The Other Foreclosure Threat

When an HOA levies assessments, it counts on being able to collect the money from every owner. It’s a reasonable assumption – both condominiums and planned communities have the power to collect both assessments and any costs incurred while chasing an owner who does not pay. Associations also have a lien on a debtor-owner’s property and make the owner personally liable for the assessments, even after foreclosure. When an owner becomes delinquent in their assessments, associations need only invoke their collections procedures to pursue collection.

But what if the owner just doesn’t have any money? With the poor economy and the tumble in the real estate market, more and more HOAs are facing situations where an owner owes a large sum to the association, is on the verge of bankruptcy or is bankrupt, and owes more on their home than the home is worth. Many of these owners’ mortgages are in foreclosure, so they simply stop paying their HOA dues while the bank goes through the motions. Unfortunately, the foreclosure process can take months and a large debt can accrue. If the owner didn’t have equity in their home, even the foreclosure sale won’t make the association whole. Even though the owner is still personally liable to the association for their debt, often times the now-former owner just doesn’t have any money for the association to collect.

When the board determines that a debt is uncollectible, it has the power to write it off. Naturally, though, this creates a shortfall in the association’s income. When an association has a financial shortfall, it has one place to turn to raise the money it needs – the owners. For that reason, when some owners fail to pay their assessments, the remaining owners bear the burden. With the ongoing foreclosure “epidemic,” many HOAs are finding themselves writing off more unpaid assessments than ever before, and the owners who are paying are starting the notice the additional burden falling to them.

There are a few things a board can do to minimize the impact foreclosures and other delinquencies have on the HOA’s bottom line and to reduce the risk the board will have to pass the hat to the other owners to make up for shortages. First, make sure you have a collections resolution and are actively pursuing owners who are delinquent. Then, carefully go through your budget and eliminate unnecessary items. Although you shouldn’t forgo necessary maintenance and repairs, now may not be the time to install a new swimming pool. Next, evaluate your accounts receivable. If you already have a number of delinquent owners, or know of several homes in foreclosure, it’s likely you will have a shortfall in assessments. Third, go back to your budget, and adjust your expected income. If after scrutinizing both your expenses and your income you still have a shortfall, budget an amount to close the gap, and increase assessments if necessary. If you foresee an ongoing shortfall, you can even create a reserve account for that specific purpose. In an emergency, you can borrow from reserves to make up for a shortfall, or levy a special assessment.

Raising assessments is never popular, especially when the need arises because not everyone is paying their share. Though times are tough for many, with careful planning you can keep your Association afloat and avoid painful special assessments and sharp dues increases.