Accounting for Past Due Accounts in Setting Annual Budget

Started by DavidK34 • 8 replies • 378 views

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DavidK34 (Washington)
Posts: 9

Posted:

We are setting our annual budget. We pretty consistently get about 80% of the money that we assess, and the rest are delinquent accounts that we probably won't collect for a year or two. I realize it is a collections problem that has to be fixed and we are working on it. In the meantime, we need the cash flow to keep us operational. So how do you adjust what income you need for the budget based on your delinquencies? I realize these accounts are in accounts receivable and it is unfair to the paying members to fund the deadbeats. My idea is to increase the dues by a factor of 1 / 0.8 = 1.25 or 25% so that we will bring in enough to fund operations. The line item in the budget would be called "Funding Efficiency" expense or somesuch. Is this legitimate? What say you all? We can't be the only HOA with this dilemma.

SheliaH (Indiana)
Posts: 6,964

Posted:

Normally, I'd say it's a little late in setting the annual budget since two months of 2023 are history, but people have different annual year periods, so ok.

Anyway, don't you have a bad debt line item? It goes under the income section and is used to reflect the actual amount coming in every month. Here's an article that explains how this usually works: https://hoacpa.com/wp-content/uploads/2018/08/FAQ-Why-and-How-to-Budget-for-Bad-Debts.html Once you figure how much you can write off, you can figure out how much the increase should be. There should be some sort of increase because of inflation - 2022 dollars may not buy the same amount in 2023, especially with the inflation and supply shortages we've been having.

One of our former presidents and I attended a CAI seminar on delinquency collection and one of the presenters suggested that the budget be based on the percentage that actually comes in. It's not that the remaining 20% are off the hook, but 80% is a more realistic number of what you're working with. If you reduce the accounts receivables, that's gravy and if these people will stop being deadbeats, you'll be in a better position next year. It may also mean you'll have to make some decisions on what you can really afford to do.

If it is not right do not do it; if it is not true do not say it. Marcus Aurelius

DavidK34 (Washington)
Posts: 9

Posted:

Awesome, thanks for the info. Just what I needed. BTW, our budget FY starts in April.

MichaelT21 (Arkansas)
Posts: 200

Posted:

David,

I don't have specific advice for you, but in our HOA delinquent accounts just make everything a mess. For the last 3 years, we have been trying to collect on severely delinquent accounts. This has resulted in 1 - 3 checks in the amount of $7000 (or so) at random times throughout the year. And then there are the accounts that we have to spend $7000 in attorney fees to collect. So it is nuts trying to decide what impact the delinquent accounts have on our budget. I feel for you.

ElleN (Idaho)
Posts: 4,420

Posted:

DavidK34, if the total owed by the delinquent owners is large enough, may I stray a bit from your question and suggest hiring a collections attorney to go after, say, the top five most delinquent owners? Twenty-percent delinquency is on the high side. A message needs to be sent. My former HOA had around a 25% delinquency rate. The HOA was only placing a lien and would then collect upon sale of the delinquent owner's house. But several hundred thousand was owed at one point. A new board said, "Enough"; hired a collections attorney (ditching the agency it had used); and things turned around within a year or so.

SheliaH (Indiana)
Posts: 6,964

Posted:

We did the same thing - it took us five, which tells you know how severe things got) but we're finally on the way to stability.

If it is not right do not do it; if it is not true do not say it. Marcus Aurelius

KellyM3 (North Carolina)
Posts: 2,239

Posted:

Quote:

Posted By DavidK34 on 03/04/2023 5:59 PM
We are setting our annual budget. We pretty consistently get about 80% of the money that we assess, and the rest are delinquent accounts that we probably won't collect for a year or two. I realize it is a collections problem that has to be fixed and we are working on it. In the meantime, we need the cash flow to keep us operational. So how do you adjust what income you need for the budget based on your delinquencies? I realize these accounts are in accounts receivable and it is unfair to the paying members to fund the deadbeats. My idea is to increase the dues by a factor of 1 / 0.8 = 1.25 or 25% so that we will bring in enough to fund operations. The line item in the budget would be called "Funding Efficiency" expense or somesuch. Is this legitimate? What say you all? We can't be the only HOA with this dilemma.

Hi David,

We created a line item in our budget called "Bad Debt/Uncollected Debt" - you could call it "Contingency" - as an EXPENSE.

Per your explanation, you could reasonably set that "contingency" line item to reflect 20% of your budget (as long as you can chart that level of non-collections and be very certain that it's a predictable percentage). Then, your operations budget would be "hit" with this expense though no money is lost or spent.

That said, HOA dues collections are rolling.....just because you're 20% under-collected by the end of your fiscal year doesn't mean the "missing" 20% won't be collected in the new year yet your current budget will probably end with folks owing money they play later.

I don't recommend raising dues on account holders who exercise payment diligence. There is a point where the HOA needs to have its proverbial haircut.

JohnC46 (South Carolina)
Posts: 14,265

Posted:

I cannot remember where, but at one time I read that the average HOA delinquency rate is about 5%. Can anyone verify or update this?

CathyA3 (Ohio)
Posts: 6,299

Posted:

Quote:

Posted By JohnC46 on 03/10/2023 10:11 AM
I cannot remember where, but at one time I read that the average HOA delinquency rate is about 5%. Can anyone verify or update this?

I think this is going to be very dependent on a community's demographics and location, plus what's going on in the larger economy which will vary over time.

FWIW, my 74 unit condo community usually has 1 or 2 long-term, determined folks plus a few "victims of circumstance" who get caught up as they resolve their issues. In the latter group, we've had the folks who forget to update their bill pay systems when assessments change, a victim of identify theft, and someone who unexpectedly lost a young-adult child and had to pay for a surprise funeral.

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