Delinquencies

Delinquencies are troubling Association budgets these days. When the real estate market was thriving, it was relatively easy to pursue collections on an owner that was not paying their HOA dues. Most had enough equity in their units, which permitted the Associations to pursue non-judicial foreclosure when necessary.

In today's market, however, collecting has been very challenging. Property Managers, Board Members and collection agencies have had to be more creative and resourceful in determining methods of effectively collecting dues. Most homeowners do not have any equity left in their homes and are very comfortable with walking away and allowing lenders to foreclose on the units. Most often, once a lender forecloses, the Association cannot transfer the debt to the new owner. You should check your Governing Documents about this, because some do permit Associations to transfer a portion of debts (it's not common).

A lot of Associations are left helpless. Some continue to pursue non-judicial foreclosure, but once the lender forecloses, not only do the Association dues get wiped out, so do the incurred legal fees. Some HOAs have been discouraged in even pursuing collections in fear of incurring more debt, but at the same time, the Association needs to protect its assets and make an attempt to collect the debts.

Our solution, while it creates more work for us, has been to handle each situation on a case by case basis. We do solicit the assistance of collection agencies to let us know if a Notice of Default or liens have been filed by any other entity. If it appears that the lender is at the final stage and is moving in to foreclose, we don't bother with the non-judicial system (to pursue the debt by attempting to collect from the unit's value by way of foreclosure to receive payment from the sale). Alternatively, the cheapest way is to pursue collections against the unit owner directly by way of filing a small claims suit. Often times, the debt does not exceed the small claims limit. If it does though, it still may be worth considering just pursuing small claims depending on how much is actually owed to the Association (again, check with legal counsel if there is a question about this). The easiest way to serve a unit owner is to attempt this while they still reside in the unit as opposed to when they have already moved out.

So, now the problem remains that if the unit owner did not have the funds to pay the debt and allowed the unit to foreclose, what will prompt them to pay the judgement? A judgement is valid for 10 years. Once a judgement is obtained, you can turn that over to a collection agency that will specifically work with the Association to monitor that individual and will search for assets. You may be able to garnish wages or pursue other assets that are founds. And, if you work with a strong collection agency, perhaps they won't be able to collect today, but 2-3 years from now when thing hopefully pick up with our economy, people will start to re-build assets and may be able to pay off their judgement at that time. The judgement may be worthless and may never be collected, but it's a better option then completely giving up once the lender has foreclosed.

Finally, another very effective option is suspending common area privileges when there are actually ammenities that residents rely on. I work with a high-rise in Century City that provides valet service, a gym, cable television and DSL connections for their residents, etc. Their policy is that if a homeowner is 30 days or more delinquent, the Board provides another 15 days to become current, or all common area privileges are suspended. For owners with tenants, this is disastrous. The tenant no longer receives internet connections, television service, use of valet services, the gym, etc. The threat of the loss of rent really keeps owners paying their dues.

In another Association I work with, we just instituted a whole new system. The community consists of 320 homes, so the only real ammenities are the pools. The pools were originally accessed with keys, but we modified it to a key card system. This allows us the ability to de-activate the key cards when common area privileges are suspended. Once again, owners and/or their tenants will not have access to the pools if they are not current on their dues. We also created a parking program that requires all resident vehicles to be registered with the Association. Any guests must use visitor permits to be parked on the streets. In order to obtain the guest parking permits, owners must also be current on their dues. So now, we have restricted those behind on their dues from using the pools OR having guests park on the streets. We issue new visitor parking placards at the start of each year, so we can have control over accounts if they start accruing more debt. This may be of interest to know that this Association in particiluar went from a 20% delinquency rate (undesirable to lenders and was considered high-risk) down to 12% now. FHA will consider approving an Association if delinquencies are 15% or better, so our delinquencies have drastically improved since the implementation of these projects. Sometimes it's worth spending a bit of money to expect a bigger return. The program is far more detailed than what I will share in this blog, but if you are interested in obtaining a copy of the parking rules or getting more suggestions on creative ways to get your delinquencies paid, leave me a comment on the blog, and I will contact you.

Neda Firouz