Budget season is upon us and one of the most controversial subjects that boards face when budgeting is budgeting for bad debt. What exactly is bad debt? It’s those assessments that are not collectible from the homeowner.
When budgeting for the association the goal is to have a zero budget, meaning not planning for income and not planning for a loss either. If assessments are equal, as most homeowner associations are, the assessment is determined by taking the total expenses, including reserve funding, and dividing it by the number of homes in the community. In condominium associations, the assessments are normally based as a percentage of total expenses. Either way, when a homeowner does not pay his or her assessment, the community is put at risk. In fact, the community potentially may not have enough to pay its expenses for the year.
How can a community plan for these homeowners who can’t or unable to pay their assessments? By budgeting properly for bad debt. Sounds simple but it’s not because in communities where delinquencies are high, the board is hesitant to raise assessments. But when homeowners don’t pay assessments, the end result affects the entire community in that oftentimes the end result is higher assessments for everyone.
Suzan Kearns, CMCA, AMS
President and Chief Executive Officer
Community Management Professionals, Inc. AAMC