When interviewing a new service provider for an association, one of the first questions asked by the board of directors is: “How long is your contract for?” For most vendors, there is an absolute beginning and a defined end to their tenure as service providers, but for a collection solution, this is a much harder question to answer. If the board of directors is satisfied with their choice of collection solutions, whether it is an attorney or a collection agency and they do not dismiss them, the end of the agreement for services is almost impossible to predict because it depends exclusively on when the delinquent units “settle out.”
Before we discuss the various ways a delinquent unit “settles out,” let’s define what the term means. Simply put, when a unit ledger has a zero balance and there is no money owed to the community association, a unit is considered “settled out.” Notice that I did not say there is no money owed from a delinquent unit owner but rather no money owed from a unit.
I believe that it serves a board of directors well to mentally divorce the owner’s debt to the association and the given unit’s ledger balance. Think of them as two separate entities. It is very possible that a unit has settled out its debt to the association, but the owner, or in most cases, the previous owner still owes the association money.
Now that we have established the difference between a unit’s open ledger and an individual’s debt to the association, we can examine the various paths to solvency for the association.
The delinquent owner pays what is due
This is the most desirable outcome. A property or unit owner has fallen behind in their obligations to the association, and at some point realizing the error of their ways, pays all of what they owe the association (including late fees, late interest, costs of collections, and legal fees if the association incurred any). This is the best possible outcome. The association can cease its collection efforts and nobody is worse for the wear. The owner retains access to the amenities, avoids having a lien placed on their property, and is no longer being reported to credit bureaus. All is well.
Tax Deed Sale
This is arguably the worst outcome. In this scenario, nearly everyone loses. In a tax deed sale, the certificate of title is purchased at auction, and the new owner can start their ledger at a zero balance with no obligation in regard to old fees owed to the association. The association is completely wiped out and short of trying to claim a portion of the surplus remaining from the tax deed, there is no recourse. Short of pursuing the previous owner for what was owed on this unit (as the association should do), it is a loss with no safe harbor amounts coming from the bank or recovery of funds from the new owner. To make matters worse, if the association had this collection file with an attorney and their fees were deferred, the law firm will now most likely send this bill in for payment as they (the law firm) were not wiped out by the tax deed sale as was the association or first mortgagee lender. This is a big ouch.
A subsequent purchaser obtains title to the unit
One of my favorite phrases in condo law is “A unit owner, regardless of how his or her title has been acquired, including by purchase at a foreclosure sale or by deed in lieu of foreclosure, is liable for all assessments which come due while he or she is the unit owner.”This most lovely sentence is the first of Florida statute 718.116. A very similar version of this significant concept can be found in 720.3085 for HOAs. It means that when a new buyer purchases a unit before a bank has foreclosed and taken title, money owed to the association from the previous owner becomes their debt.It’s a beautiful thing.
As with most issues in law and community associations, there is significant debate on this topic. Some people believe that only past due assessments are owed and nothing more. Others believe that everything that was on the delinquent ledger is owed, including late fees, late interest, administrative collection costs, and attorney fees. This specific issue continues to be a point of contention between associations and subsequent purchasers, but in many cases, the association prevails. Even if they do not, it is still a respectable recovery. If the association had sent this file to an attorney, then legal fees would have to be paid. Hopefully, they can be recovered from the subsequent purchaser. In this scenario, we find a new owner in occupancy, and substantial money in the association’s bank account. Not a bad end result.
First mortgagee pays the association for delinquent fees
This is the least likely method of resolution. A community association by right of a planned unit development (PUD) or Condominium Rider can request that a mortgage holder pay the association what is due, and said financial institution will cut a check for the association, adding these paid fees to the mortgage amount. The banks can do this to protect their interests, but until equity returns to these delinquent units, it is not likely they will pay. That said, there is no harm in trying, and every association that has a delinquent unit should make such a demand upon the holder of this note and mortgage. There is no harm in trying but don’t hold your breath.
Rental revenue pays down the debt
There are a few ways in which rental revenue can pay down a delinquent unit. The first and most common way is that the association forecloses their lien and takes intervening title. In some situations, those looking to sell lien debt can reach out to a second lien position buyer looking to acquire second mortgage loans. The association then gains the right to evict the previous delinquent owner, who by the way is still on the hook for what they owe until such time that the association may recover their debt by way of rental revenue. Then, the association must rehabilitate the unit and hand it over to a real estate broker, who in turn will find a tenant to lease the property.
Welcome to the landlord business. I have seen this work well in some situations and be a complete disaster in others. It is definitely a gamble, and I wish you good luck.
The second type of rental solutions interception of the property’s rental income if the unit is rented out by a delinquent owner. If a unit is in arrears in its payments to the association and the unit has an occupant, the association is well advised to send out a rental demand letter. If the renter fails to pay, the association has the right to evict.
The third rental resolution is when a unit is abandoned and the association has retained the services of a receiver to rehabilitate and rent out the unit. This solution has been utilized and can be helpful, but when engaging a receiver be sure that you do your due diligence. A court order gives a receiver a lot of power, and this court authority can lead to shenanigans on the part of the receivers. Caveat emptor.
The bank forecloses
The ultimate endgame is when a first mortgagee forecloses and takes title to a property/unit. This is where we separate the boys from the men when it comes to the association’s recovery of money. We have all been told that when a bank forecloses, all an association can collect from the equitable holder of the mortgagee and note is the lesser of 12 months of past due assessments or one percent of the first mortgage amount. Mind you that the old owner has not been excused from the debt to the association, and they should be pursued if any write-off occurs. However, let us not be so quick to let the banks off the hook.
In order for a bank to qualify for this “safe harbor” amount (aka statutory cap), they must have proceeded with their foreclosure in a proper and legal manner. It should come as no surprise that there is an abundance of incompetence in today’s banks. For associations, this is good news for if the bank’s methodology and procedures are not within guidelines as prescribed by the law this qualifies the association to a complete and full recovery of the money that is owed. This, my good readers, is the subject of another article, but a topic managers and board members alike should research nonetheless.
The only question that remains is: how long does it take for a unit in arrears to be resolved? The best answer that can be given is…It depends.
Mitch Drimmer is a respected thought leader in his field and has led numerous continuing education classes in collections, His articles have been published in key trade journals and newspapers, and he is a speaker at educational seminars. Drimmer is also a former board member of the Florida Community Association Professionals (FCAP) and earned his company the distinguished FCAP Reader’s Choice Award for collections four years in a row. Throughout his career, Drimmer has worked with community associations to help them see their way through tough times, especially during the real estate crash. He is a passionate advocate for community associations and has participated in the legislative process over the years trying to bring fair and equitable legislation that serves community associations.
Drimmer earned a BA in History from Hunter College and served as CEO of Drimmer Industries, Inc. in New York City for 35 years.