About HOA Delinquencies

This is another is a series of "reality check" posts. I include several charts to substantiate my position.

Delinquencies continue to be a problem for many HOAs. A delinquent owner is one who doesn't pay HOA fees in a timely manner.  The consequences of delinquencies include:

1. Higher fees for other owners, who make up for the lost fees.
2. Higher operating costs for HOAs as management time is spent dealing with this problem and lawyers are retained to work these problems through the court system. Owner fees, of course, pay for management time and legal fees. Some, but not all, legal fees are eventually collected.
3. Interference with HOA operations as boards are diverted to deal with the issues caused by delinquent owners. 

Dealing with these problems can cause serious financial difficulty for the HOA, higher fees,  and can also result in serious disputes between owners, owners and board and among board members. Here at BLMH it is entirely up to the board to make most of the decisions with management support. This includes dealing with this problem, the financial consequences and upset owners who have been pressed, and who are having difficulty to honor their financial obligation to the HOA. Only after the board reaches a consensus can directives be given to management.

Has it gotten bitter? Does anyone think that pressing an owner to make good on their financial obligation won't lead to bitterness? What the HOA is asking delinquent owners to do is to make the necessary sacrifices to pay their fees. That is not always greeted well. Owners who fall behind and don't take positive action will be turned over to the attorney for collection. Some will argue they shouldn't pay the attorney's fees that were reluctantly required to get positive action. Some delinquent owners assert "The HOA should pay these legal fees." In other words, "Let the other owners pay these fees."

Sometimes an owner who has fallen behind in his or her payments makes it personal. What board member would want to deal with that? Who wants to be branded as "mean" or "uncaring"? Who wants to be threatened? In some HOAs from time to time it is the board that is treated as the outcasts and the pariahs. The delinquent owners are sometimes put on a pedestal as either victims or heroic. That says quite a lot about the mindset of some HOAs. It is absolutely no surprise to me that BLMH has had great difficulty finding people to serve on the board, do the work, who were willing to make the difficult decisions and be a target of the rotten tomatoes. That's why for most of the time the board is understaffed. Shame!

Some boards may avoid the problem. One board decided that it was easier to avoid the issue rather than make difficult decisions, upset a few owners and deal with the consequences. A kick the can down the road approach leaves the problem for future boards to deal with. All the while the lost fees accumulate and the financial hole gets bigger. Nevertheless, all boards have had to divert resources, adjust fees and delay some projects or maintenance as a consequence of the financial burden placed upon the HOA. At the end of the year it is a requirement of the board to create a budget. That is when the board may become grounded. Ultimately, no one has benefited from these delinquencies with the possible exception being the attorneys. Monthly fees are higher than they would otherwise be if there had been no delinquencies. Some delinquencies become foreclosures and the HOA loses the opportunity to collect past due amounts and those legal fees. The HOA pays attorney fees in the hope that this will be eventually recaptured. That is not always the case.

Is the situation better today? Here is what was done to manage this problem.

1. Identify it as an important problem and worthy of much board effort. Determine the magnitude of the problem so priorities can be established. Boards are volunteer organizations. Ours is understaffed. There are more tasks than hands. 
2. Build a board coalition to do the necessary work and take the necessary, but unpopular steps. I call this "The power of two." Then three, then four and so on. 
3. Get the support of management in dealing with the problem. Managers provide professional advice, but it is easy for boards to avoid following the professional advice.   The boards provide the directives to management. With no directive there can be no action. The boards "hire and fire" and that includes the managers.  Any manager who doesn't play ball with the board can be put on notice. That may make it difficult for the manager to function properly. 
4. Go back in time and assemble information that the board could grasp and present it in such a manner that the full magnitude of the problem becomes impossible to avoid. 
5. Provide this information to the board during open HOA meetings, with frequent updates. This will make it difficult for board members to avoid the issue or to avoid taking a public stand on the issue and making prudent decisions. 
6. Improve communications with the owners. Responsibly communicate the problem to all owners. Repeat that communications. 
7. Do the work necessary to enable the difficult decisions required to take the next step. This included meetings with the HOA attorney and management discussions, including doing the work to enforce the Illinois condominium act provision about "Forcible Entry and Detainer."
8. Do everything reasonable to keep all owners within their units and paying their fees. This requires board diligence about delinquencies. If any owner is allowed to fall further and further behind in their fees, at some point it will become impossible for them to catch up in a reasonable time.  Some will foreclose. Without proper communications and information it is impossible for the board to determine this breaking point. If is best for the board to be rigorous and forceful and not allow the situation to get out of control. If a delinquency makes it to the point to which it goes to the attorney for collection, those legal fees become a greater burden for the delinquent owner to deal with. 
9. Do everything possible to enroll the entire board in taking the necessary and very difficult steps. However, some will resist, kicking and screaming at every step of the way. Some will say taking those difficult steps is "bad" and a "wrong" course of action. 
10. Take steps to assure that all owners are treated equally. In other words, all are required to pay their fees and any "payment program" is structured in accordance with board set guidelines and monitored by management and the HOA attorney.  
11. Determine and interview service organizations who could and would rent any unit taken over under the "Forcible entry and Detainer" provisions of the Illinois Condominium Act.  The purpose of renting an owner's unit is to collect back fees. Thereafter the unit is again turned over to the rightful owner. 
12. Expand the newsletter information provided to owners to include information about the steps owners must or should take to avoid legal action in the event of delinquency. In other words, pay your HOA fees! If you don't there will be unpleasant consequences. Delaying will bring in the attorney and it will be more costly. No Kidding!
13. Recognize that even with the best efforts of the board and management, some owners will default and seek bankruptcy and/or foreclosure. 
14. Recognize that some fees and legal costs will never be collected. Create a "Bad Debt" account in the HOA Chart of Accounts for this. Failure to do this results in a write-off in the annual report, but does not provide the HOA board with a monthly number to view, discuss and track. Why is this important? HOAs formulate budgets a year in advance, and with reserve studies, that budget includes a 30 year financial collection plan. "Bad Debt" is simply money that won't be collected. If only pennies, it is of no consequence. However, it is not unheard of for bad debt to reach 1% to 3% of an annual budget. Here at BLMH, the board strives to control spending to maintain annual fee increases of 3% or less. Bad debt can wreak havoc with these financial plans. 
15. Create a spreadsheet which provides detailed monthly information on total delinquencies, delinquencies of significant dollar amounts (greater than $100) and the quantity and percentage of owners in these categories who are delinquent. Chart this month to month and discuss each month. 
16. It's useful to remember that "The road to hell is paved with good intentions." Remain cautious, but also realize that your "partners" on the board may be operating in ways that are contrary to the greater good. 
17. It's useful for the board member to realize that they are here to do the tasks that many will not, cannot or refuse to do. At BLMH, currently 6 do the tasks of 336. It is truly a job that will, at best, be one "of service" and at worst will be one "of a servant." 

Of course, none of the above was popular and it was merely another in a long list of chores for a few (two) members of the board to take on. Some on the board simply did what they usually do, and that is to either avoid the matter, avoid dealing with the consequences, or pass the problem and the work on to others. Planning and preparation can be difficult. Some owners do little of this in their personal lives and on achieving board status, attempt to run the HOA exactly as they do their personal lives and personal finances.

In this situation as in so many others, I think it is prudent to ask who in the HOA benefits from this type of board inaction? There is an unpleasant answer to this question. 

Dealing with the Unavoidable
In the fall of 2010 I successfully enrolled another board member in moving forward to deal more forcefully with the delinquency problem. We two board members decided the situation really, really needed to be dealt with. How did we achieve this? I followed the steps in the program above, management was empowered and the board agreed one by one. Taking the necessary but difficult steps was not acceptable to all on the board. It took time to change direction, get everything into place and change the direction. It took more time for the situation to change. Of course, this was merely one of a number of concurrent problems to deal with.

However, the question to ask is "Why hadn't it been dealt with prior?"  It is a fact that prior to 2008 many HOAs had few or no delinquencies. In January 2008, BLMH did have some delinquencies. That all changed in 2007 with the "Great Recession." Boards and HOAs were slow to react and many did not have the management systems in place to deal with this. BLMH was no different.

Here's the problem. First, the award of a position on the HOA board is the consequence of an election which is a "Popularity Contest" and at BLMH  is frequently avoided by many of  the shareholders.  Second, the actual work required is not commensurate to that expected of a figure head group. Third, allowing things to simply continue "as in the past" will not necessarily draw a straight line and get us to the predicted result. Fourth, being on the BLMH board is really a lot of work. Fifth, being on the  BLMH board will require making sometimes unpopular decisions. I assert that any "populist" board will be unable to fulfill it's fiduciary duties. Doing real work may also be unpalatable for some board members. After all, we're volunteers. Finally, in 2008 our owners elected a "kindler, gentler" board which was committed to "change." It seems some of that board viewed BLMH as a social and philanthropic organization.

At BLMH, the board is given a "management packet" which is typically 90 to 150 pages in length. It arrives after the closing of the books for the previous month and before the monthly meeting. Our meetings are on the second Thursday of the month. It is not uncommon to receive this packet somewhere between Saturday and Monday immediately preceding the Thursday meeting. For anyone who works for a living this can provide little time to read, absorb, generate comments on the contents of the packet and formulate a plan of action, much less a solution to the problems in the packet. I am not only employed, I travel for business.

It is no surprise that boards can become blindsided by the data and numbers in the packet. Nevertheless, I focus on identifying and dealing with serious problems. So, to deal with delinquencies in the fall of 2010 with the newly appointed treasurer I created a spreadsheet which provided great detail about the delinquency information and also added a "bad debt" number. It provided charts going back to January 2008 to provide trend data.  When presented to the board during an open HOA meeting it was not greeted with enthusiasm by all on the board. In fact. there was great resistance to this among some of the board. However, it is impossible to refute the facts when accompanied by charts tracking the issue since January 2008.

Some of this goes back to the extreme financial problems of 2007-2008 and the manner in which boards deal with acute financial problems. For delinquencies, some board members may operate from the position "We are all owners and neighbors." Yes we, are, but my position is "We all have responsibilities and agreements to keep with the HOA, and each and every owner benefits from the fees and so we must each pay our fair share." For a time commencing in 2008, it seems that "being neighborly" won the debate.

For any board, there is also the option of running out the clock. Simply delay dealing with certain problems until the current term is over and we can move on with cheers and accolades. Someone else will have to deal with these problems which remain unconcealed. When that future board acts, some will say "How could this happen?" How indeed.

The Wake-Up Call
In situations that go from "bad to worse" there will always be a point in which it becomes impossible to avoid the obvious. There will be a few who are unwilling to bury their head in the sand. In 2008 with fear gripping the nation our skilled board was replaced. The slogan of the new team was "Change."  It's my opinion that the replacements had great difficulty in dealing with the new reality, what some business people described as the "new normal". After attending HOA meetings I was more than concerned.  That's why I ran for the board. I admit I was reluctant. I knew exactly what I was in for and I don't like open ended agreements. I have been in accountable positions in a volunteer organization. It was very difficult.

As I said, I did know what was unfolding. Our annual reports are available to all owners and I did understand some of the financial issues. I am a specialist who is retained to solve problems which are "difficult to impossible." I did recognize the problems at BLMH. I knew it would be an uphill battle. Financial disasters create a wide net which many cannot escape. Since 2007 some owners faced financial difficulties. Board members are owners and pay the same fees and are not immune from personal financial difficulties.

As a board member I simply don't read the management packet. I do my independent analysis. On assuming a board position in the fall of 2010 I became immediately concerned by some of the financial data. Over a period of months I reviewed financial information and compared previous months to the then current situation; I then became extremely concerned. The data confirmed some ominous delinquency trends. The board in place was not capable of dealing with the problem, but one could be built.

On February 28, 2011 with the hard work of the newly appointed treasurer I prepared a summary spreadsheet about delinquencies. This was for the use by the board to empower us in making the difficult and uncomfortable decisions.

Here is what the spreadsheet displayed. I am using percent increase as compared to January 2008 in the charts below. I show 0% change as of January 2008, but in fact the HOA did have delinquent amounts. The charts presented to the board indicated actual dollars, not percentages. Graphing the rise in dollars delinquent month by month and year by year does effectively present the problem to the board. Each $10,000 represents 1% of the annual budget. After the 2008 election the board announced a 0% fee increase. How would a responsible, but reticent to act board react if it became very, very clear that delinquencies of $10,000, $30,000 or $50,000 represented possible fee increases of 1% to 5%? One approach is to implement an austerity program. Another is to tighten up collections. However, boards are not required to do these things. Another approach is to start a "witch hunt" and blame management and the contractors. Yet another is to create a red herring about "transparency." The charts provide real transparency, are readable and understandable. .

If any board does not recognize the impact of delinquencies a board will be spending money it isn't collecting. That is not a good thing.  In my monthly spreadsheet I provide to the board additional supporting data including a chart of the number of owners delinquent, a chart of the number of owners delinquent by more than $100 and a chart of the amounts owed by owners who are delinquent by more than $100. I chose $100 as a separation because it is not uncommon for any owner who has electronic financial transfer from their bank and the HOA accounting system to take a month or so to record the payment of fines; it is also well below the monthly fee amount. I wanted to separate the minor problems from the significant ones. After all, the board is to act for the significant problems. Why get tied into knots about a $0.06 delinquency?

The charts and data provided to the board have been updated each and every month by me. I also include the change, year over year, in the cost to each owner in actual dollar amounts to deal with this. "Bad debt" has been added. So armed, and with two board members who were willing to do the hard work, the HOA did all of the things I outlined above. So how did this turn out?

Here's a current chart, again in percentages. The board is provided this same chart in absolute dollars. Today our delinquencies remain higher than they were in January 2008. Is the problem under control? Perhaps. Was this difficult to achieve? Yes, it was, and it wasn't universally popular either. In society there are those who are vocal and visible and are more than willing to spend the money of others. Some board members have view a HOA as a "philanthropic, or social organization." The problem for the average HOA owner is simply this: "Don't automatically expect the few to responsibly spend the dollars of the many!"

In 2011 the BLMH took many steps to deal positively with the problem of delinquencies. This is not a war that has been won. It is a contagion that has been contained. Future boards may again stumble. The economy may get worse. There are never any guarantees.

Background Information

Let me also say that that delinquencies are one of the many, many problems that the board at a HOA must deal with. Some problems can be quickly created but take years to correct. In 2007 with the onset of the "Great Recession" many HOAs hunkered down and listened to the rosy pronouncements of politicians. Doing so provided another excuse to avoid making difficult choices. Much has happened since 2007.  Today in Illinois our state income taxes are 66.67% higher. Unemployment remains high, and the employment that is created is primarily low wage or part time. I am using U.S. Department of Labor statistics. Illinois continues to financially struggle. Anyone who thinks this problem will go away is delusional. Here at BLMH the owners "voted for Change" in 2008. That did not work.

In 2007 with the onset of the "Great Recession" delinquencies began to rise at HOAs. Over the next few years delinquencies rose to higher dollar amounts. A confluence of factors created the situation.

1. HOA owners found their income reduced. Something had to give as paychecks were stretched.
2. Retirees were hit with a huge loss in interest income. 
3. The stock market value dropped precipitously and portfolios shrunk.
4. HOA boards were unprepared for the situation. In some HOAs delinquencies had been few or none. 
5. Some HOA boards were slow to respond to the situation. 
6. Courts, overwhelmed by foreclosures allowed proceeding to continue for a year or more. All the while HOAs had no fee income from these foreclosed owners. HOAs were further damaged as they paid large legal fees to wind these delinquencies through the legal system.
7. Debt counselors routinely advocated dealing first with high interest, high penalty credit cards, mortgages and real estate taxes. The coaching was to allow the low interest debt including HOA fees slide. And that is exactly what some financially stressed owners did. Postponing bill payments will only delay the day of reckoning. It cannot avoid it. 
8. Boards cannot reveal the names of delinquent owners. That provides an opportunity for mischief and misunderstanding among the owners and in the boards.  

In August 2007 the global financial crisis manifested itself. With the "Panic of 2008" and the pop of the real estate bubble a lot of people lived in fear. With a $700 billion government bailout and lending at a stand still the economy was on the brink of collapse. On October 6, 2008 noted financial entertainer Jim Cramer appeared on the Today Show and told people to "sell any investments you won't need for 5 years." There was a serious and real threat of total collapse of large financial institutions.

By 2008-2009 some HOAs had a serious problem to deal with. Delinquencies were higher than in recent years, the management and the boards were dealing more and more with delinquencies and lawyers, to the detriment of other issues. Boards found that pressing delinquent owners made them the enemy. After all, these owners are "our neighbors and friends." The veil of secrecy kept other owners uniformed. In some HOAs all discussion about delinquencies and foreclosures was held behind closed door "executive sessions," and so the general owner population had only the knowledge that there were, in fact, delinquencies. Who and in what amounts was not revealed. For its part, the general ownership didn't want to know just how serious it was. The owners had their own problems to deal with, and solving this was solely the duty and responsibility of the board, wasn't it?.

Today, 7 years after the onset of the "Great Recession" the U.S. economy continues to mend, unemployment remains high with many of the recently employed in low wage and/or part time jobs.