Why Does Bad Debt Happen In Community Associations? by Mitchell Drimmer of Axela

Why Does Bad Debt Happen In Community Associations?

by Mitchell Drimmer of Axela

In your Condo or HOA you are going to have delinquencies every month in good times and bad times. These are bad times and the delinquency rate is only going to increase to levels where hard choices by the board of directors need to be made, If Action is not taken!

What is an Average Delinquency Rate?

In normal times CAI (Community Association Institute) estimates that delinquencies fall between 5%-8% but these are not normal times. With the ravages of Covid-19 and the ensuing economic downturn, we can expect delinquency rates to go as high as 35% in some community associations.

What Happens to a Community with High Delinquencies?

It is no secret that the lion’s share of the revenue for community associations comes from the assessments that are paid for by the members of the Condo or HOA. So any cash shortfall is going to place a burden on the entire community. Employees need their salaries, vendors want to get paid, supplies need to be purchased, it costs money to keep a Condo or HOA property running.

So what is to be done if the community has more bills to pay then money in the bank because the owners did not pay their assessments? Hard choices need to be made and attitudes must be adjusted. It all starts from the top and boards of directors of community associations must come to the realization that they have been elected to manage a business. Just like any business there are the leaders of the association and understand that everybody needs to do their part each month to keep the lights on.

Homeowners Should Prioritize Payment of Community Assessments

Another attitude adjustment must come from the owners. Some members of Condos and HOAs sometimes feel that their least important financial obligation is to the community which houses them. While it may be true that units are purchased, an important part of the covenant the association has with the members is that they will pay for the maintenance of the association. So even when hard times come, and for sure they are here, the members need to continue to pay their fair share.

It is all too common that the HOA maintenance bill is at the bottom of a member’s pile of bills and it’s the last one to be paid. If by the time the member gets to that particular bill, there’s not enough money to cover the payment, it may not get paid at all. Other bills get paid first like credit cards, car loans, utilities, and such.

Yet your most important bill might very well be the community association assessments. The neighborhood that you live in needs to keep the streets safe, services like garbage collection kept up, and the facilities running, not to mention life-safety issues like fire alarms and security.

Boards of Directors Have a Fiduciary Duty to the Welfare of the ENTIRE Community

Members of HOAs and Condos live among the elected leadership of the community and have the ability to watch as the board governs the association. This familiarity may be the cause for some owners to consider their obligations to the community less compelling than a utility bill. One does not expect a neighbor to send another neighbor into collections.

This should never be the case because by not sending in a delinquent owner into collections a board of directors is NOT being good neighbors. They are enabling the delinquency, which will snowball into a larger cost that may not be recoverable. Then the association has to take more serious actions and foreclose on a property and put a family out of their home.

Bad debt happens to associations who will not communicate to an owner that non-payment is not an option and owners who do not understand that this is a bill that needs to be paid.