Over the past few years, I have been advocating that community associations add a new line item to their budgets – Delinquency. Did you heed my advice? Did you help protect your community from facing new financial consequences by preparing for the inevitable delinquencies and financial shortfalls caused by missed common fees and increased foreclosure expenses? If you did, then I congratulate you on your far-sightedness and prudent planning to avoid a budget delinquency. If you didn’t, then I guess you’re budget is delinquent, see?
Joking aside, delinquency is no laughing matter. Successful implementation of adding the line item to your budget is not an easy sell. If you are not already communicating the problem to your residents, I suggest you use your condominium newsletter, HOA newsletter, bulletins, websites, and any other communication tools to do so.
The facts are really quite simple. The country continues to have a high unemployment and underemployment rate. Property values have decreased in many communities so it is not uncommon to have individual homeowners within a community holding mortgages that exceed the liquidation (foreclosure or short sale) value of their unit. If any homeowner gets behind in their mortgage or common fees, the foreclosure process is likely to begin and the community will incur a delinquency in the form of uncollected common fees and/or increased legal expenses to try to collect those fees.
Unless your budget includes money set aside for these occurrences, that delinquency will directly impact your ability to pay for other items that are in your budget. Since I live here, let me use Connecticut as an example. In December of 2010, Connecticut had a foreclosure rate of .073%, resulting in 1050 filings. Granted, not all of these filings made it all the way through to foreclosure but many did. If you had one or more foreclosures in your community, you already know the bittersweet process of filing a claim to collect your share of the proceeds and figuring out how to cover the deficit created by delayed or lost revenue. It is at best a burden, at worst a disaster, to any community’s budget.
So how do you stop delinquency from crippling your budget? Education is always your first line of defense, so why not start by explaining how the budget process works in your community association. I maintain that community association budgeting is part math, part guess, and part crystal ball. I begin with the known factors, based on last year’s historical records. I work with my property manager to make a best guess as to what things are likely to cost this year. Then I consult with my crystal ball, that is, I take a good look at outside factors that may influence what goes on within my community. Foreclosure rates, local economy issues, etc. are all considered before the final budget is prepared.
In preparing last year’s budget, I decided that 5% was a reasonable number to use for our Delinquency line item. That meant that after the Annual Budget was completed, I added 5% to the bottom line and called it Delinquency. Of course, that meant a majority of all unit owners in attendance at the Annual Meeting had to agree that they and their neighbors would fork up an additional 5% to their common fees for the entire year. They may not have been happy about that but when one of our homeowners went into foreclosure, we found ourselves consistently running a 5% shortfall over predicted revenues each month. Thankfully, our advanced planning for delinquency meant we still had money to pay our bills and the increased legal fees to chase the uncollected common fees that were owed us.
We may not think of ourselves as salesmen when it comes to serving our communities but I can assure you that the successful implementation of adding a Delinquency line item to your budget will require a certain degree of salesmanship as well as conviction on your part. You first need to sell yourself on the idea that your budget needs to address the likelihood of Delinquency striking within your community. Then you need to tell the story well and often, using your condominium newsletter or HOA newsletter to your fellow homeowners so that they accept the need as well. You can turn Delinquency into Opportunity and your community will be reaping the rewards that come from prudent financial planning.
Written by Bob Gourley Originally posted at MyEzCondo