Navigating HOA debt can be tricky, especially for board members with little to no experience. Debt can take two forms, and it is imperative to understand how they affect the community and how to address them. While professional assistance is always preferable, boards must also get the basics right.
What are the Two Types of HOA Debt?
Homeowners associations work similarly to corporations. They earn revenue, pay vendors, and even rack up debt. But debt can mean two things for HOAs: delinquent dues and debt to vendors. Both can affect the community’s financial health.
Owner Debt to the HOA
Associations rely on owner dues and assessments to cover daily and long-term expenses. When owners stop paying their dues, they become delinquent. This can lead to more debt to the association in the form of late fees, interest, and even attorneys’ fees.
In addition to dues and assessments, owners may incur fines for violating community rules. Unpaid fines can also accumulate, resulting in debt to the HOA.
HOA Debt to Vendors
While boards are responsible for governing and operating the association, they can’t do everything alone. They must hire vendors, contractors, and third-party professionals for assistance. Examples include landscapers, handymen, insurance carriers, pool companies, and management teams.
When an HOA can’t pay vendors, it incurs debt. This usually happens when the association fails to earn enough revenue to cover costs.
Additionally, large construction or capital projects require significant funding. Some associations raise dues or levy special assessments, but many take out a loan. Failure to repay the lender can also result in HOA debt.
How HOA Debt Affects Community Finances
Debt, be it owed to the association or another party, often signals a cash flow problem. Here are the ways HOA debt can affect the association’s financial health.
High Accounts Receivable
When an association has a high AR, it means that there are too many unpaid dues, assessments, or fines. Boards often have no choice but to use more aggressive collection tactics, leading to higher collection and legal costs.
These collection methods don’t always work either. Delinquent owners may still refuse or be unable to settle their debts. As the association continues to collect dues, other owners are forced to shoulder the costs. Many of them may see this as unfair, resulting in a spike in complaints.
Ultimately, when there’s a cash-flow blockage, the HOA can’t pay its vendors. This leads to the second form of HOA debt.
High Accounts Payable
When the association is in debt, it can quickly trigger a domino effect. Service interruptions are usually the first to happen, as vendors refuse to provide services without payment. The more vendors go unpaid, the worse the situation gets.
Before long, the association will earn a reputation as a bad payer. This can affect the community long after it settles its debts. Fewer vendors may be willing to work with the HOA thanks to past transgressions.
Lastly, service disruptions can lead to deterioration, diminished curb appeal, and lower property values. Debt can affect the entire community.
How to Address HOA Bad Debt
Delinquent accounts typically trigger collection efforts, including late fees and interest. If those strategies don’t work, the charges only add to the owner’s debt.
It is important to follow an established HOA debt collection policy. That said, if owner debt piles up, boards should more seriously consider the options below.
1. Offer Payment Plans
Some owners experience temporary financial hardship. By offering a payment plan, the HOA can recover more unpaid dues and reduce legal costs. It can also help the delinquent owner avoid grave consequences such as foreclosure.
Of course, payment plans shouldn’t always be available. The board should reserve this option for those struggling with their finances, as offering it too freely can lead to abuse. To prevent issues, the board must adopt and enforce a payment plan policy consistently.
2. Hire a Collection Agency
Another option is to hire a collection agency for HOA fees. This transfers the burden of collection to a third party. Of course, agency services don’t come free, but the board can negotiate to pay a percentage of the collected debt in exchange.
3. Use Liens and Foreclosure
Liens and foreclosure are often the strongest collection tools available to associations. That said, they are typically time-consuming and expensive. Legal costs can accumulate for both the HOA and the owner.
Moreover, foreclosure often results in tension within the community. It is not a popular course of action, so boards should only use it as a last resort.
An association’s authority to file liens comes from state laws and the governing documents. In Illinois, 765 ILCS 605/9 authorizes condominiums to place liens on delinquent units. On the other hand, HOAs must refer to the CC&Rs and bylaws.
What to do When HOA is in Debt
When it’s the other way around and the HOA owes money, boards should take the steps below.
1. Review the Financial Situation
First, the board must take a serious look at the association’s finances. It is important to determine how much money the HOA owes, which vendors are affected, and if the problem is temporary or ongoing. The board should also identify if there is a budget shortfall or underfunded reserves.
2. Prioritize Essential Expenses
Not all bills carry the same level of urgency. Generally, the board must prioritize insurance premiums, utilities, essential maintenance, legal obligations, and anything involving safety. Meanwhile, non-essential projects should be postponed.
3. Communicate With Vendors
Ignoring unpaid invoices won’t make them magically disappear. Board members must contact vendors immediately and explain the situation. If possible, they can negotiate a payment plan.
This will help maintain the association’s credibility. That said, boards should never make empty promises or promises they can’t keep. Vendors may want to hear them, but the lack of follow-through will only make matters worse.
4. Increase Revenue
When the HOA is in debt, the root cause is usually a lack of funds. The solution, of course, is to increase revenue.
Boards may need to raise dues, levy special assessments, or borrow money. If the association has a high delinquency rate, the answer may be to pursue more aggressive collection methods. Alternatively, the board can review its budget and cut back on non-urgent expenses to free up more funding.
5. Create a Recovery Plan
Finally, to address HOA debt, the board should develop a written recovery plan. This plan should outline debt repayment goals, collection strategies, and budget adjustments. It must also include reserve funding plans and a clear timeline for restoring financial stability.
A Never-Ending Cycle
When owners don’t pay their dues, revenue goes down. Without sufficient funds, the association can’t pay its vendors and service providers, forcing the board to turn to homeowners once again. This cycle of HOA debt can be difficult to break, but a strong and consistent collection policy certainly helps.
Hillcrest offers HOA management services to communities in Chicago. Call us today at 630-627-3303 or contact us online to request a proposal!
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