Delinquencies do not make for good neighbors in Condos and HOAs
“It’s unfair, and its wrong!” a homeowner shouted out of turn when the issue of delinquencies came up. “How dare they use the pool, the clubhouse, the gym. They haven’t paid their maintenance fees in two years!” the board tried to restore order, but the owner had one final thing to say: “what can we do about this?”
Scenes like this play out regularly at board meetings across the country, but those concerned individuals are right. This is a serious problem.
Community associations (this includes HOAs, condos, and co-ops) are what is known as “zero-dollar businesses”. That means the total of all maintenance fees charged association wide need to match exactly to the cost of running it. Simply put, the budget needs to balance perfectly, and be spent in full. Running the association as a zero-dollar business is necessary, but it creates a fragile economy. If a single owner misses just one payment, it could compromise the entire association. Bills will go unpaid, services will diminish, and worst of all, the burden will fall to the paying owners in good standing by way of increased regular, and special assessments.
This is bad for the association, but disastrous for the community.
By law, community associations are required to make available all their financials, this includes a list of who is paying…and who isn’t. Talk moves the speed of sound, and if just one person finds out who isn’t paying their fair share, it won’t be long before the whole community knows.
Our homes aren’t just the property we live on, but the relationships with the people around us. This includes our neighbors. A board member might feel they are pursuing the peaceful path by allowing someone to miss a few payments without much fuss, but they are in fact doing a grave disservice to both the community and the delinquent owner. Not only will the uneven payment of dues create a rift in the community, it could spiral the owner into an ever expanding hole of debt. I can tell you for certain that neither of those things will improve the quality of your community, and if a community suffers, so do property values.
The solution is simple: swift action. For the good of the association, the board must devise a uniform code for the handling of delinquencies and place it in the governing documents. It should include specific details on when and how a delinquency should be addressed. There should be no question how a unit that is 90 days delinquent should be handled, for you and any future board. Often a simple note will suffice to remind the owner of their obligation, but when it doesn’t, professionals must be brought in.
The dynamics of delinquencies have changed dramatically since the last financial crisis. During the bad old days of 2007-2014, many owners were simply walking away from properties they could no longer afford. Often purchased as an investment (not a home) and backed by unfavorable financial instruments, these properties were deeply underwater and owned by people who lacked the ability and inclination to pay the mortgage, much less the maintenance fees. Worse yet, the real estate market collapse meant banks were unmotivated (and often unable) to foreclose on the very homes they held the paper to! Management companies came under extreme stress as the revenue side of HOA’s and Condos were under-performing. At the center of all this was the board of directors, regular people forced to face a crisis no one was prepared for.
At the time, the most common solution was to turn to lawyers. These lawyers did exactly what you would expect them to: litigate. In the context of HOAs and condos, that means lien and foreclose. When they were successful (and they often were), the association was not issued a check by the court, instead they received title to unit. With title in hand, boards were free to recoup their losses by renting the unit.
This may sound extreme to you, and frankly, it was. The legal route was a long, arduous process, It was a difficult time for condos and HOA and drastic measures had to be taken to keep them afloat.
Fortunately, times have changed and what once required drastic legal action, now requires a simple “collections solution”. The real estate market has changed dramatically in the past five years, and more often than not, any given owner will have a significant portion of equity in their home. That means delinquent owners are significantly more likely to pay, avoiding the need for an expensive and long legal process. If there is little chance for legal action, why bother involving lawyers? Furthermore, If you think the harmony of your community is at risk with delinquencies, when legal action starts happening it will become down right dire.
Instead, consider a specialized collections agency. One with the technology and aptitude to assess unit equity, perform skip traces to locate owners, prepare consistent and well worded collections notices, make outbound calls with a courteous disposition, be constantly available to take inbound calls to answer questions, and most importantly, back it all up by working closely with credit reporting agencies. These are the skills and resources one needs to make a collections event happen.