When (not if) your HOA gets into financial trouble, your board basically has two options: raise dues or issue a Special Assessment. So which is worse?
Notice we didn’t say which is better because either way you’ll be paying more money to cover the previous financial mismanagement of your HOA.
Here’s a real world example that will hopefully make it clear… The roof on your building needs to be replaced now. Unfortunately, your HOA has not saved enough money to replace the roof and each owner will need to contribute $5,000 to cover the shortfall. Your HOA Board has proposed two options:
Issue a Special Assessment for $5,000 and keep monthly dues the same.
Increase monthly dues $150 per month for the next 3 years and no Special Assessment.
So your choice is pay $5,000 now or $5,400 over 3 years.
As with most large expenses, you would probably choose to pay it off over time. If you can get a low interest rate this is usually the smart choice… With HOA expenses it’s almost always the wrong choice. Here’s why:
Temporary dues increases usually become permanent… Has your county ever proposed a temporary sales tax increase? Most likely that temporary increase was not so temporary. In general government is not good at reducing spending and they will find a way to spend all of the tax revenue they receive. HOA Boards are usually no different. Saving money is hard. Spending money is easy. In our roof example above, it’s very unlikely your dues will go back down $150 per month after 3 years.
There’s no requirement that your monthly dues are only spent on specific budget items… In CA, we pay very high gas taxes for future road repairs. When it comes time for these repairs, there’s never enough saved because the money was spent on other things. So they raise gas taxes higher. HOA Boards do the same thing. In our roof example, your HOA was supposed to be saving a portion of your monthly dues for the future roof. They spent the money on other things and now there’s not enough for the new roof. Since your HOA couldn’t save correctly in the past, why would you trust them to save correctly now? With a Special Assessment, your HOA Board is required to use the money ONLY for the expenses specified in the Special Assessment.
High monthly dues reduce your home value. It’s simple supply and demand. Higher dues reduce the number of buyers interested in your home. Fewer buyers reduce the number of competing offers. Fewer competing offers reduce the sale price of your home.
Special Assessments are painful in the short term but they will ultimately cost you a lot less in the long term versus increasing Monthly Dues.
It may not be a requirement to have funding requirements for each Common area component but it is a good idea to designate funds according for replacement costs and cycles for each common area component. It is a best practice for HOAs.