THINGS YOU SHOULD KNOW:

Measuring Delinquencies

Collection Options

Collections Timeline
Definitions

Money Judgement

Foreclosure

DELINQUENCIES AND COLLECTIONS

The Board of Directors (BOD) for homeowner and condominium owner associations has a fiduciary responsibility to reasonably attempt collection on delinquent assessments.  As a contractual standard, MAY Management pursues this effort on behalf of the BOD by mailing past due statements, intent to lien letters and placing a lien on the property.  Beyond these steps, it is the BOD’s decision how it shall pursue collections against the delinquent owners and with whom it shall contract for those services.  While MAY Management has a standard practice of passing the delinquent accounts on to a collections attorney who will pursue a money judgment, the BOD may decide to pursue collections differently, i.e. collections agency, foreclosure or do nothing beyond placing a lien on the property.  This decision is largely driven by the rate of delinquency within the association.

Associations with a small accounts receivable balance may place a lien on the property of past due owners, but do nothing beyond sending more past due statements.  Other associations, where delinquencies are higher, may decide to pursue a harder line and go right to foreclosure after placing a lien on the property.  However, most associations fall somewhere in between these two extremes and may pursue a course of action other than that described.  Regardless of how lenient or severe the collections policy, the consistent and persistent application of the policy will result in lowering delinquencies.  Nevertheless, the level of delinquencies depends on a number of other factors and neighborhood values.

MEASURING DELINQUENCIES

You simply can’t believe everything you read in the press about delinquencies. Most reporters have no idea how delinquency is measured and yet report them as gospel to the masses without qualifying the numbers.  In the research done by our team, there has never been confirmation of the average delinquency rate statewide, let alone nationally.  So in short, no one really knows the average delinquency rate.  And if we did, that delinquency rate would constantly change depending on the calculation date in relation to the day assessments were charged.  Annual assessment would typically have a very high delinquency rate at the end of January, the first month assessments are due, as opposed to July when most accounts have been settled.  There is also a difference in delinquency and roll rates.  Delinquency is a measure of the outstanding balances due divided by the charges billed.  If Accounts Receivable is reported at $27,000 and the assessments charged to homeowners are $351,000, the delinquency rate is 8%.  On the other hand, roll rates measure how many homeowners are 30 or 60 days past due.  If the association has 700 units and 76 owners are 60 days past due, the roll rate for 60 day accounts that is delinquent for the association is 11%.  The roll rate is used by mortgage companies and Fannie Mae to determine the risk of writing a mortgage within the association for a potential borrower.  Anything greater then 15% is considered risky as it indicates there may be a need for special assessments the potential homeowner is financially unprepared to pay. 

The Wall Street Journal recently reported delinquencies are as low as 5% nationally, and that would be about right if the data is collected at the end of the annual accounting cycle.  Also, geographic locations will affect this outcome.  You would expect the delinquency rate to be much lower in Kansas as opposed to Florida where many homes and condos were purchased as investments or second homes that have since lost much of their value.  In many of the recent articles reporting real numbers, the delinquency rate in the first quarter has been reported at 18 to 68%.   Independent auditors have reported association delinquencies averaging 35 - 40% as of the first quarter in 2008.   The average delinquency rate for associations managed by MAY Management, is 16.51% at the end of the first quarter. 

For the typical association, what MAY Management will recommend is collection policy Option B, not too severe, but not too lenient.  However, with the changing market, much of the policy decision is based on several criteria.  What is delinquency ratio, how many units are investor owned, and how quickly is the need for cash, etc.  For some associations, desperate cash flow issues drive these criteria.  For others, it’s not an issue, but Board of Directors’ need to know the difference in policies and their advantages and disadvantages before adopting a policy. Also, once a policy is adopted, it will be applied timely and equally among all delinquent owners.

COLLECTIONS OPTIONS

Option A - Lenient Policy: this policy may work for associations that typically have cash surpluses and delinquency is rarely an issue.  Essentially, the association will lien the property to protect its assets, but wait for balance to accumulate beyond the typically 90 days past due before taking further legal action. Legal action is typically decided case by case.  MAY Management does not recommend this option.

Option B – Standard Money Judgment Policy: this policy is a standard industry practice and is a bit more aggressive then Option A.  First, all accounts are sent through the lien stage and from there are sent to a collection attorney for further action.  Option B pursues money judgments, which will survive a foreclosure.  The association’s attorney will mail the owner a letter demanding payment and informing the owner that the association will be seeking damages.  The money judgment will be reported in section 2 Public Records of the owner’s credit report from Experian, Equifax, and/or TransUnion.  (See definitions for more information on money judgments).  Also, money judgments may not be included in future foreclosure action against a homesteaded property.  Example: if you have a balance due of $5,000 and a money judgment of $2,000, you may only foreclose on the balance of $3,000 if the property is homesteaded.

Option C – Collection Agency Policy: Where associations want to keep the option of foreclosing on the entire delinquent balance unencumbered by a money judgment, this policy works well.  The only pitfall is that collection agencies charge 25 – 30% of the balance collected as fees and there is some limitation on what can reasonably be charged against the homeowners account.  For instance, if an owner has a $500 balance, the additional amount need to be applied to the owners account is $166.67 for new balance of $666.67.  $666.67 X .25 (fee) is $166.67, which equals the agency fees plus the $500 for full payment of the assessments due prior to sending to collection agency.  Most associations limit the amount that they charge to an owner at $150.00, so the association has to be prepared to write off any balances that remain outstanding after the owner has paid in full the collections agencies demand. Delinquent accounts that fail to pay are reported to the credit bureau.

Option D – Aggressive Foreclosure Policy: For some associations, delinquencies are such a problem that there is a no holds barred fight to remove the delinquent owners from the association altogether.  The solution is foreclosure; otherwise known as the nuclear weapons approach to collections.  Foreclosing on the property is the most aggressive policy (see Foreclosure in Definitions).  The premise is the sooner delinquent owners are removed, the smaller the write-offs will be in the future.   The options for the association beyond this are limited.  Most of the debt will be allocated to bad debt reserve and the Mortgage Company or bank will eventually foreclose on the association for the property it now has title to.  This action generally results in delinquent owners paying the balances due, but occasionally, the association is going to follow through to foreclosure and end up holding the title to the property and potentially be out several thousand dollars in attorney fees.

COLLECTIONS TIMELINE

Timelines may vary by association, depending on whether the association’s documents require actions other then those described here.  As a standard, the timeline mentioned hereafter describes a standard practice.  The ABC Homeowners Association assessments are due on the first of every quarter, with statements mailed approximately three weeks before the due date.  Any assessment not paid within thirty (30) days after the due date shall bear interest from the due date at the highest rate of interest permitted by law (currently 1.5% per month).

If the account remains past due, the following actions will be taken:

Actions	Days before Action
Past Due Statement	10 days
Intent to Lien Letter	40 days
Lien	85 days
Collection Attorney	85 days

10 to 30 Days Past Due

A past due statement will be mailed.  Interest and a late fee (if applicable) will be added to the account.

40 to 60 Days Past Due

A notice of intent to lien will be mailed to the property owner indicating that their balance is 60 days past due and that payment must be received within 45 days or a lien will be placed on the property.  Additional interest will be added to the account. For HOA’s Florida Statute requires the owner’s be provided 45 days to dispute and/or pay the balance due.

85 to 105 Days Past Due

A statement will be mailed to the property owner indicating that their property is being liened and an additional $125.00 is being charged to the delinquent owner’s account to cover the cost of processing the lien. (lien process may take an additional thirty days before it is recorded by the Clerk of Court).   Also, additional interest will be added to the account. 

Beyond processing a lien against the property, it is up to the BOD’s to decide how it is going to pursue delinquent accounts and with whom it will contract for those services.  Failing to do so, the association will default to MAY Managements standard policy of seeking money judgments.  However, each association will be periodically reviewed to determine if there is perhaps a more effective policy.  Either the accounting manager or property manager will make those recommendations to the BOD.

DEFINITIONS and FURTHER EXPLANATIONS

Liens:

The legal process for collecting delinquent assessments generally starts with filing a lien on the property for uncollected debt.  Simply put, the lien binds the property.   Liens cannot be placed against properties for fines incurred by homeowners, nor can fines be included in the amount for which the lien is being placed; only the assessments, late fees, interest and legal fees are included.  When a delinquent account reaches the 85-105 day past due mark, MAY Management will prepare a lien, have it reviewed by an attorney, then file the lien with the Clerk of Court in the county of the delinquent owner’s property.  This process generally takes three to four weeks, which means the owner’s account is generally 105-120 days past due when the lien is recorded by the Clerk of Court. 

Advantages:

1.      Generally, about 70% of owners who get the lien letter will make an attempt to pay their accounts. 

2.      Title companies must ensure the lien is satisfied before a new owner will purchase the home. 

3.      Refinancing of the property will generally require all encumbrances against the property be satisfied.

Disadvantage: Liens do not guarantee the delinquent account will be paid.

Money Judgment:

A money judgment in a civil matter is an order issued by a court that one party to the lawsuit is indebted to the other party for an established sum of money. The amount of the debt recognized is referred to as a 'money judgment'.  The money judgment acts as a lien against the individual, allows for discovery of financial information, garnishments, etc.

After the lien has been recorded with the clerk of court and at the direction of the Board of Directors, the association’s attorney can pursue a money judgment.  The attorney will send a letter to the delinquent homeowner allowing the homeowner thirty days to satisfy the delinquent account or face a possible lawsuit.  If payment or payment arrangements have not been satisfied within the thirty-day period, the attorney will file a money judgment with the Court.  The court will schedule a pretrial conference, usually within two to three months and send notices to all parties involved.  At the pretrial conference, the Judge will hear the case against the defendant and determine if a trial is necessary. Typically, the case will be remanded (sent to lower court) for mediation. Fortunately, most delinquent accounts will have been satisfied at this stage.  However, failing that, a trial or mediation date will be set two to four months later.

Trials are generally held in the Judges chambers and both parties will be sworn in and asked a series of questions by the Judge assigned the case.  The Judge will generally rule on the case at the conclusion of the trial and awards a money judgment to the plaintiff.  It is very rare that the Judge does not rule in favor of the association.  Allowed attorney’s fees and the extent of the debt will be disclosed in the money judgment.  The money judgment is good for ten years before it must be renewed.  (See Addendum A for attorney comments)

Associations cannot later foreclose the money judgment if the home or condominium is homesteaded property.

Advantage: The defendant’s wages can be garnished or a judgment lien may be filed.  Additional legal cost will be incurred to see this through, but generally speaking the money judgment is effective ninety percent of the time.

Disadvantage:   Money Judgments do not guarantee the defendant will pay.  The judgment only recognizes the debt.

Additional Resources:

Money Judgments in Florida

How Collect on Money Judgments in Florida

Foreclosure:

A legal process through which the adjudicated sale of private property at public auction is used to recover monies owed or to satisfy a lien.  Whoever takes the property at foreclosure sale takes it subject to certain debts, including any mortgages attached to the property.

Once a decision to foreclose is made, a “Title Search” has to be performed to locate all those with claims against the property (Mortgage banks get first dibs by Florida Statutes; the filing party would be second and all others behind the filing party).   A foreclosure notice, known as a Lis Pendens is sent to all parties.  A court date is set, which may take 2 to 6 months, where a County Circuit Court may render judgment for the plaintiff.  The County Clerk of Court will be instructed to sell the property to the highest bidder in a public auction (all foreclosures are sold at public auction).  

The association would be required to bid the amount of the past due balance to ensure all winning bidders at the very least cover the delinquent balance.  The winning bidder would take possession of the property when issued a title and assume certain debts.  Bidder’s are required to pay a deposit of 5% in cash or cashiers check to the Clerk of Court at the time of the sale and pay the balance of the bid no later than 3:00 or 4:00 PM that same day (The HOA/CO as the plaintiff gets to bid its judgment amount before it has to come up with the cash).  Failure to pay the balance of the bid will result in forfeiture of the 5% down payment.  In the State of Florida, the winning bid takes possession 10 days later.  It is at this time the amount of the foreclosure for the plaintiff is paid.  If the defendant files bankruptcy, the clerk is of court is stayed from issuing a title or taking any action pending further order of the bankruptcy court.

The association would then be required to evict the old owner.  It may also expect to be subsequently foreclosed on by the mortgage company, which is a good thing since the association does not what to be in the real estate business.

Advantages: There are very few advantages to the association, except for possibly replacing an owner who is unable to pay assessments with one willing and able to keep up with association assessments.

Disadvantages: Foreclosure is generally an expensive proposition with little or no recovered assessments or legal fees to the association.  There is no guarantee the defendant will pay.

Recommendation: As advised by legal counsel, unless the delinquent owner has thousands of dollars in outstanding assessments, this is generally not the best solution.

Florida Foreclosure Laws

CONCLUSION:

It is very unlikely the association with moderate to high delinquencies will escape unscathed.  There is a possibility the association will have to recognize losses, which is a critical reason associations must plan for the eventuality by budgeting bad debt expense to book against accounts receivable.  Your accounting manager may make specific recommendations in your budget and it is a good idea to follow those recommendations.  Regardless of the policy options and best intentions to follow those policies, there are unforeseen circumstances that may delay or redirect the collection effort with individual accounts; things such as bankruptcy or the death of an owner.  In any event, the bookkeeper will make the effort to keep the BOD informed.  However, once an account is turned over to an attorney, it is the responsibility of the attorney to report directly to the BOD the status of accounts of money judgments and foreclosures. 

Addendum A

Money Judgments

1) Small Claims Money Judgments – Less than $5,000.00 For claims less than $5,000.00, a truncated procedure is available in the court system that is every effective for dealing with Association delinquencies.  The typical procedure for this process is as follows:

a) The Association decides to pursue the money judgment (MJ).

b) The Association issues the cost deposit check to attorney.

c) Upon receipt of the cost deposit, the MJ form is prepared and filed with the clerk.  The clerk automatically assigns the first court appearance date for what is known as a pretrial conference.  The MJ and the notice of the pretrial date must be personally served on the owner being sued for the court to take jurisdiction of the case and in order to proceed at the pretrial conference.     

d) A good percentage of cases will resolve by payment or a written agreement for payment (which provides for a final judgment upon default in payment) prior to the pretrial conference date. Most of the rest result in a default final judgment because the owners do not show up at the pretrial conference or in a stipulated final judgment where they admit they owe the money but cannot pay.  A very few end up setting a trial because they contest some issue, but those typically end up with a judgment at some later point.

e) On average, the period of time between the decision of the Association to proceed to collection lawsuit and the pretrial conference is 60 days.

f) The biggest delay problem we run into is finding the owners to serve them.

2) Money Judgments in excess of $5,000.00 - The typical procedure for this process is as follows:

a) The Association decides to pursue the money judgment (MJ).

b) The Association issues the cost deposit check to attorney’s office.

c) Upon receipt of the cost deposit, the MJ form is prepared and filed with the clerk. 

d) The MJ must be personally served on the owner being sued for the court to take jurisdiction of the case and for the case to proceed.  The owner has 20 days from the day he is served with the court papers to respond to the lawsuit.   

e) After the 20 days allowed for the owners response has expired, we can file a motion for summary judgment, and set a hearing on that motion, which must be at least 20 days in the future.  It is usually longer due to the judge’s calendar.  At the hearing, the judge would normally enter the final judgment for amounts due, including attorney’s fees and costs.   

f) I would estimate that on average, the period of time between the decision of the Association to proceed to collection lawsuit and the motion for summary judgment hearing is 100 days.