There’s a lot to be said about using the right tool for the job. For example, you shouldn’t use a rubber mallet to hang up wall decor. I mean you COULD, but the chances of something going wrong are far higher than the odds of success. In the same way, using any old generic collections agency to handle your HOA or condo association delinquency problems is almost a guarantee that you’ll end up with more problems than when you began, especially if you’re considering selling your HOA debt.
Why That’s a Bad Idea
Traditional collections agencies tend to specialize in some way regarding the kind of debts they’ll attempt to recover. But that usually just means that they don’t take debts that are very new, very old, or very low. And once they’ve agreed to collect on that debt, all they’re going to do is the exact same things that the board of directors is already expected to do: send letters and make phone calls to convince the debtor to pay–and they’re going to carve a nice chunk of this recovery from the association for this service.
Because of this, it doesn’t make sense to engage a traditional collections agency at this step of the process. Instead, communities sometimes consider an alternative: sell the debt to the agency, effectively passing off the responsibility. Traditional collections agencies will often only do this if there are multiple accounts bundled together to generate a higher potential payout at the end, so communities will sometimes consider this option if there are multiple delinquent units they’re having trouble collecting from.
This is a mistake. Do NOT do this to your community debt.
Selling HOA debt only pays out a fraction of what is owed
This is a two-fold problem, really. On the surface, you’re getting a pittance for your existing HOA debt, because debts are purchased for such a meager amount of money, often only a few cents for every dollar of debt sold. That’s a big enough problem as it is–it leaves your community in nearly as much debt as when they started, without any ability to be made whole in the long run.
The other side of this problem is that when debt is sold, it isn’t just a one-and-done interaction. What’s really happening is the lien on the delinquent property is being reassigned to the entity that purchased the debt. So let’s say a home in your community owes $5,000 in unpaid assessments and various fines, and the community sells it for $250 (five cents per dollar). That $5000 is not being sold on its own, instead what a collection agency purchases is the assignment of the lien. That lien stays intact and can accrue more debt after the sale. So if the homeowner continues to miss another $5000-worth of monthly payments, that new owed debt still belongs to the lien on the property, and to the entity that purchased it. Now instead of selling $5000 for $250, you’ve sold $10000+ for $250, losing even more money for the community.
In this kind of situation, the argument that many will make is that collecting some is better than collecting none. That is not true! It’s a dangerous mindset to have and it ignores the fact that there are collections agencies that specialize in HOA and condo association debt recovery who can collect on your behalf and recover nearly all (if not 100%) of the debt owed. Don’t fall into the trap of thinking that some is better than none!
Selling HOA debt opens HOAs to a world of unintended consequences
Selling off HOA debt takes away all power from the community. Even though HOAs and condo associations are businesses and should be run as such, they are also the place people call home. Remembering that and being respectful and empathetic when recovering debts is important. Many traditional collection agencies aren’t worried about that–they are just careful enough to operate in compliance with the FDCPA and care very little about the subjects they are collecting from. Axela is a specialized collections firm run by licensed community association managers and we care deeply about the sensitivities of the owners and the sensibilities of the boards of directors we serve.
Although the FDCPA (as well as a variety of state laws) helps to stop predatory collection tactics, there are still ways for collectors to operate that are technically legal, but both questionable and/or unethical. If you sell your HOA debt to a traditional collections agency, you’re potentially exposing your neighbors to some serious mistreatment from a company trying to make a quick buck.
It also means that the association loses all control over the ability to foreclose. Let’s say that the homeowner who is $5000 behind on payments is an elderly, long-standing member of the community suffering from a serious illness. The association wanted to avoid foreclosure because they have some humanity and don’t want to make someone homeless. An entity that offers to buy HOA debt wholesale isn’t concerned about anything but its bottom line, and the HOA will have no ability to stop them from foreclosing on a legacy owner. Losing that sort of control is simply not acceptable.
Most importantly, selling HOA debt violates the business judgment rule
Is it possible to sell your HOA debt? Sure. It’s also possible to drive 35mhp in a 25mph zone or jaywalk. That doesn’t mean it’s less wrong. Most community associations have it written into their governing documents that any delinquencies in the community must be collected in their entirety (except, of course, in bank foreclosures which often cannot result in the association being made whole). That means that by selling HOA debt for only pennies on the dollar, the board could be in breach of their fiduciary duty to the association. One way to avoid this could be by obtaining a supermajority vote by members of the board, but that threshold is so high that the chances are very slim.
Selling HOA debt is also in clear violation of the business judgment rule, as losing so much money for the community can be seen as acting without care. This opens your board of directors up to potential lawsuits from members of the community if those unrecovered funds lead to direct negative repercussions. It may be such a reckless decision that the Directors and Officers’ insurance may not cover any related litigation. There can be no question that for pennies on the dollar this is not a good business decision.
Ethical. Industry-Specific. Axela.
The best thing an HOA struggling with delinquency can do is partner with an industry-specific collections agency that prioritizes ethical and humane interactions with homeowners. Your neighbors deserve to be treated with respect, and your community deserves to recover as much money as possible to ensure long-term financial health and success. At Axela Technologies, we are dedicated to making the collections process as effective and pain-free as possible for all parties. Call us today for a no-risk, no-cost consultation.