By, Dee A. Rowe, CACM®, Contributing Author

In a condo or homeowners association, it’s common to expect each delinquency to be the same. The “norm” is that the delinquent owner either has no money to pay or no intention of paying what’s owed. The debt can be sent to an attorney or a collection agency to engage a delinquent owner. It is important that the board work with licensed professionals when they cannot “move the needle” on a delinquency. If the board does not adhere to  federal, state, and local laws  and the associations own bylaws bad things can happen. After a review of the ledger, the attorney will most likely recommend proceeding with foreclosure for the debt secured by the property. If the board has engaged a collection agency, they will work with the owner to engage them on payment plans or convince them that it is imperative that they pay to protect their interests. It’s important to note that this is not the same as the total debt owed, but this article focuses on the secured debt. 

Here are six unexpected cash recovery scenarios that an association might come across on the journey to being made whole.

The Owner Realizes the Gravity of the Situation and they Pay.

If this happens, throw a party to celebrate, or at least toast with your coffees at the next HOA meeting. The owner either claims they didn’t receive earlier notices, borrowed or came into money, or decided their moral objection to paying HOA dues was not worth losing their property over. Either way, everyone wins in this scenario. The HOA recovers the secured debt, and the owner does not have to deal with a collection company or attorney. Perhaps, this event happens after a collection agency or attorney is engaged but it is a good day, nevertheless. 

It Could Happen That the Lender Will Pay for the Delinquency.

This is another one that is worth a celebration. Sometimes, with enough equity in the unit and the right financial climate, the mortgagee (bank) pays the debt to protect their interest in the property. The money paid to the HOA is then added to the loan on the property. It’s a bit of a long shot, but worth sending a demand and seeing what happens. The worst-case scenario is that they say no. 

A New Owner Obtains Title Through a Sale 

There is a doctrine in the land that applies to most states that when a sale of a property is made the new owner cannot have clear title until the association’s lien is removed. Otherwise the property is encumbered and quiet title is not obtained. As always, when giving advice on a national level check your bylaws and state statutes to see if Joint and Several liability is applicable in your state and specific community. 

There’s debate over whether the new owner must pay the entire balance due, including collection costs, fines and violations, and attorney fees. Even if collection and attorney fees are not included, this is still a relative win for the association. The fees to collect are a small part of the debt compared to the actual assessments. 

Rent Money to the Rescue

HOAs aren’t landlords, why would they collect rent? First, HOAs aren’t usually landlords, but they can be. For example, an HOA may take title to the property in an association/lien foreclosure sale where there were no other buyers interested in the property. The HOA then leases the unit and uses the money received to pay the debt owed. 

Second, the HOA may be able to collect rental income when a delinquent owner has a paying tenant at the property. In some states, the HOA can make the tenant pay rent to the association and has the power to evict if they don’t.

The third and most risky scenario is when a court-appointed receiver is in charge of a vacant unit. This is a last resort rental solution, as the receiver will have almost unlimited power over the unit, and what looks like a blessing could turn out to be a curse.

A Small Tragedy Occurs and the Lender Forecloses

If the owner has no money to pay the HOA, they might not have money for their mortgage either. If that’s the case, the bank may foreclose to collect the mortgage debt owed to them. In most cases, the lender’s lien on the property is superior to the association’s. As Mitch Drimmer says, “This is where we separate the boys from the men when it comes to HOA collections”. 

Most attorneys will tell you that when the bank forecloses to go after the owner personally for the debt. But, why be so quick to let the bank off the hook? While in about half of the states in the Union there is some sort of “Super Lien” in most cases it does not cover what is owed. Yet, bank foreclosure is not the end of the road for community associations as they have a “second bite of the apple” by following the sale to see if there was a surplus when the bank forecloses. A third bite of the apple is if the bank forecloses but does not take title and instead SELLS the property …In that case the Joint and Several Liability doctrines takes effect, and the purchaser must pay the associations lien off in order to have quiet title. Don’t accept bank foreclosure as the final action regarding these debts.

A Bigger Tragedy, a Tax Deed Sale, Occurs

If this happens, there’s nothing to celebrate. An owner who’s not paying the HOA may also be behind on property taxes. If the property tax debt isn’t resolved, there’s a tax deed sale auction, and the buyer has no obligation to pay the other debts on the property like HOA dues and delinquent mortgage payments. The association can and should try to file a claim for any surplus funds from the tax sale, but that is the only hope in this bleak scenario where everyone loses except the new buyer of the property.

Why Doesn’t the Attorney Talk About This?

Attorneys are generally well-educated and mean well, but they are not the best solution for your collection troubles. They play it safe and are rarely “out-of-the-box” thinkers. Why not try something different? Send your next collection case to someone that specializes in fair, affordable, outside-the-box solutions. Someone like Axela Technologies. Contact them today to learn more about their services.