Greasing the Wheels
Money is the grease that oils the homeowner association’s wheels. Without it, the HOA screeches to a grinding halt. Without money, bills go unpaid, needed repairs are delayed, property values fall and tempers rise. In most HOA budgets, there is little margin for slow or no payers so attention to timely collection is essential. Yet, it’s a recurring problem in many HOAs because Boards are reluctant to enforce collection on neighbors and/or friends. But there is no government bailout for HOAs. If all don’t pay, the remaining members must make up the difference. The picture ain’t pretty.
While the governing documents empower the HOA to collect the money it needs to operate, the details on collection is left to the discretion of the Board. There is much to consider:
- Should a Late Fee be charged?
- How about charging interest on the outstanding balance?
- Bad check charge?
- Should a lien be filed?
- Should an attorney be used for collections?
- Can the HOA get reimbursed from the debtor for costs of collection?
- Should the HOA consider foreclosure in some cases?
- Can the HOA garnish wages?
The answers to these questions is "Yes". And all should be integrated into a Collection Policy that should be adopted and followed consistently by the Board and Manager. The primary goal of the policy should be to keep the HOA bill at the top of the debtor’s bill paying stack.
Since a Collection Policy is complex, it should be formalized in a Board Resolution which recites the governing document authority and the details of the procedure. As with all resolutions, it should be circulated among the membership prior to enactment for review and input. Once adopted, the Collection Resolution should be posted on the HOA’s website and attached to each attempt to collect a delinquency. That way, members know exactly what the process is and are forewarned of consequences.
Collection Policies vary in procedure but the following reflects a sequence commonly used unless the governing documents indicate otherwise:
- Homeowner fees (dues, assessments) are due on the first of the month.
- On the 10th, a Late Charge is applied and Notice of Balance Due sent which includes a Right of Appeal and Repayment Plan Request.
- After 30 days, a 10 Day Notice of Intent to Lien is sent.
- After 40 days, the account is turned over to the HOA’s attorney for further action.
- Attorney immediately sends a 10 Day Demand for Payment letter again citing the Intent to Lien.
- By 60 days late, attorney files a lien against the debtor’s property and may, if appropriate, invoke termination of HOA paid utilities provided to the owner, restriction to amenities (like pool, clubhouse, etc.), acceleration of fees due for the remainder of the fiscal year, garnishment of wages, seizing assets for resale (cars, boats, etc.), taking an assignment of rents if the unit is rented and other allowable options.
- By 120-180 days late, the HOA should consider processing a foreclosure action.
Here are details on selected actions:
Late Charge. A late charge is appropriate for each month the account is delinquent. Generally, a flat fee of $10 to $25 per month is acceptable. If partial payment is received, it should always be applied to the oldest balance so that Late Fees are levied for each month there is a balance due.
Notice of Balance Due. This statement advises the debtor early of the Late Fee. It usually results in a speedy payment. The debtor may have an explanation (check’s in the mail, Post Office lost it, dog ate it. etc.) which can be considered.
Right of Appeal. The debtor may dispute the validity of the debt, especially if there are fines and other charges that are not part of the regular fees. They are entitled to appeal the billing. Of course, convincing evidence must be presented that negates the charges. The Board has the final say and Appeals should be heard quickly and not delay the collection schedule.
Repayment Plan Request. There can be extenuating circumstances like injury, disability, job loss or other unavoidable financial setback that the Board should consider in allowing a repayment plan. Repayment plans should not be granted automatically since they put an additional burden on the other members to fund the shortfall. However, filing an aggressive collection on someone that is unable to pay for valid reasons could alienate an otherwise good neighbor, unnecessarily increase the debt on someone who can’t even pay the principal and tip the debtor into premature bankruptcy. If there is a reasonable expectation of financial recovery, it’s often in the HOA’s best interest to work with the debtor.
In general, repayment plans should serve as a stop gap measure only and extend only a few months. The plan should be strictly adhered to so the HOA doesn’t lose ground as time passes. Approving the plan needs to be considered in the overall scheme of the HOA’s cashflow. If the HOA needs every penny every month, approving a repayment plan means others will have to ante up the cash so bills can be paid. This translates into a "special assessment"(the longest four letter word there is). In other words, if the HOA has no excess cash to draw on, the members should approve the plan.
Notice of Intent to Lien. This warning notice advises the debtor of the costly consequences for non-payment. In most cases, outstanding balances are resolved before the deadline.
Lien Recording. Recording a lien against the debtor’s unit/home is the most important collection action the HOA can take since it secures payment of the balance due. It is very important that the lien be properly prepared and recorded. A knowledgeable HOA attorney should always be used for this purpose.
The attorney will need:
- Copies of all notices sent to the debtor.
- Copies of appeals, repayment proposals and responses, if any, from the debtor.
- A copy of the unit deed verifying who the legal owner is.
- Mailing address of the legal owner.
- Property Tax ID number.
- A current account balance with all charges detailed including late fees and interest charges.
- Copy of the Collection Policy.
Acceleration of Assessments. Some governing documents provide the right to accelerate the balance of the current fiscal year's assessments in the event of default. Invoking this right is subject to the Board’s discretion which includes the number of times a particular owner has been delinquent and the amount of the delinquency. If your HOA has this right, it’s best for the Board to establish the criteria under which it is invoked (like, if the debtor has been delinquent twice in the previous 12 months or the balance exceeds, say, $1000).
Foreclosure. Foreclosure of debtor property is the most extreme form of HOA collection and not particularly easy to pull off. The HOA must be able to buy out prior lien holders like lenders and, possibly, the IRS. Debtors enjoy Homestead Right protection in most states which protects tens of thousands of dollars of equity. After all prior lien holders are satisfied, there must be enough equity remaining to justify the action, that is to say, to pay the outstanding balance owed.
Foreclosures are politically charged inasmuch they usually involve a person’s home. If the owner is disabled or elderly, the issue gets even more sensitive. For a variety of reasons, the Board should seriously consider whether foreclosure should be pursued. Unless the debt is significant (many thousands of dollars), it is generally more prudent to wait until the property sells. The attorney should make a recommendation to the Board after all the facts are known and discussed at length. Foreclosure should never be undertaken lightly or automatically.
Money comes and money goes but mostly goes. Money is hard to come by. Keeping the HOA wheels greased is a never ending task. To ensure that your homeowner association never lacks the lubrication it needs, develop and follow a fair but firm Collection Policy. Then hire a professional manager to enforce it. Keep that HOA rolling