Delinquency Rate of an HOA - Why It Matters

By Kevin Wiley

President - CitiScape Property Management Group

Last week, a friend of mine was looking to purchase a condo and visited two condominium complexes, one in Vacaville and the other in Fairfield.   She reported that the Vacaville complex was in a nice well kept neighborhood.  But when she walked into the complex itself, something didn't seem right.  The swimming pool was closed.  The tennis court didn't have a net, and there was some lumber within the enclosure.  Half of the condos looked freshly painted from the outside, but the other half looked pretty worn out.  A couple of days later, the agent who showed her the two condos in that complex informed her that he just found out that lenders are not lending in this complex anymore because of the high HOA delinquency rate. 

The other complex she visited was in Fairfield, built around 2004. She said it looked nice and was well kept.  However, the HOA newsletter mentioned a high delinquency dollar figure.  Her agent also informed her that a few days before a few sales had fallen out of escrow because of the same issue with financing in a high-delinquency community. 

Rising delinquencies for homeowners associations, which function like municipalities, are forcing cutbacks on services like landscaping, security and community services.  Potential homebuyers can learn about delinquency rates for their HOA before buying in the neighborhood, and lenders generally ask the management company of a community association to provide delinquency rates for that HOA when they're writing a new mortgage.  But what if you're already in a condo in a high-delinquent HOA?

Almost nothing devalues a condo unit and makes it unsellable faster and more irretrievably than being located in a complex whose HOA dues delinquency rate is higher than 15 percent.  With higher than a 15 percent delinquency rate, most lenders won't fund loans on the property, though there are some who don't even have a delinquency-rate guideline for buyers with oodles of cash down and impeccable credit.  (Their theory is that these buyers are so unlikely to walk away from their investment in the property that the HOA delinquency issue is moot.)

These days, lenders are all about minimizing the risk that the buyer will walk away from their unit and/or run up big liens and other bills that are secured by the unit, like back property taxes and past-due HOA dues.  Mortgage banks are spending literally millions upon millions of dollars bringing foreclosed homes current on property taxes and HOA dues, which they often must do before they can resell a bank-owned property.

Condo complexes that have higher than a 15 percent rate of delinquency on HOA dues are seen as risky by lenders.  The risk is partially illuminated by this hypothetical:  What happens if the underfunded HOA can't pay its bills (e.g., roof and exterior building maintenance, grounds maintenance, security, etc.)? It can do only one of two things: dip into its reserves and/or hike up everyone's HOA dues.

Dipping into reserves exposes the HOA in the event any major repairs are needed; in that event, the HOA will be forced to impose a large special assessment against each unit owner, which increases the risk the unit owners will fall behind on something - including their mortgage payment.  Lenders also find high-delinquency-rate developments risky because delinquencies can create a snowball effect. The more socially acceptable it is in a community to fall behind on HOA dues, the more likely people will do so when they run low on funds.

Additionally, the other owners in an HOA with a high delinquency rate are often forced to pay higher dues to keep the association afloat in light of the dues that are not being paid by their neighbors.  That puts an additional burden on them, then some of them will stop paying, and you can see how it snowballs from there.

In these difficult economic times, more than ever it's critical to pay very close attention to staying on top of delinquencies, contacting delinquent owners early to learn why they are not paying, not allow the global HOA's delinquency rate to approach the 15% mark, and to work with owners who are unable to pay all, but can pay some, of their dues in workable payment plans that keep them in their homes and out of foreclosure.