(and, why do they happen so quickly?)
By: Helsing Admin
Delinquent assessments are a serious problem for any homeowners association. Community Associations are typically not-for-profit corporations and the California Civil Code does not allow your Board of Directors to adopt budgets that include money that has no anticipated expenditure. The net result is that when a homeowner becomes delinquent, unless that delinquency is quickly corrected the association is in danger of running out of money unless it levies increased assessments on all the other homeowners. California Law recognizes this dilemma, and provides for a rapid method of escalating HOA collection efforts before the community becomes insolvent.
Before going further, it is important to understand that the assessments to your association are not business bills. They are an obligation that runs with the land and for which the homeowner is personally responsible. The responsibility exists even if they do not get a courtesy statement, or a coupon, or any other reminder. That said, most associations do either send statements or use coupon books – the point is only being made because the often-heard excuse of “I didn’t get my statement on time” does not apply. Technically, if you own a home in a common interest development you have the obligation to follow up and make sure you are paying in a timely manner. Also, these assessments cannot be withheld like a renter can withhold rent if they have an issue with the landlord. A homeowner cannot simply state “I don’t like the job the landscaper is doing so I am not paying my assessments until the association gets it to my liking.” Lastly, the Board of Directors may not forgive assessments. They do not have that authority.
With that background, let’s discuss delinquencies. Every association should have a delinquency policy and that delinquency policy is required to be given to the membership annually. It is typically one of the disclosures included in the annual budget packet. That policy informs the homeowners when the assessments are due, when they are late, and what happens with HOA collection when they become late.
Typically, although there are variations, assessments are due on the first day of the month, and late on the 15th day of the month. This is the minimum timeline under the law, and the vast majority of associations follow it because it is the responsibility of the association to protect the cash flows of the association and try to protect the rest of the membership from increased assessments. It also protects the rest of the membership against liens that may be placed by other third parties. The faster the timelines in the delinquency policy, the better the protection provided to the rest of the association.
HOA Collection: An Example
Using as an example an association with an assessment due on the 1st and late on the 15th as our hypothetical, a penalty of $10 or 10% (whichever is higher) would be charged a late fee on the 16th, and if still late on the 30th 1% interest would be added, and then on the 45th day the account would be turned over to a collection company. Again, this is a policy consistent with California law and one followed by the vast majority of associations.
The system is not without plenty of notice, however. On the 16th day, HOA collection efforts typically include sending the delinquent homeowner a delinquency letter that includes a copy of the delinquency policy and announces the amount of the penalty and the total amount due. The owner would then get a statement just prior to the 30th showing the upcoming assessment, the late fee, and the past-due assessment. Just after the 1st of the next month, the delinquent homeowner is sent another late notice which also adds the 1% interest and again a copy of the delinquency policy. That notice would typically tell the homeowner that if the account is not paid in full by the 45th day it will be sent to an HOA collection company without further notice. So, for the first 45 days, the late fees are not terrible and the homeowner has four notices that the assessment is due, two copies of the delinquency policy, and a notice that the account will be sent to an HOA collection company. Yes, that is pretty quick because the association’s duty is to protect the other homeowners. On the other hand, it is not without plenty of notice to the homeowner about what is happening along the way.
While the above explains the need for speed, let’s talk about costs once it goes to the HOA collection company. Most HOA collection companies that specialize in past-due assessment collections do so at no cost to the association for the first several steps. Those steps are all heavily mandated by law, and require specific notices and specific legal actions to take place. It is technical enough that most associations and management companies are not going to try to do it themselves. However, each step is a cost for the collection company. Most of the HOA collection activities involve a notice prior to each step in the process. The initial letter includes the required disclosures, setting up the owner’s accounting, background discovery that can include pulling credit reports, and searching for lender default notices and bankruptcy filings. Overall, the cost to this point is not unreasonable. However, clearly the costs go up as additional HOA collection activities occur. From this point forward, the association is working on likening your home and eventually foreclosing on your home or otherwise offering it for sale in foreclosure. Therefore, this is not like late payments to a bank where interests and penalties incur. There is a legal process now beginning which has significant costs associated with those actions. If there is still no payment by the homeowner then a lien is recorded, and the Association can choose its next course to either foreclose the property as payment of the debt or sue the owner in small claims or superior court to obtain a judgment. Both courses are costly and can add thousands of dollars to an already surmounting debt.
Typically, the delinquent owner pays the HOA collection costs; however, when the account advances to foreclosure and litigation, the Association has to pay and charge the owner’s account for reimbursement. The Association could contract with the collection company to pay for each collection service provided; which would make the fees lower, but would result in a huge expense for the rest of the homeowners who are paying their assessments. So, as harsh as it may sound to the delinquent homeowner, when viewed across the entire community the “no fee to the association” route is the better business plan.
Articles are for advertising and general information by The Helsing Group, Inc. They are not intended to provide legal advice, but rather reflect our opinions as Community Association managers and Consultants. Readers should not act on issues raised in our newsletters or websites without consulting legal counsel.
Copyright 2011
The Helsing Group, Inc.
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