Successful Assessment Collection Strategy-Then & Now 2011

Successful assessment collection is always vital to the smooth operation of a community association. In this era of increased mortgage foreclosures and higher delinquency rates, employing the right strategy is more important than ever. In this memorandum we will explain how the traditional strategy employed for assessment collections should be modified to address the current times.

The chronology of an assessment delinquency and the collection process is, generally, as follows:

1. Assessment Invoice/Coupon sent to property Owner with a specific due date for payment.

2. Late Notice sent to property owners who have not made payment after the grace period which is usually 10 or 15 days after due date.

3. Final Warning Letter – Letter from Association/CAM warning of intent to send owner to an attorney for collection. Generally allows Owner 15 to 30 more days beyond late notice due date.

4. Pre-lien letter - Letter from attorney warning of intent to file a claim of lien. Required by law.

5. Lien and Intent to Foreclose Letter - Letter from attorney enclosing lien and warning that foreclosure lawsuit will be commenced if payment not made within 45 days. Required by law.

6. Foreclosure law suit. - Typically takes 4 to 6 months and results in property being auctioned off to highest bidder at foreclosure sale unless property owner pays debt in full including interest, costs, late fees and attorney fees.

7. Full Payment of debt and fees.

Traditionally, the key component to a successful assessment collection strategy when following the procedure outlined above, is speed. The faster the Association pursues each of the collection steps the greater the chance of success. However, due to the mortgage crisis and real estate bubble bursting this traditional strategy does not always work in these times and, in a bad case, can actually result in the Association losing more money than it otherwise should. Below we will discuss the traditional assessment collection strategy and then how it needs to be modified for the current economic conditions.

Traditional Strategy – “Speed Always Wins”

The traditional strategy of “speed always wins” was premised on four “truths” of the real estate economy.

1. Property values were rising. Sometimes values rose slowly sometimes faster but property values were always rising. This meant that a property owner had equity in his or her property and that the equity was growing and would continue to grow as long as the person owned the property.

2. A homeowner could re-finance his or her mortgage relatively easily because banks extended credit more easily and there was equity in the property.

3. Owners rarely defaulted on a 1st mortgage or let their home be sold at a foreclosure sale because it meant the loss of their equity.

4. Owners worked very hard to avoid foreclosure and bankruptcy because of the adverse affect it would have on their credit rating.

In debt collection the creditor that pushes the hardest and has the biggest stick will get the attention of the debtor and usually gets paid before other creditors. In the community association context, the Association has a big stick (i.e. foreclosure of the lien which results in the sale of the home) and has the ability to move along the collection timeline quickly. Pursuing the collection as quickly as possible “pushed” the homeowner to the decision making point sooner than other creditors. This almost always resulted in the owner paying the full amount owed to the Association to avoid the foreclosure and loss of their property. When pushed to the decision making point the owner typically could refinance his or her mortgage or obtain other funds to pay the Association. The debtor also had powerful motivation to do this because he had his equity interest to protect and his credit rating. Associations that delayed in pursuing their collections reduced their chances of success because typically a debtor’s financial situation grows worse over time and when that decision making point finally came the debtor would file bankruptcy or simply have no more resources to tap to obtain funds to pay the Association.

Thus, traditionally with rare exception, the strategy of “speed always wins” was the best strategy to employ. In many cases today however this is no longer always the right strategy.

Today’s Strategy – “Speed Sometimes Wins”

The four “truths” of the real estate economy have drastically changed. As a result, the traditional speed always wins strategy is no longer as effective in all cases. In today’s economy the four truths are now:

1. Property values are not rising and in fact most have dropped substantially and in many cases well below the value of the first mortgage. This means if there is any equity in a property it has eroded and the owner has less to lose. Moreover, because values are stagnant the future possibility of equity growth is slim at the present.

2. Homeowners cannot re-finance because they have no equity in their property and the banks have significantly tightened their credit lines and lending policies.

3. Defaulting on a first mortgage that is “upside down” does not result in the loss of equity and sometimes “walking away” is the “prudent” business decision for the homeowner.

4. The stigma of bankruptcy or bad credit is not as great as it once was and can be explained more easily - i.e.“I got caught in the real estate bubble just like everybody else”.

Because the four truths have changed the traditional strategy of “speed always wins” will not work in all cases and if not modified will likely result in the Association not only failing to collect its delinquent assessments but also spending unnecessary funds on legal fees that will not be recovered. The strategy for today’s economy should be called “speed sometimes wins.”

In today’s market an Association should still act as quickly as possible in moving through steps 1 through 4 on the assessment collection chronology. These steps are very inexpensive and moving fast will not risk very much for the Association should the case go bad. In fact to move even faster the Association should consider combining items 3 and 4 in the following ways:

1. Assessment Invoice/Coupon.

2. Late Notice on day 15 after due date.

3/4. Final Warning Letter/Pre-Lien Letter Combined Into One – Combine the two letters into a single letter. You will be required to give more time at this stage than you would at the traditional stage 3 because a pre-lien letter by Statute must give the debtor 30 days to pay in Condominium and 45 days to pay in an HOA. However, you will save the additional 15 days of the traditional final warning letter by rolling them into the 30 or 45 day period required in step 4. Moreover, this step can be taken by the CAM which also saves processing time in sending the file to the attorney and legal fees as the CAM’s charge for the letter is less than the attorney’s.

5. Lien and Intent to Foreclose Letter - Letter from attorney enclosing lien and warning that foreclosure lawsuit will be commenced if payment not made within 45 days.

6. Foreclosure law suit. - Typically takes 4 to 6 months and results in property being auctioned off to highest bidder at foreclosure sale.

7. Full Payment of debt and fees.

It is at step 5 that the “speed always wins” strategy can backfire in this market and it is also the step where the Association will begin to incur significant legal fees. Therefore, it is important to evaluate the case closely at this point and make an informed decision as to whether or not to proceed with the collection effort.

There are also new laws that allow associations to collect rent, and suspend use and voting rights of delinquent owners. These new tools should be used when appropriate.

If the property is in bank foreclosure or if the property appears to be abandoned which suggests that it soon will be in bank foreclosure, the Association should most likely just stop its collection efforts and wait for the bank foreclosure to play out. Once a property goes into bank foreclosure there is virtually nothing the Association, the CAM or lawyer can do that will result in the owner deciding to pay the assessments to the Association. If the debtor has no equity to protect and has made the decision to default on a multi-hundreds of thousand dollar loan owed to the bank it is extremely unlikely that the debtor is going to pay his or her Association. Therefore, any money spent on attorney’s fees will likely be wasted and will not result in payment to the Association. This situation presents the “speed kills in the wrong case” scenario and one in which the Association should actually slow down its collection efforts to minimize its exposure. In such cases the property will very likely end up being owned by the bank at some point and the Association will then collect “some” past due assessments from the bank. That “some” will likely be the last 12 months worth of assessments but will not include any attorney’s fees or costs.

When a bank foreclosure lawsuit is filed the Association should send the Complaint to the Association’s lawyer and have the lawyer review it and file an appearance in the lawsuit. The cost for doing this is minimal (usually a few hundred dollars). It is important to have the lawyer review and monitor the case because there are certain factors that could occur that will result in the Association being able to recover more than the 12 months past due assessments. Some Association’s believe that sending the bank foreclosure to the lawyer is an unnecessary expense but this is a bad practice and in certain circumstances can result in the Association failing to collect significant amounts of money owed to it.

If you reach step 5 and the case is still “good” then the Association should proceed, employing the traditional strategy. A “good” case is one which is not in bank foreclosure or bankruptcy and the indications are that it is not heading into foreclosure. Again the best predictor of this is a 1st mortgage that is less than the fair market value of the property indicating that there is equity in the property. Other favorable indicators that the case should be pursued are: 1. The property is owner occupied. 2. The property is the debtor’s homestead. 3. The property is being maintained in relatively good condition. Even if the property is “up side down” with the mortgage, if all other factors are favorable it still can be considered a good case and thus pursued.

Unfortunately, in the present economy a case that appears “good” can go bad very quickly and with little notice. Therefore, there is always a greater degree of risk when pursuing any collection case in this market. However, an Association that decides not to pursue any collection cases to avoid all risk will, in the end, lose much more in uncollected assessments than uncollected attorneys fees and costs. The key to successful assessment collection in this market it to carefully evaluate each case at step 5 and then make an informed business decision to pursue the good cases and wait out the bad cases. This evaluation requires a close collaboration among the Board, the CAM and an experienced community association attorney.

*The information contained in this memorandum is general in nature and is not intended as legal advice applicable to any specific factual situation.

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