Once a year in every community association one of the most significant event occurs: the formulation of the association’s annual budget. It’s even more important than the annual election because this budget is the road map for how the association is to be run for the next year. The board can decide on many issues including capital improvements, added amenities, reduced services, and everything in between.
However, the one item that always leaves the board and management confused is the disposition of delinquent fees and questionable debts. Whether that figure is 1% or 20% of the budget is irrelevant. It exists, and it must be budgeted for and addressed. Condo & HOA Collections are essential for budget considerations.
While expenses are broken down into various categories, income is mostly (just about exclusively) derived from maintenance fees. Other income items such as fines, violations, vending machine income, parking revenue, and party room rentals tend to be a small percentage of the budget.
Every member of the board must be clear as to the task at hand and how the budget is formulated and what it is all about. Without an efficient plan for how to address Collections, nobody really knows what the association’s shortfall (if any) will be at the end of the year.
It is easy to estimate the costs and what needs to be budgeted for, but one can never truly know what the delinquencies and costs for Condo & HOA Collections are. More than that, one can never be sure if these delinquencies will ever be collected so the board must allow for a “bad debt” allowance and at the same time plan how best to make that number as low as possible.
By using last year’s numbers, the manager can make a good first draft for the board to review expenditures including operating budgets, capital expenditures, and reserve funding. However, the most difficult line item is the ever-present unknown line item for delinquencies. A community association can depend on what occurred in the previous year, but delinquencies are the most unpredictable of all budgetary line items.
It has been determined that the best solution is to engage unit owners and convince them that their obligation to their community is just as significant as any other debt that they may have and to get them to pay.
It is for this reason community associations need to establish a uniform collections policy in tandem with their budget and decide how they will approach unit owners who pay late or who have completely stopped paying at all. The decision usually comes down to either sending the delinquent file to the community association attorney (don’t forget to include their fees in your budget) or to a qualified collection agency who is merit based and gets paid by the delinquent owner only upon a successful collections event (no entry on the budget for this method of collecting delinquencies).
The attorney path is the traditional way for boards and managers to deal with delinquencies, but there should be no doubt that foreclosing on a unit (which is what attorneys do) is not a great solution.
It has been determined that the best solution is to engage unit owners and convince them that their obligation to their community is just as significant as any other debt that they may have and to get them to pay. Gentle persuasion, outbound calls, written notices, along with real life consequences such as reporting to the credit bureaus is the most effective way to convince delinquent owners to pay their debts. Its all about engaging best practices for Condo & HOA Collections
So this year when you are considering your budget and you come to the part where you have to decide on what to put into your budget for doubtful or bad debt, consider a more effective solution that one one currently in place. At the end of the year you will be surprised by how little the association needed to raise maintenance fees due to non-payment and late payment of maintenance fees.
Now Is the time to consider all financial matters and collections should be at the top of your list.