Too many community association boards of directors avoid the question of how to deal with delinquent assessments until it falls squarely in their lap. When that happens, some quickly pull the trigger and start pursuing foreclosure, while others drag their feet or attempt various ad hoc measures.
You can help them avoid these potentially risky and costly responses by working with them to develop effective collection policies that are applied on a consistent basis.
The Case for Formal Collections Policies
According to Mitch Drimmer, vice president of business development at Axela Technologies, a national collections firm that specializes in association collections, not many associations have formal collection policies in place.
Some associations just turn to the governing documents when the issue comes up. “But many governing documents aren’t really geared toward collections,” Drimmer says. “They’re geared toward sending a delinquent owner to an attorney.” The attorney typically engages in the legal process of filing a lien, foreclosing, and taking title.
Foreclosure isn’t always the optimal route, though. “Every option needs to be explored prior to commencing a foreclosure,” says Paul Grucza, director of education and client engagement for CWD Group, Inc., an association management company in the Pacific Northwest.
Drimmer points out that the current economy boosts the odds of collection.
“It’s easier to recover money today than it was 2007 to 2013,” he says. “If you have equity, who wants to lose a home over a few thousand dollars in maintenance fees? Back then, you had no choice [other than to foreclose], but nowadays it doesn’t make sense because if you engage with these people, they’ll pay.”
That’s where the collections policy comes in. It provides a road map that an association can follow before turning to legal remedies.
The 5 Critical Elements
Drimmer says “uniform collection policies” are built on five components.
1. The delinquency threshold. The first step is for the board to determine when an owner will be declared delinquent on his or her assessments — after one month, two, three? Drimmer suggests a 60-day threshold.
2. The courtesy letter timeline. The policy should designate when the association manager will send the first “courtesy letter” letter (for example, seven days after the due date or expiration of the grace period for the missed payment) and any follow-ups.
Drimmer says managers should exercise caution when sending such letters: “Managers should never send a demand letter because then they’re in the practice of collections and subject to the Fair Credit Reporting Act fines and regulations.
“Instead, send a courtesy reminder that states the facts. Never make a demand or make threats, just tell them that a check was missing.”
3. The solution provider. If the courtesy letters don’t prompt payment, it’s time to turn to a professional — an attorney or a collection agency. “The default is the attorney because associations, especially condos, are creatures of statute so there are always lawyers around,” Drimmer says.
“It is always better to attempt to collect delinquent assessments rather than foreclose,” Grucza says. “The association is never in an appropriate position to own property, simply because of the costs involved, the carrying costs to the association, and the nuisance the unit creates until it’s re-sold.”
Drimmer generally favors collections over foreclosure, too, but is less equivocal. “I do get cases where the owner doesn’t have much equity, and they’ve dug themselves into a deep hole because the association didn’t have a uniform collections policy and just let things go,” he says. When it’s clear such an owner isn’t going to pay, Drimmer thinks you should foreclose, assuming the mortgage holder isn’t moving toward foreclosure.
In most cases, though, associations will be better off trying to collect before bringing in the legal guns. (Note: State law may require associations to satisfy certain steps before submitting an owner’s debt to a collection agency.)
4. Penalties. If provided by the governing documents, the policy should state the interest and late fees that will be charged. Drimmer takes a hard line against waivers of these fees. “That opens you up to claims of unequal enforcement,” he says. The board also might consider suspending voting rights or the rights to use amenities.
Explicitly stating the penalties can help deter boards from taking matters into their own hands — or instructing managers to do so. Drimmer has seen boards cut off utilities or deny unit access.
The problem isn’t just that those acts are illegal, he says. “Suppose someone has a heart attack and picks up the phone to call for help, but it’s dead. Or someone can’t access the medication in their unit. Do you want to be on the other end of that lawsuit?”
5. Payment options. In some states, associations have no choice; they’re legally required to offer a payment plan. In others, the board must decide whether it will accept payment plans. If so, the policy should spell out the requisite conditions an owner must meet and how long plans can run (generally, you should limit plans to no longer than 12 months, where legally permissible). And any payment plan must be formally documented.