Collecting money from delinquent homeowners is by far one of the least popular aspects for community association management. For boards, it's right up there with raising dues and levying special assessments in terms of undesirable duties of the board.
The unfortunate truth is that collections always come down to the people. These usually aren't deadbeats who have plenty of money but just refuse to pay. Most homeowners in arrears on their assessments come complete with a sad story. They may have been laid off at work, suffered an injury, lost a loved one, or simply gotten under water. It's often heartbreaking, and your first instinct as a caring and empathetic person is to want to give them a break.
But collections is vital to the health of the communities you manage, and whether you are a community manager, CAM accountant, or a board member, collections is a necessary aspect to maintaining the value of your community.
A Poor Collections Process Hurts the Community
Failure to properly collect on assessments affects the community as a whole. First, the community operates on a strict budget that assumes that all members are contributing their share to the association, in order to pay for maintenance and repairs, to fund reserves, and to cover the operating costs of keeping up the neighborhood.
When even one homeowner doesn't pay, that carefully constructed budget starts to unravel, leading the board to face even tougher decisions, such as cutting back on services, deferring maintenance, or even shutting down amenities.
This leads to the community becoming more and more run down as the association does not have the funds to properly maintain it, causing the value of the homes to decline, which means homes sitting on the market forever, or being sold at a loss, which leads to a further decline of the community. It's can be a very slippery slope.
Delinquency Rate: A Grade for Your Collections Process
The percentage of homes in your community that are in arrears is called your delinquency rate. The delinquency rate is a good indicator of how strong your collections process is. The lower the delinquency rate, the more likely it is that the community is properly keeping up with collections.
Here's a general guide to determining collections health through delinquency rates:
- 0-3% - Excellent
- 4-5% Good
- 6-10% Poor to Average
- >10% Deteriorating Financial Position
A high delinquency rate can lead to serious financial problems for you community beyond just a general decline. Communities with a high delinquency rate may find themselves ineligible for bank loans or other financial programs when it comes time to do a major project, disaster recovery or capital expenditure. This too can come back to bite the board, when they are forced to enact a special assessment due to lack of other options to raise emergency funds.
A Good Collections Policy is the First Line of Defense
The governing documents of the community should contain language outlining a collections policy for the community.
If your community is older, or your governing documents haven't been changed since the developer incorporated the association, there is a chance that your governing documents only have boilerplate collections language, or reference outdated technologies and procedures. (For example, many communities still have a provision that dictates a cutoff on the 25th of the month, even going so far as dictating that the bank should hold checks received in this time-frame. This was meant to give the accounting team time to compile the monthly financial reports. However, technology has made that rule obsolete, now that reports that used to take a week can now be completed in two clicks of a mouse.)
Most past due homeowners respond to a simple follow up letter or email with their payment. Your delinquency policy should include a series of letters with an appropriate escalation of fees and actions. Consider that the homeowner may not be receiving their mail for any number of reasons, and include communications in alternate channels, such as courtesy email warnings, certified mail, or even a note on the door in a smaller association.
Even if you already have a collections policy, it is sound practice for the board to review these policies and procedures every few years to insure that they are up to date and in alignment with the current practices and expectations of the board. We have a sample delinquency policy you can download to get you started if needed.