Any organization that deals with finances will sometimes be forced to handle bad debt. An example of this is a homeowner’s association. But what is bad HOA debt, and how can HOAs prepare and manage it?
What is Bad HOA Debt?
Bad debt, simply put, is a monetary amount owed that is more likely to remain unpaid. It can also be described as an uncollectible account. In HOAs, bad debt usually involves homeowners who owe fees to the HOA.
Most HOAs collect a regular fee from their homeowners to fund the association’s everyday operations. It is used to fund everything from administrative expenses to repairs and maintenance. The fees are based on the annual budget prepared by the board, taking into account anticipated expenses for the coming year. That budget is divided among all homeowners in the community to determine how much each household needs to pay.
However, for one reason or another, some homeowners fail to pay these fees. This results in their accounts being tagged as delinquent. When these unpaid dues pile up, they become bad HOA debt, which may negatively affect the association’s finances and operations.
The Effects of HOA Bad Debt on the Community
HOAs are responsible for ensuring the community runs smoothly. They are responsible for managing numerous aspects of the neighborhood, including maintenance and repairs, as well as safety and security.
However, like most things, these don’t come for free. Associations need to pay contractors and vendors to provide these services to the community.
Bad HOA debt from delinquent accounts causes a domino effect that negatively impacts the community as a whole. When a resident fails to pay their dues, especially for an extended period, the HOA may have difficulty budgeting properly. Without sufficient funds to cover these expenses, the HOA would also risk being unable to provide key services to its residents.
Of course, the HOA board would have to find a way to avoid this. As such, they may be forced to consider HOA assessments to cover what’s missing. This would then place a greater burden on other, non-delinquent homeowners in the community.
How to Handle HOA Debt
Whether the HOA already has it or not, board members should always consider the possibility of HOA debt. With this in mind, they should also be prepared to handle it if it happens, to lessen the impact on the HOA and its residents.
Here are some ways to do so:
1. Monitor Delinquent Accounts
To handle HOA bad debt, you need to know where it’s coming from. The association would need to accurately account for these debts to properly prepare for them. For this, tracking delinquencies in your communities is a must.
You can easily monitor delinquencies by putting them on a table or spreadsheet. This file needs to include which accounts are delinquent, the amounts they owe, and how long the fees have been overdue.
Additionally, this needs to be kept up to date regularly. The practice ensures that your records are accurate at all times and helps you identify trends and changes that could inform your strategy.
2. Anticipate Additional HOA Bad Debt Expenses
When accounting for bad HOA debt, you should aim to keep delinquent accounts at around 1 to 2 percent. However, certain factors can change that target, such as the state of the economy and its effects on households.
If you don’t put enough effort into reaching this target, the high number of uncollectible accounts would force your hand to take necessary action. Such actions may involve hiring a collection company, placing a lien, or starting foreclosure proceedings. All these actions would incur additional expenses, which you will need to account for.
3. Add a Budget Cushion
When your association expects bad debt to account for, the board may add a cushion to the annual budget. This financial cushion would help ensure that the HOA can cover all its expenses in the coming year. Having one also helps with future unanticipated expenses.
While these three steps can help your HOA deal with bad debts, it is still best to seek professional help. You can seek counsel from a CPA or a lawyer on how you can handle bad debts and delinquencies.
Handling Delinquent Accounts
Other than handling uncollectable debts when they’re already in place, HOAs would likely benefit even more if they could lower the number of homeowner delinquencies.
Here are some ways that your HOA can do so:
1. Well-defined Payment Policies
Payment policies in HOAs outline the homeowner’s responsibility of paying their regular HOA dues. However, crafting a good policy benefits both the HOA board and residents alike.
A good payment policy goes beyond just indicating the amount each homeowner would need to pay. It should be clear to avoid confusion and frustration for everyone involved. The policy needs to clearly state the processes involved, key deadlines, and the payment options available to homeowners.
Additionally, well-crafted policies should be transparent. It should let HOA members know where their funds are going. This helps improve residents’ trust in the people handling their money.
2. Timely Communications
Given the fast-paced way of life most people experience nowadays, it’s easy to get distracted. Therefore, it’s common for residents to forget their monthly dues because of these distractions.
To help them remember, a little nudge from the HOA wouldn’t hurt. This is where timely notices and communications come in. You can send reminders to homeowners as the deadline nears. This small step benefits both the HOA and the homeowner: the HOA receives dues on time, while the homeowner avoids late fees.
3. Flexible Payment Plans
Many different factors can affect a resident’s ability to pay for their monthly dues. There are times when people get the short end of the stick and suddenly find themselves struggling financially.
Often, when delinquent fees pile up, the more money is owed, the less likely one is to be able to pay it off all at once.
In such scenarios, HOAs can benefit from considering their situation. That is not to say, however, that they should pardon the fees. Instead, they can offer more flexible payment plans, making it easier for homeowners to pay what they owe.
4. Numerous Payment Options
For most people, time is a limited but essential resource. Another way for HOAs to minimize bad debt is by making it easier for members to pay their dues. You can adopt numerous payment channels to do so, increasing the convenience for the community. This makes them more likely to pay their dues consistently and on time.
5. Consequences and Fines
Sometimes, the most effective way to minimize delinquencies and bad HOA debt is by putting deterrents in place. In the HOA setting, these result in consequences such as loss of privileges and fines.
When imposing these, make sure that they’re within a reasonable range. Going beyond that would only result in complaints and, in the worst cases, legal action against the HOA. For this, it would be best to consult a lawyer to pinpoint the reasonable amount for fines.
Achieving Healthy Finances
Numerous factors can affect how much bad HOA debt your association will need to handle. However, with the right, proactive steps, your HOA can lessen its impact on the community.
CWD Group offers HOA management services, including budget planning and debt management, to community associations in Oregon and Washington. Call us today at 503-488-2008 or contact us online!
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