A down economy is no fun. Not for you, not for your neighbor, and certainly not for your homeowners association. But when homeowner delinquencies and operating costs are both on the rise, it creates a perfect storm for HOA debts. So, how do you protect your community from this situation?
In this article:
HOA Debts: Do All Roads Lead to Special Assessments?
An economic recession makes it harder for homeowners to meet their financial obligations such as paying mortgages and HOA dues. While it is easy to empathize with what your community members are going through, a rise in uncollected assessments can be very troublesome for the HOA.
Unless an association has external sources of revenue, it greatly depends on the members’ monthly assessments to operate. HOA dues are used to pay for operating expenses such as utilities, maintenance services, management fees, insurance, and taxes. So, the more your HOA delinquency rates increase, the harder it is for your community to operate.
In the face of HOA debts, associations try to come up with ways to raise money for their operations. Levying special assessments is the last resort because it places a huge financial burden on the dutiful HOA members. However, in the end, all roads seemingly lead to special assessments.
For example, some HOAs draw from their reserves to pay for their operating expenses. While this will solve your current financial problems, it also creates a bigger problem in the long term. What happens when you need to fund large-scale maintenance and capital improvement projects? If you depleted your reserves, you will eventually have to levy a special assessment on homeowners.
Some states like Washington also impose a deadline on when you need to replenish a depleted reserve account. Again, if you are dealing with HOA debts, you will have a hard time coming up with the money. The association can get a loan, but this too eventually leads to levying special assessments on your homeowners.
Thankfully, there is a way to deal with HOA bad debts without having to resort to special assessments — HOA budgeting. However, this requires adequate planning and preparation from the HOA board.
How Proper Budgeting Can Protect Your Community From HOA Debts
The economy goes up and down in a business cycle. While most people are surprised when the economy goes down, a recession does not happen overnight. There are key indicators that signal that a recession is coming. So, what does this mean for HOAs?
HOA board members must realize that they can protect their community from bad debt during a down economy. How? Through proper budgeting. When planning the budget before a recession, board members must budget for uncollected assessments.
Here are some things to consider when budgeting for bad debts:
1. Total Amount of Operating Expenses and Reserve Fund Contributions
HOAs must think about both operating expenses and reserve funds when budgeting for bad debt. You don’t want your budget to simply breakeven at the end of each month; you want some surplus to add to your reserve fund. HOAs that have insufficient reserves will continue to face financial hardships even after the economy has recovered.
2. Percentage of Delinquent Homeowners
If you have a high percentage of delinquent homeowners, the higher the amount that you have to budget for HOA debts.
3. Amount Owed by Each Delinquent Homeowner
The higher the amount owed by each delinquent homeowner, the less likely it is to cover your operating expenses.
Budgeting for HOA debts will translate to higher monthly fees. However, it won’t be as burdensome as special assessments. The key is to increase HOA fees before the next recession. When the recession does come, the association will have a cushion that softens the blow of uncollected assessments. Increasing HOA dues is also a better long-term solution because it lessens the likelihood of special assessments.
Since HOA board members may not have sufficient financial and economic expertise, it’s best to have an HOA manager or HOA attorney present during the budgeting process. They will be able to advise the board on whether or not the budget is feasible.
Other Ways to Decrease HOA Debts: Are They Effective?
While proper budgeting helps protect the community, the HOA board should understand the added stress placed on responsible homeowners.
The ones who dutifully pay their dues each month will have to pick up the shortfall created by delinquent homeowners.
As such, the association comes up with other ways to decrease HOA debts. While some expenses such as insurance and taxes are non-negotiable, some HOAs may be able to cut back on their expenses. Here are some examples:
- Closing amenities to reduce operating costs
- Postponing capital improvement projects
- Cutting back on landscaping, maintenance services, etc.
- Having volunteer homeowners perform services
While these examples might help decrease operating expenses, they may not be enough to cover the shortfall created by delinquent homeowners during a recession. One of the best ways to protect your community during a down economy is to establish a strict collections policy from the get-go.
A Strict Collections Policy for Delinquent Homeowners
A strict collections policy will be able to decrease your association’s delinquency rate. You need to make homeowners aware of the consequences of not paying their dues. While this becomes a harder task in the face of a recession, board members must remember their fiduciary duty to the association.
Depending on your governing documents, the HOA must take action on homeowners who are delinquent for at least six months. This could mean sending their accounts to a collections agency, placing a lien on their property, or filing for foreclosure.
When your community has less delinquent homeowners, there is also a lower chance of having HOA debts. In case of future financial hardships, it will also be easier to get a loan. The Federal Housing Administration (FHA), as well as many banks and lenders, no longer lend money to associations that have a delinquency rate of 15% or higher.
A Down Economy Doesn’t Have to Lead to HOA Debts
Though homeowners associations don’t have the power to prevent a recession, they can at least protect the community from bad debts. Having a proper budget that accounts for HOA debts and a strict collections policy can be crucial during difficult economic times. Nevertheless, it helps to have an HOA board that is proactive, organized, educated, and consistent.