Written by Chris Majerle, PCAM on September 10, 2020
Community Management Edition
Delinquent assessments are a problem at a great many communities. Delinquencies not only impact a community’s ability to meet operating expenses but also have a nearly direct effect on property values. Whether you have high delinquencies or low, you will be asked to report on them. Do you know how? Well, it depends on who is asking.
One way delinquencies affect property values is through the loss of financing options. FNMA, FHLMC, and FHA all have adopted policies allowing them to reject loans in communities with excessive delinquencies. Facing the possible loss of financing, it is important to recognize how those agencies expect delinquencies to be reported. The secondary market lenders mentioned above are looking at numbers: How many unit owners are more than 30 days in arrears? If it’s more than 15%, they may not make the loan and that means buyers cannot borrow. But, in today’s economy, most community associations dream of having only 30-day delinquencies. Instead, we are seeing multiple-year delinquencies.
When reporting on lender questionnaires, you likely will be asked the total amount of delinquent assessments in addition to the percentage of units more than 30 days in arrears. Answer accurately. It would constitute fraud to stretch the truth on such a questionnaire.
More than just affecting financing possibilities, delinquencies also reduce operating funds. Take a single case. If the assessments are $100/month and a homeowner is two months behind, the association has one delinquency over 30 days and is only short $200 toward operations. But, if the homeowner is eight months behind, you still have only one 30-day delinquent, but you are short $800. Big difference!
Community managers are working on next year’s association budgets now, and are looking at how delinquencies affect your association. If your current year operating budget was $300,000 and you are on track to collect only $270,000, there is 10% or $30,000 in uncollected assessments that you cannot spend. If you are budgeting on a cash basis, you now should budget not to collect 10% of your assessments in the coming year.
Some of what you collected might be payment of prior years’ assessments while the rest was the current year, but it’s all cash. If delinquencies are on the rise, you’ll need to allow for less coming in than budgeted. If delinquencies are falling, you can spend more than your total assessments because you’re collecting old assessments this year. On an accrual basis, you will show 100% of assessments in income, but you will have to investigate how much of the assessment revenue that came in was current vs prior years. It is essential to recognize whether actual cash income equals budgeted cash so you know whether to buy that new tot lot or to defer that maintenance project.
In summary, it’s important to know to whom you are reporting. If answering questions for a lender, answer exactly the questions asked: How many owners are 30 days in arrears in assessments? What is the total amount of assessments more than 30 days in arrears? Count only assessments—not late fees or legal fees, etc.
However, what is most important to the association board is to know the trend in delinquencies: to have the ability to see whether the number of delinquent owners is rising or falling and whether the amount delinquent is rising or falling. If cash is more than accrued assessments, we collected more than budgeted and our delinquencies were reduced. The opposite is true: If we collect less than budgeted, delinquencies rose. In the end, it’s a matter of cash flow and you can’t spend more than you receive.
Find a reporting model that answers the question being asked and report in that model consistently so the reader can recognize trends.