By Mitch Drimmer / Published August 2016
When it comes to collections for condominiums and HOAs, the problems that need to be resolved are twofold. The first problem is rooted in owners who have completely defaulted in their payments to the community association. The second problem comes from owners who are habitually late in their obligation to pay the association on time.
Community associations are a zero-dollar business, and every cent that they budget to maintain the community they have budgeted equally for collections. Therefore, at the end of the year, they should not have made a profit or lost any money. That is how things work in a perfect community association world. Often there are people who, due to one reason or another, completely default on their payments to the association, or there are those who are always late, making it difficult for the association to pay their bills. Non-payment of obligations to vendors can result in expensive penalties for late payments (not budgeted) or a reduction of service levels (not acceptable).
Every community association during good times and even during bad times suffers from this problem. Yes, during the real estate meltdown a few years ago the default and delinquency rates were astronomical; but in good times, you can expect a three to five percent delinquency rate to be the norm. No percentage of delinquencies is acceptable.
Delinquencies occur for many reasons. Some people are genuinely having a difficult time making ends meet, and due to their financial hardship, they have decided that the bill they won’t pay is their community association maintenance fees. This is very common because folks believe that the least likely of consequences for non-payment of a debt obligation will come from their own neighborhood, and often they are right. Many boards of directors fail to take swift action to engage a delinquent owner. Even if somebody is having a hardship, allowing a delinquency to go unresolved does a disservice not only to the community but to the owner as well. Don’t let owners dig themselves so deep into a hole that they cannot recover.
Another reason for a delinquency is that an owner may feel that the association is not providing them the services and amenities that they deserve. This is not an excuse for not paying community association dues, and if such is the case, these people should be dealt with swiftly and with severe consequences. Other people feel that they can get away with not paying their dues because their boards of directors often do nothing, and why pay if there are no consequences?
Finally, some people don’t pay because they budgeted wrong. They purchased their house with a variable rate loan, and when that monthly payment increased, they took the money from the association payment to pay the bank.
If left unresolved, there are two consequences for the community association and the good paying owners, which are to reduce servi-ces (security, landscaping, pool maintenance, valet service, preventative maintenance, and even capital expenditures), or to ask the good paying owners to make up the shortfall by way of special assessments or increased dues. Also, when there are shortfalls, it is very tempting for boards of directors to dip into the reserve fund, which is the very definition of community association foolishness. That money is for a special purpose, and often it is even illegal to use those funds for day-to-day operating expenses.
The knee-jerk solution is to punt this problem to the community association attorney. This is what is most commonly done to resolve these issues. What happens when an attorney gets a collection file? Well, the first thing he must do is send an initial demand letter giving the delinquent owner 30 days to dispute the debt. Then the attorney can send a notification that he will place a lien on the delinquent owner’s unit and eventually place a lien on a unit. So far so good—however, this may not produce results, but it most certainly will produce expensive legal bills. The next and only step is for the community association attorney to foreclose on the unit on behalf of the community association (also an expensive proposition), and if they are successful in court, they will win the case and the association now will hold what is known as “limited title” or “intermediary title.” This means they own the unit, but it is still encumbered by the first mortgage, and the association cannot sell the unit to recover their lost maintenance fees and legal expenses that have come out of pocket. The only thing they can do is become landlords and rent a unit out to recover what they have lost in late maintenance fees and legal expenses. Sometimes it’s a good outcome, but often it is not.
One of the most effective solutions is to place a delinquency where it should be, and that is with a collection agency that is merit-based and will defer their fees and costs to such a time that the association recovers its money and the cost of collections. By merit-based, we mean that unless the collection agency recovers its fees from the delinquent owner, subsequent purchaser, foreclosing bank, or surplus from a tax deed sale, the association is not required to pay for these services—no more spending good money to collect what may be a total loss for the association.
Two years ago SNAP Collections was signed on by Sunset Trace HOA to handle their collections for delinquent and non-paying owners. The community had a serious problem with their cash flow, was burdened with many delinquent accounts, and was not prepared to foreclose. Over the past two years, without the association having to spend one cent, SNAP Collections took approximately 25 delinquent units owing more than $200,000 and, by working with the owners using standard FDCPA collection tactics, has been able to recover more than $128,000 for the association. Many units that remain in collections are on payment plans and are due to make the association whole again by the end of 2016.
This was accomplished by sending out initial demand letters, making outbound calls, sending notice of intent to lien letters, and requesting attorneys to place liens on units. People were advised that should they continue not paying they would be subject to credit bureau reporting, and that was a great motivator in getting owners on payment plans. When banks foreclosed on units, the negotiators at SNAP Collections worked hard to collect as much as legally possible and squeezed the foreclosing entities as hard as possible. Subsequent purchasers and third-party buyers were also asked to pay as much as legally possible, and by being tough and resourceful, the collectors were able to maximize the amount recovered by the association. In one case, it was possible to recover surplus funds from a tax deed sale, which covered the entire debt owed to the association.
Collections is an ongoing proposition, and there are still a few accounts that need to be settled out at Sunset Trace. HOA director Trish Beucher remarks, “I’m very impressed by the recovery of funds made and grateful that we do not have to pay from our operating account for any of these collection efforts.” Sunset Trace continues to send collection files to SNAP Collections, but it is a well-known fact in this community that the board of directors will not take delinquencies lightly, and failure to pay will result in a member being sent directly to collections.
Mitch Drimmer, CAM
Mitch Drimmer, CAM and Vice President of Business Development, and SNAP Collections by Association Financial Services have become synonymous with collections success for community associations. SNAP Collections by AFS has grown to be a national company. Drimmer is a licensed community association manager and real estate broker, and has three collection certifications from various industry organizations. He is on the advisory board of Florida Community Association Professionals (FCAP), a content provider for the FCAP educational program, and is a contributor for various publications dealing with issues in community associations. Contact Drimmer at (305) 677-0022 ex 804, e-mail mitch@SnapCollections.com, or go to the website SnapCollections.com.