can increases if you wait for an HOA loan

With some digging, construction inflation numbers can be forecast. In the case of our recent analysis, many credible sources were projecting regional construction inflation to rise at more than double the core inflation rate for the near future. These sources based the projections on many factors, including a tight labor market and the imminent start of multiple large-scale municipal projects. There was also robust activity in new home construction that added additional stress to the demand for materials. Driver shortages are one factor in high transportation costs that put even more upward pressure on material prices.

These factors implied a five-year delay would increase the project cost from $10 million to more than $13.3 million. This projection assumed one of the more modest inflation targets. This type of delay would increase the assessment burden per household by more than 33% (due to cost compounding). Worse yet, the more pessimistic scenarios projected a 5-year delay could increase costs more than 45% to just under $15 million.

Although the reserve funds would be in an interest-bearing account, the interest earnings would be negligible in offsetting these projected cost increases under even the best-case scenario. 

Knowing the interest rates’ fluctuations on the HOA loan can help you decide when to take it out.

Longer-term interest rates have been relatively low for quite some time. However, short-term rates have been creeping up recently. A delay in borrowing would also subject the HOA to less favorable loan terms. 

Many financial professionals agree that interest rates are poised to increase in the next few years. If the association opted to borrow as soon as possible, their interest costs would be locked-in for a 10-year term. Predicting where borrowing costs will be five years into the future adds another element of uncertainty to the financial picture.

Monitoring home values can help you decide when to take out an HOA loan

Real estate values within the community have lagged the local market due to two factors. First, the general uncertainty around the upcoming capital improvement project has suppressed sales. And the overall appearance of disrepair has made the association uncompetitive and less desirable than other communities in the area.

The consensus from realtors was that even though the monthly assessments would increase to include loan repayments, the association’s [home values] would benefit tremendously from having the repairs done and the uncertainty removed. Realtors overwhelmingly felt that a post-repaired association would help buffer prices in a declining market and allow a more favorable correlation if prices continue to appreciate. 

Conversely, If the association continued down its current path, the consensus was that housing prices would remain weak regardless of the direction of future housing prices.

If you wait too long to take an HOA loan out for repair, it might cost more. 

Left unattended, disrepair issues that exist today are likely to worsen over time. Although not as quantifiable, there was also concern that any delay in repairs could trigger a domino effect. Unrepaired roofs could lead to leaking, collapsing, and mold issues. Further deterioration in balcony and pool areas exposed the association to expenses related to potential and preventable injuries.

Legal costs:

There are also disclosure and defect-related duties that the board needs to follow. Aside from avoiding potential injury-related litigation, the board is obligated to repair and maintain their community. Members of the board would have to rationalize their logic had they decided to postpone a major repair project.

In summary, there was an indisputable financial argument in favor of getting an HOA loan for repairs. The advocates for putting off borrowing realized that their position was based on an emotional approach to remain debt-free as long as possible. 

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 has a fiduciary duty to make financial decisions in the best interest of its 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.