Due Dilligence

When looking to buy a house in an HOA or a Condominium unit, there is much to consider. Location, shopping, schools, transportation and other elements that relate to your lifestyle factor in to your decision to buy or not to buy. So, would I buy a condo with a 15% delinquency rate?

What many new home buyers fail to factor into the decision process is the financial stability of the community.

Buying a Condo? Do Your Due Diligence

When you are buying a residence in a community associations you will be interviewed. The board and management team will review your financial health. They do this to see if you can afford to live in the community. So should you, the buyer, look into the financial health of the community association. Because once you’re in, you are on the hook for what may have been poor financial management.

Ask about the delinquencies and how much is owed to the association? It is not out of line to request to review an aging of the delinquencies. See how much of the association’s budget goes to attorneys to collect these funds. They want to know all about your financial issues, so why not ask them about their financial issues?

When you are presented with numbers, like, “Our condo association has a 15% delinquency rate“, it may not mean a lot to you. Is that good? Bad? Irrelevant? We are going to break it down for you, and help you determine what the financial stability of your potential new community is, and whether you should buy or pass on that property.

What is a Delinquency Rate?

The delinquency rate is the percentage of homeowners in the community who are not paying their fair share of the maintenance assessments. When enough community members don’t pay, the community’s budget cannot cover the loss, and the services and amenities of the community may suffer. This can lead to cutting corners on maintenance or upkeep on the property, reduction or loss of services, and other negative effects that affect your enjoyment of your new home.

What is an Acceptable Delinquency Rate?

Ideally, every homeowner would pay their assessments regularly and on time, and every community would have a 0% delinquency rate. Barring a perfect rate, you want to look for a community with as low a delinquency rate as possible. We have seen communities begin experiencing problems with rates as low as 3% so there is no ‘safe’ threshold when it comes to delinquency rates.

Cash Flow Indicates Your Residential Experience

A potential purchaser must consider the cash flow of the community. Think about the delinquency rate of the community as it will be you who will be paying the shortfall. I also urge buyers to never buy into a condo or HOA that does not have an adequate reserve fund.

HOA cash flow is a great indicator on how your residential experience will be. If you buy in a condo or HOA that has a delinquency issue then you should ready for an unhappy experience. The cash flow in your HOA or Condo dictates the future of your family economy.

In a scenario like the above 15% delinquency rate, you have to ask yourself: Why does the Condo or HOA have such a high delinquency rate? Then you should inquire about what they are doing about it. Inadequate cash flow is symptomatic to issues that will become frustrating to you. Financial health of your community association should be high on your list of what to look for.

Will a High Delinquency Rate in My Condo Association Affect Me?

If the budget is not right you will get an unhappy surprise by way of a special assessment

If the budget is not right you will get an unhappy surprise by way of a special assessment. Then you can expect a reduction of services and the eventual lowering of your property value.

The special assessment is inevitable. With poor cash flow that is a given. With such a high delinquency rate as 15%, the community’s budget is out of whack and you might as well write a check the day you move in.

Yes, a high delinquency rate will affect your family economy. Your property will not appreciate like it should. Most important is that your quality of life , and your safety of your home will be affected. When the HOA or Condo cash flow slows down, cuts in services happen.

Find Out Where Your Money Will Be Going

HOA and Condo delinquencies are expensive. Not only is the association coming up short every month but they are also paying attorneys. You want to see your maintenance fees go into the maintenance of the building. These are two line items on the budget that you the new owner will be paying for.

Unless the association has hired a merit based collection agency, legal fees often are greater than what is recovered from the delinquent owners. That is quite a difficult situation to walk into.

So, to answer the question: Should you buy a condo in a community that has a 15% delinquency rate? The answer is an unequivocal NO.

One Reply to “Should I buy a condo with a 15% delinquency rate?”

  1. Mitch – great article. Like you say, 0% delinquencies are perfect. But we don’t live in a perfect world. Somewhere in the 0-5% is “normal” in my experience. As the percentage gets higher, associations dangerously approach the “tipping point”, or the “death spiral”, when bills get piled on fewer and fewer homeowners, making their assessments higher and higher as they try to support the expenses of the association with significantly less owners joining them pulling the association into the future.

    So agreed – look for low delinquencies, and do all you can to keep them low. Hire professionals to assist the association in recovery and cash flow efforts.

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