Uncollected Assessments: HOA Budgeting for Bad Debt

Uncollected Assessments: HOA Budgeting for Bad Debt

[ Blog/News ]

Uncollected Assessments: HOA Budgeting for Bad Debt

Budgeting for bad debt is something that associations should consider doing even in the best of times. Saying that associations need only budget for uncollected assessments in a down economy would be as shortsighted as… well, not budgeting for uncollected assessments.

One of the things I let collection clients know right off the bat is that they are not alone.  According to RealtyTrac, 20,960, or 1/33 of all homes in Washington have received a foreclosure notice during the first six months of 2010 (this does not include properties that are already bank-owned). 

Considering that associations make up approximately 25% of the total housing market, this means that over 5,200 association lots/units in Washington are subject to bank foreclosure.  If homeowners are having that much difficulty paying their mortgage, it follows that association assessments are going unpaid. 

If your association does not have any delinquencies, consider yourself fortunate, but don’t stop reading.  Budgeting for bad debt may increase the amount owners pay each month in the short term, but in the long term helps alleviate the need for special assessments, which can cripple or destroy the finances of the owners and families that make up our communities.

Why Budget for Uncollected Assessments?

Except for a few common denominators like insurance, taxes, and utilities, different associations spend their money on different items for maintenance, services, and the like.  Unless an association has an external revenue stream such as rental income, all of the money that an association uses to pay its expenses comes from the assessment payments from the members that make up the association. 

If even one association member’s assessments go unpaid or short-paid, anticipated projects cannot be carried out, the association may have to withdraw from its reserves to pay for operating expenses, and eventually the membership is required to pay special assessments to make up for the loss in revenue.  Condominiums in Washington are “encouraged” to establish a reserve account to fund major maintenance, repair, and replacement of the common elements. 

Associations that are not meeting their operating budgets are likely not funding their reserve accounts.  Further, if a condominium association withdraws from its established reserve fund, the Washington Condominium Act requires that the association notify its members in writing and replace the money in the reserve fund within twenty-four months unless replacing the funds would be an unreasonable burden on the owners. 

How will an association raise the money to pay back the reserve fund?  By levying a special assessment.

Uncollected Assessment Scenario

Let’s assume a ten-unit condominium association assesses its units an average of $400.00 per month and has an annual budget of $48,000.00.  In Month 1 the owners of one unit run into financial difficulty and stop paying their assessments and mortgage. 

At around Month 6, the bank will start foreclosure, and the trustee’s sale will take place sometime between Month 10 and Month 14.  After the trustee’s sale, the unit could sit vacant and on the market for another six months or more.  If the association was formed under the Washington Condominium Act, or if formed under the Horizontal Property Regimes Act and has amended its declaration to provide for lien priority over foreclosing deeds of trust, the association can recover the assessments that became due in the six months before the trustee’s sale from the purchaser. 

Assuming someone buys the unit from the bank in Month 20, the bank will pay the association the assessments during the six months before the foreclosure and the assessments through the date the new owner takes title (Months 9-14 plus Months 15-20).  In this scenario, the association suffered a ten percent reduction in revenue for twenty months, only to recover 55% of the total amount owed by that unit.

If the association decides against suing the former unit owners and collecting on a judgment, or if the former unit owners file bankruptcy after the foreclosure, that is all the association will ever get.  The remaining 45% of the unit’s share of the common expenses spread out among the remaining nine units is $400.00 per unit. 

Had the association a bad debt contingency of 7.5% of the total budget, the monthly assessments for the units would average $430.00 per month, but the members would not have had to come up with an additional $400.00 per unit on short notice so that the association can pay its electricity bill.

Levying Special Assessments

Another important situation where budgeting for uncollected assessements comes up is when there are insufficient funds in reserves and an association takes out a loan from a lender to fund a maintenance project or capital improvement. 

An association needs to levy a special assessment to pay back the lender. This will typically allow the owners to either make a lump sum payment of the full special assessment, or pay over the period where the association repays the lender the balance of the loan plus interest. 

A bad debt contingency should be included when the association determines the amount of the special assessment.  In these cases, an association should get input from its owners to determine who can afford the special assessment and remain in the property. 

If owners are already underwater on their property they may decide to walk away, so the Association will need to make sure that it generates enough income during the life of the bank loan in order to maintain the monthly payments to the lender during the time where one or more unit’s assessments are going unpaid.

How to Budget for Uncollected Assessments

Because all communities are different, there is no set amount or percentage that an association should budget for uncollected assessments.  Instead, an association should consider the following factors when deciding on what amount to budget for bad debt:

  1.  The total amount needed to pay for the operating expenses and fund the reserve the account.  In adopting a budget, associations need to consider how much it will cost to pay the operating expenses and fund a reserve account, plus account for bad debt, and then work backward to determine each unit’s assessment liability, rather than starting with an “acceptable” amount per unit.
  2. The percentage of delinquent units.  Communities with a high percentage of delinquent units should budget a greater amount for bad debt.
  3. The delinquent amount per unit.  The higher the delinquent amount per unit, the less likely it is for the association to recover its expenses.
  4. The amount that can reasonably be collected from the owners.  Associations should consult their attorney to determine the feasibility of collecting delinquent assessments from owners.

Should an association have questions about budgeting for bad debt, it should consult its attorney, CPA, or manager when configuring its budget.  You can find a list of WSCAI member service providers in their Business Partner Directory.  

A properly adopted budget that includes a line item for bad debt will protect an association and its members from special assessments that can lead to financial difficulty for an association’s members, and ultimately the association itself. End Of Article

By William Justyk, Esq.

William Justyk, Esq., is an Attorney with 12+ years experience in real estate transactions, nonprofit corporate law, and civil litigation.
  • Newman HOA CPA - Banner Ad
  • Barker Martin
  • Porter Construction Inc - Building With Integrity - www.porterci.com
  • Rafel Law Group - Banner Ad
  • Condominium Law Group, PLLC - General Counsel & Collection Services - Partners Ken Harer & Valerie Oman - Phone: (206) 633-1520 Website: www.condolaw.net
  • HUB International NW - HOA And Condo Solutions - Web Ad
  • The Copeland Group - Banner Ad

Search WSCAI


Search Business Partners Directory


Diamond Sponsors

  • Columbia Bank - Logo
  • Transblue - Logo
  • CAU - Community Association Underwriters - Logo
  • RW Anderson Services - Logo
  • Rafel Law Group PLLC - Logo
  • CIT - Community Association Banking - Logo
  • HUB International NW - Logo
  • Association Reserves WA - Logo
  • Agynbyte - Logo
  • Newman HOA CPA - Audit & Tax - Logo
  • Superior Cleaning & Restoration - A COIT Service Company - Logo
  • ServPro Of Seattle NW - Logo
  • SageWater - Logo

Chapter Magazine

Journal July-August 2022

Jul/Aug 2022 Issue

Journal Advertising Partners:

  • Newman HOA CPA Audit & Tax
  • CIT Group Inc. - Logo
  • Rafel Law Group PLLC - Logo
  • The Copeland Group - Logo
  • Bell-Anderson & Associates - Logo
  • Community Association Underwriters - Logo
  • Ruff Construction - logo
  • Charter Construction - Logo
  • Popular Association Banking
  • SSI Construction
  • Sagewater
  • RW Anderson Services - Logo
  • Pacific Engineering Technologies, Inc - Logo

  • Pacific Western Bank - Small Ad
  • Association Reserves of Washington - Ad

Start Community Association budgets early and enjoy the holidays

[ Blog/News ]

Start Community Association budgets early and enjoy the holidays

Believe it or not, it’s already mid July and time to start budget preparations.  Most associations are “multi-million dollar non-profit corporations.”  This means that the board of directors of an association is often running a small to midsize business.  Like other businesses, Homeowner Associations and Condominium Associations need to prepare their annual budget for the following year.

Gather Requirements. Get out those governing documents and review the budget requirements.  Is there a maximum assessment increase?  Who approves the budget?  Is a meeting required?  Many communities have requirements in their governing documents that specify the budget be adopted 30-60 days before the end of the fiscal year.  Draft a timeline to ensure the notice requirements are met.  Avoid late November and December budget confirmation meetings so volunteer leaders can enjoy the holidays. Starting early gives the committee and/or board members time to prepare a thoughtful and comprehensive budget for the community and can reduce the workload.

Anticipate Changes. Utility costs typically increase every year.  Contract services are also subject to increases. Call your service providers to check if there will be an increase in the coming year.  Determine your goals for next year and review your projects so that funding is included in the budget.  Solicit input from committees and owners on their priorities for the community.  Communication during the budget process is essential.  This is especially important if you are considering a rate increase.

Review Current Year. July is also an ideal time to review the expenses for the first half of the current year to see how the community is tracking to the current budget.  Identify needed adjustments for the rest of the year.  Complete the income and expense estimates for the balance of the year so that any surplus or deficit can be included in next year’s budget.

Checklist for July

  • Form Budget Committee
  • Review Reserve Study updates
  • Determine annual reserve contribution
  •  Identify goals/projects for next year
  • Solicit budget requests from committees
  • Submit budget requirements to Manager
  • Solicit bid estimates for projects, contract increases, utility increases, etc.

By Trestle Community Management

Trestle Community Management is a full-service manager of condominium and homeowner associations with headquarters in downtown Redmond, WA. Trestle’s serves associations in Redmond, Kirkland, Bellevue and other nearby communities.
  • Newman HOA CPA - Banner Ad
  • Barker Martin
  • Condominium Law Group, PLLC - General Counsel & Collection Services - Partners Ken Harer & Valerie Oman - Phone: (206) 633-1520 Website: www.condolaw.net
  • The Copeland Group - Banner Ad
  • HUB International NW - HOA And Condo Solutions - Web Ad
  • Rafel Law Group - Banner Ad
  • Porter Construction Inc - Building With Integrity - www.porterci.com

Search WSCAI


Search Business Partners Directory


Diamond Sponsors

  • Newman HOA CPA - Audit & Tax - Logo
  • ServPro Of Seattle NW - Logo
  • Columbia Bank - Logo
  • Superior Cleaning & Restoration - A COIT Service Company - Logo
  • RW Anderson Services - Logo
  • Rafel Law Group PLLC - Logo
  • HUB International NW - Logo
  • Association Reserves WA - Logo
  • CAU - Community Association Underwriters - Logo
  • Agynbyte - Logo
  • CIT - Community Association Banking - Logo
  • SageWater - Logo
  • Transblue - Logo

Chapter Magazine

Journal July-August 2022

Jul/Aug 2022 Issue

Journal Advertising Partners:

  • Newman HOA CPA Audit & Tax
  • CIT Group Inc. - Logo
  • Rafel Law Group PLLC - Logo
  • The Copeland Group - Logo
  • Bell-Anderson & Associates - Logo
  • Community Association Underwriters - Logo
  • Ruff Construction - logo
  • Charter Construction - Logo
  • Popular Association Banking
  • SSI Construction
  • Sagewater
  • RW Anderson Services - Logo
  • Pacific Engineering Technologies, Inc - Logo

  • Association Reserves of Washington - Ad
  • Pacific Western Bank - Small Ad