Editor’s note: This column was included in the April 25 version of The Pulse, a weekly BankBeat email newsletter sent to subscribers.
Did you know that more than half of owner-occupied households in the United States belong to a homeowners association, or HOA? Every condominium, cooperative, cluster of townhouses, and now roughly 80 percent of newly constructed single family homes are governed by, and paying assessments to, one of the nation’s 370,000 HOAs. In the United States, 22 new HOAs form every day.
Not surprisingly, Florida and California have the greatest number of HOAs. In the Midwest, Illinois, Minnesota, Wisconsin, Michigan, Indiana and Iowa each have a significant number of HOAs.
I’ve lived in a community governed by an HOA for nine years, but hadn’t given its governance, or its balance sheet, a millisecond of thought until I joined my HOA board and got a look at its complex financials. For example, our 89-townhome community, which is valued at more than $47 million, has nearly three-quarters of a million dollars in the bank. Most of those funds are held in what we classify as a “reserve” account, money set aside for capital improvements.
In Minnesota, where I live, it is state law that we keep reserve funds in an FDIC-insured account “sufficient to meet the needs of the HOA.” (Can you appreciate the lack of specificity?!) Most of our “reserves” earn about 0.05 percent interest, which is to say the asset really isn’t working for us. It’s working for our bank — a large, public institution based in North Carolina.
It’s the rare HOA board volunteer who knows how to read a financial report or how to maximize HOA resources by developing a relationship with a good banker. Homeowners don’t know what they don’t know, which is good for banks focused solely on shareholder value, and bad for HOAs that need to keep up with inflation.
Complicating the process are HOA management companies, an administrative layer inserted between the HOA and the bank that processes assessments, issues monthly reports, and provides property management (of varying degrees of competence). Really, it’s the management company that chooses the bank, unless an HOA really pushes hard. And while a management company cannot prevent an HOA from receiving a better return on its savings, its business model does not provide incentives for encouraging client financial education.
Providing HOAs with banking services (deposits and loans) is mostly the province of the nation’s largest banks. But that doesn’t mean community banks cannot compete. They can. I’m working on a story for BankBeat now about one that is.
There exist banks that have built their entire franchise on serving HOAs, providing checking and savings and ACH services, because there is always money in these accounts. Sometimes a whole lot of money, which amounts to several tons of low cost deposits. And isn’t that just what you need right about now?