This article was written by Mitchell Drimmer, President of Axela Technologies. Axela is a valued partner of Innovia Co-op, and helps our members increase operational efficiencies every day. This blog post is an excerpt from Axela’s whitepaper, After the Pandemic: How Community Associations Can Recover in the New Economy
Foreclosure Does Not Equal Fund Recovery
Every association should have an attorney who is charged with overseeing any legal work that arises. But is collections included in that ‘legal work’?
Attorneys continue to be the de-facto solution for collecting past due assessments, but this is only a viable option when an association has the unlikely goal of foreclosing and owning the homes of delinquent owners. Any association that seeks to recover money due to them while helping a homeowner back to financial stability should look for alternatives to the legal process to achieve that goal.
Attorneys do not do collections. It’s that simple. When an attorney is engaged to do collections work, their plan of action involves filing a lien and foreclosing on a home. During the process, they might see some successful collection events as a result of their actions. Attorneys seldom make outbound calls and do not provide owners with online tools to cure the delinquency.
Collection attorneys are inherently disincentivized to collect on the account. Why? Because their revenue is generated from fees that get charged throughout the process. The quicker they resolve a collections file, the fewer fees will be earned on the account.
Unfortunately, collection files are commonly referred to attorneys because it is the most convenient and familiar solution for an association. This widely accepted practice is extremely disadvantageous to associations and does not put money in the association’s bank account, which is the objective of collections efforts. In fact, associations are often on the hook for legal fees, regardless of the outcome, further increasing the burden and risk caused by the delinquent account.
Predatory HOA Collection ‘Solutions’ Cause More Harm than Good
Given the growing size and scope of the community association industry, a handful of specialized service providers have appeared to provide collections and/or financing solutions. In non-judicial states, such as California, the foreclosure process does not require legal action, meaning non-attorney firms can handle the task. Much like attorneys, these companies have a fee schedule that highly incentivizes them to push for foreclosure proceedings as quickly as possible.
The longer a file stays delinquent, the further along the process it goes, ultimately ending in foreclosure which generates the most fees for the firm. Again, many of these actions are directly at odds with the desire of the association, which is to recover the money that is due to them, as quickly as possible.
During the last real estate meltdown, a handful of specialized finance companies introduced what was then hailed as an innovative solution designed to mitigate the damage caused by delinquencies. By buying or funding delinquent receivables, these companies promised a much-needed injection of capital to struggling associations. Unfortunately, because they charged exorbitant fees, small debts by delinquent owners would quickly balloon into enormous obligations that made it almost impossible for an owner to catch up.
Given the statutory applications of payments in many states, proceeds were first applied toward the fees charged by the finance companies; associations would often not receive any of the proceeds from successful collection events. This so-called ‘solution’ soon turned from an association lifesaver to an association’s nightmare.
Ultimately, this scheme has proven to be an unfavorable option for community associations.
An HOA Collection Solution that Focuses on Recovering the Association’s Money
While there are a number of legal or alternative solutions that community managers have relied on in the past to enforce assessment collections, there is little evidence that these antiquated and/or predatory approaches will work to cure delinquencies in the future. Associations today can turn to specialized collection firms that effectively recover funds due to them, without facing the consequences of foreclosing.
Today’s owners face a different dynamic, as an overwhelming majority have equity in their homes, which they will not want to risk losing. For this reason, the best solution is one that incentivizes a quick resolution without burying the association and the owner in unnecessary fees.
Thanks to the introduction of credit reporting capabilities, an owner’s obligations to their association will be placed on the same level of importance as their credit cards, car payments, and mortgages. It is now a viable option to work with collection agencies in lieu of foreclosing and putting people out of their homes, which is the wrong path to take from both the financial and human sides of the equation.
These are times when a community can engage professionals to work out a reasonable means to get these owners back on track and up to date on their obligations. This is not the time to spend good money to foreclose on families and remove them from their residences.
Associations and management companies that embrace technology-based solutions like Axela’s to streamline and improve their collection protocols will find themselves in healthier financial standing and with happier homeowners residing within their communities.
