There are several reasons why money judgments may not be an effective way to collect delinquencies in homeowners’ associations (HOAs):
In general, it is often more effective for an HOA to work with delinquent homeowners to find a resolution that is mutually beneficial. This may involve setting up a payment plan or finding alternative ways to resolve the delinquency.
Foreclosure is a legal process in which a community association takes possession of a property to sell it to recover the outstanding assessment balances. In the context of a homeowner’s association (HOA), foreclosure should be the last option for collecting HOA assessments that are past due. Here are several reasons why pursuing a foreclosure may be a better option than seeking a money judgment:
Why get a money judgment on a secured debt? The collateral is the property so why would you want to get a money judgment and then go to court again to get a writ to collect?
- Recovery: Ever try to garnish wages or repossessed assets for a money judgment? It is not easy and, again, why would you go after a judgment that people often think they can evade, and often do. You already have the best type of collateral for the debt – the property itself.
- Difficulty in enforcing judgments: Obtaining a judgment is only the first step in the collection process. The HOA must then take steps to enforce the judgment, which can be time-consuming and costly. This may involve garnishing wages, levying bank accounts, or seizing assets. When it comes to collecting on judgments you are on your own.
- Limited recovery: Even if a judgment is obtained, there is no guarantee that the delinquent homeowner will be able to pay the amount owed. If the homeowner is unable to pay, the HOA may not be able to recover the full amount of the judgment. Resulting on a negative return on investment.
- Negative impact on community: Pursuing a judgment against a delinquent homeowner may create tension and conflict within the community. This can be especially difficult in a small community where residents may have close personal relationships. If the community has been able to get an ongoing wage garnishment on a resident the animosity may drag on for years.
The overwhelming majority of the time, units in foreclosure are paid off before a sale ever occurs as the new buyer and their bank will insist on clear title before purchase. Foreclosure is the end of the road for the owner, and they will almost always find the money to pay to stay in their homes. Just because you initiate a foreclosure does not mean the sale will occur, and from our experience, it seldom does.
- Stronger legal remedy: A foreclosure is a stronger legal remedy than a money judgment because it allows the HOA to take possession of the property and sell it to recover the unpaid assessments. A money judgment is only a court order requiring the homeowner to pay the amount owed, and the HOA must still take additional steps to enforce the judgment and collect the funds.
- Quicker resolution: Foreclosure can be a quicker process than seeking a money judgment. Depending on the state in which the property is located, the foreclosure process may take several months to a year. In contrast, obtaining a money judgment can be a lengthy process that may involve multiple court hearings and appeals.
- Higher recovery rate: Foreclosure may result in a higher recovery rate for the HOA because the sale of the property can often cover the unpaid assessments, legal fees, and other costs associated with the foreclosure process. With a money judgment, the HOA may not be able to recover the full amount owed, especially if the homeowner is unable to pay.
- Deterrent effect: Foreclosure may have a deterrent effect on other homeowners in the community who may be considering defaulting on their assessments. This can help to maintain the financial stability of the HOA and protect the value of the community.
Many delinquencies are settled under the joint and several liability doctrines when a new buyer purchases the property. If you have eviscerated an amount of the debt and turned it into a personal obligation, you cannot collect it as easily when the property sells. The association has a money judgment, but now you must make it good even after the owner has sold the house, when you would have otherwise been paid in full at the time of the sale.
During the Real Estate meltdown of 2008 associations foreclosed and took title to units that were underwater (everything was underwater during that epoch), and in those cases, they would refurbish and rent the units. The banks were not foreclosing, the units were underwater, and the associations had no other choice if they wanted to be proactive. But times have changed, and there is a record amount of equity in the housing market. The chances that the association will ever take intervening title in these times of high property value to rent the are incredibly slim.
It is also about the consequences. If you go after somebody with a money judgment, they will evade you until they cannot and that can take years if you ever get to cash in. This is not about revenge; it is about cash flow. When a HOA goes after a delinquent owner, you can be sure that the subject debtor would be more motivated to pay with a foreclosure over their head than a money judgment. They may be able to circumvent or have exemptions not to pay.
It is important to note that foreclosure is the last resort for collecting HOA assessments. Before pursuing a foreclosure, the HOA should consider utilizing a specialized and licensed collections solution like Axela-Technologies. Our methodology includes client outreach, respectful phone calls, email and letter strings and notices, bank notifications, credit bureau reporting, and other commercially reasonable methods to collect.