In finance there’s a term known as the “delinquency rate.” It’s a calculation used to evaluate the percentage of borrowers who are delinquent by answering the question “who owes (a lender) how much money, and for how long?” This number ideally exposes who is past 30 days, 60 days, and 90 days or more, which informs important budgetary and financial decisions.
For lenders, like banks, those decisions are all about how to get a debtor to pay what is owed. Maybe they stop extending credit to that delinquent customer until they can come back to being punctual with their payments, or reduce their line of credit after they pay.
For HOAs and condos, your decisions are different. In HOA collections, when we talk about a community’s delinquency rate, we’re not talking about borrowers of money, but of the percentage of owed association assessments either by member or by amount.
Consequences of a High Delinquency Rate
Calculating your delinquency rate isn’t about a single specific past-due homeowner, but about the overall financial health of your community. High delinquency rates can result in serious consequences for the association that should keep every board member up at night.
Imperfect Cash Flow
Owed money means your cash flow is not what you anticipated when you built your annual budget. With an imperfect cash flow, your operating account doesn’t meet your needs which can lead to services being cut, vendor late payment fees, and more.
Communities struggling with cash flow are also more likely to be forced to issue special assessments. These are band-aids that only help you to scrape by, and that can wreak havoc on family economies and community morale. They can also lead to more delinquencies, creating a cyclical, ever-growing problem.
Funding Difficulties
As we mentioned earlier, delinquency rates are used by financial institutions to determine who owes how much money and for how long. But those same institutions also use HOA delinquency rates to inform future lending decisions.
So if your community wants to apply for a loan to fund a major project, the lenders you approach will consider your HOA delinquency rate in their decision. High delinquency rates can lead to loan offers with unfavorable interest rates, or loan application rejection altogether. (In fact, we recently hosted a webinar about that very topic—take a look: Your Delinquencies Are Holding Your Association Back).
Decreased Property Values
Fannie Mae and Freddie Mac also take delinquency rates into consideration, and are speculated to include condo communities with high delinquency rates on an infamous “do not lend” blacklist. It is widely believed that anything over 8% is considered negative by these institutions.
This means that potential owners trying to purchase a unit in the community may not get approval, making it harder for your owners to sell. Ultimately, this will drive the prices down, decreasing property values and amplifying dissent in your community.
How to Calculate HOA Delinquency Rate
Determining an HOA delinquency rate can be tricky, so we’re going to use an example to help explain why that is: let’s say that ABC Homeowners Association has 100 doors, and 10 delinquent owners. And let’s say that the monthly assessments are $500.
Using that information could potentially yield two different delinquency rates: Account-Based and Balance-Based.
Account-Based Delinquency Rate
Also known as a Dollar-Based or Amount-Based Delinquency Rate, this rate is used to reflect the percentage of people behind on payments. To get this number, you’ll use the following formula:
(Number of delinquent accounts ÷ Total accounts) × 100
So for ABC HOA, assume that the 10 delinquent owners are one month past-due. If we take that number of units past due (by 31 days) and divide by the total number of units, then multiply by 100, the Account-Based Delinquency Rate equation would look like this:
(10 ÷ 100) × 100
This would give ABC HOA an Account-Based Delinquency Rate of 10%.
An Account-Based Rate will only change if the number of delinquencies changes. The dollars owed will not influence this percentage.
Balance-Based Delinquency Rate
This rate is used to reflect how much money is owed. To get this number, you’ll use the following formula:
(Total dollars delinquent ÷ Total dollars owed by all owners) × 100
Now if all 10 of the delinquent owners in ABC HOA remain only one month behind on payments, then this formula will yield the same delinquency rate as the Account-Based formula (10%).
To show how these delinquency rates can differ, let’s assume another month has passed, and those same 10 owners are still the only delinquencies. But, half have paid one month’s dues. So now, at a rate of $500 per monthly assessment, 5 owners owe $500, and 5 owners owe $1000. ABC HOA is short $7500 of the $100,000 they expected to collect in this time.
So if we take the total dollars delinquent and divide by the total dollars owed by all members, then multiply by 100, the Balance-Based Delinquency Rate formula would look like this:
(7,500 ÷ 100,000) × 100
This would give ABC HOA a Balance-Based Delinquency Rate of 7.5%.
A Balance-Based Rate will change both as the number of delinquencies changes, and as delinquent owners partially repay their debts.
Which Delinquency Rate Should My HOA Use?
The reality is that both of these numbers can be helpful for your Board to know. No matter which calculation you’re using, a high delinquency rate can negatively impact your HOA.
Let Axela Help
In a perfect world, every community would have a 0% delinquency rate, Account-Based or Balance-Based. But in our beautifully imperfect world, Axela is here to help you handle the delinquencies that do exist. If you want to know how to calculate your HOA delinquency rate, or are looking to resolve delinquencies in your community, contact us today for your free collections analysis.
