In The Interest of HOA

HOA(s) have the misguided notion they need to charge the maximum amount of interest. Then when payment is not forthcoming file a lien with the intention of following up with foreclosing. The problem with this single minded approach, almost 100% of the tim

The problem with most HOA(s) confronted with delinquent fees, they do not think strategically. First they get a cursory view of the state’s laws governing remedies available on how to recover these types of moneys. Second they review the procedures from the standpoint how to stick it to their fellow property owners. Finally they invariably take the most extreme stance thinking this is the best way to recover the debt.

In actuality the general or extreme aspects of the process are not written to benefit the association. They have been written by lawyers for the benefit of lawyers. As a result the property owners, the association and the community at large suffer. You can be assured of one more thing. When the laws were written the banks took care to make sure their interest was protected too.

In most states, after 15 days the HOA can collect late charges, cost for collection and “reasonable attorney’s fees”. Then after 30 days the HOA can collect, up to 12% interest calculated per annum on the unpaid balance, the cost of collections and “reasonable attorney’s fees”. The HOA(s) have been led to believe the only way for them to recover the delinquent dues is to place a lien on the property, or file for (judicial or non judicial) foreclosure. 

There are many problems with this approach. For example, take a Short Sale, the best case scenario for the HOA when it comes to recovering moneys governed by a distressed property situation. HOA(s) have the misguided notion they need to charge the maximum amount of interest. Then when payment is not forthcoming file a lien with the intention of following up with the litigious procedural process of foreclosing. This typically involves filing a number of public notices eventually leading to either a non judicial or court process where in either case would lead to taking possession of the property.

The problem with this single minded approach, almost 100% of the time there is a first lien holder, i.e. the bank and of course the lenders made sure the lawyers had written into the various laws banking interest supersedes the HOA’s. Electing to go this route exacerbates the problem. Eventually it turns on the Association likely leaving them in the cold. Best case, the property is sold, putting them in a negotiated position to get a portion of their money the size of delinquent sum notwithstanding.

What further complicates the problem. The people who were once neighbors are now hateful. The HOA shoots itself in the foot. In economic hard times the more home owners in the development who find themselves in this situation it tends to lower property values. Then to add insult to injury the banks will not lend in areas where the delinquency rates are high.

On top of that the lawyers who have written these laws their portion of the bill in some cases, doubles the outstanding amount due. Their payment is protected as part of the lien. While they insist during the process all sums must be paid through their office. Taking their payment first before applying anything to the HOA.

Then if the property gets foreclosed, and high per cent of them do, the legal fees are not tied to the property and are not statutorily limited to an amount certain. Nor can they be wiped clean as part of the foreclosure process. The entire legal bill would become the obligation of the HOA to be paid in full.

The HOA(s) should consider the following as a matter of self interest. First assess a reasonable interest rate. They are at the lowest points in history with no sign of increasing in the immediate future. Second if needed file a lien against the property in small claims court without the aid of an attorney. In any event perhaps with the exception of a private all cash transaction the HOA is almost assured to get paid. Finally and most important Escrow will always ask for a payoff. The amount will be accounted for in full before the property is exchanged. Even in the case of a private transaction the delinquency travels with the property not with the Seller. The Buyer will be on the hook.

The net result this approach likely will be more cost effective and/or profitable for the HOA. They will not rack up absorbitant Legal fees. Chances the community will have a better chance to manage the delinquencies rather than it spiraling out of control. These tactics will help resist the level of indebtedness and reduce the stigma of Association Developments being overly burden by distressed properties.

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