Sooner or later, your association is going to have a member who can’t or won’t pay their dues. Occasionally, you may have a member who has a dispute of some kind with the association and is withholding dues for that reason, though that is both uncommon and generally a loser in court.
Most of the time, though, when a member falls behind on their association dues, it’s because of a personal or family hardship, such as job loss or a medical problem.
No board member or association manager likes to be the bad guy when it comes to enforcing the homeowners association’s bylaws in these situations. However, board members have a fiduciary duty to look out for the association’s collective interests. Your association needs to collect these dues to maintain everyone’s investments and quality of life. Failure to collect these dues, in addition to failure to enforce the terms of your bylaws, is a violation of your fiduciary duty to your association.
It’s not just the association’s immediate cash flow that’s at stake: If an HOA or condo association fails to enforce the payment of dues, Fannie Mae will. They won’t back loans for homes in developments in which 15% of members are more than 30 days delinquent on their HOA dues. That will make it very tough to sell units–and will lower property values across the board.
Have a Safety Valve
Most HOAs provide a reasonable grace period for the payment of dues. They may be due on the first of the month but have a grace period of 5 to 15 days before the board starts taking enforcement action. This can save your staff a lot of extra work in chasing down payments from residents who simply have irregular income. If there’s a faithful payer who’s always late for this reason, you can, of course, work with this individual–within reason.
Note: Don’t fail to send reminder and collection notices as scheduled to all association members. Do it by registered mail, if need be, so that you have a record of doing so. This preserves your right to enforce in the future, as nobody can dispute a future collection action by claiming selective enforcement. You can produce the record of correspondence with the late payer to shut down this possible objection.
Put Teeth Behind Prompt Payment Enforcement
Whatever your grace period may be, you should have a meaningful incentive to get people to meet it: A late fee. It should be enough to make owners wince, but not enough to prevent payment.
The problem is most acute where the board has to impose a special assessment because of an emergency; because reserves were not sufficient to cover the need; or because the board accidentally left a gap in its insurance coverage.
People tend to budget for monthly dues. They can’t budget for special assessments. That’s what makes them special! So if your board imposes a special assessment, you should anticipate a few people who can’t merrily write a check at the moment, for whatever reason.
The best way to deal with someone with a temporary hardship is to work out a payment plan. The plan should accomplish three aims:
- Bring the struggling member fully current within a reasonable period of time.
- Protect the interests of the association by preventing the need for costly and inefficient legal action in order to collect.
- Have a clearly understood consequence for failure to pay as agreed.
6-month plans with an option to renew seem to work well. 12-month plans are generally reasonable and doable. Anything over 12 months is probably too much of a risk for the board. If it really takes the owner more than a year to pay off a couple of months of back dues, is this someone the association can rely on if there’s a special assessment in the future?
For any case not specifically covered by a payment plan that’s been approved by the board of directors, it’s vital to be very consistent and methodical in following your procedures. If you blow any step along the way, you may set back your timeline for being able to collect (or, in the worst-case scenario, foreclose). You might also compromise your ability to conduct future collections, and could potentially even give the delinquent member an actionable complaint against you.
At this point, it’s important to get an attorney involved. Different states have laws on the books that define how much notice you need to give before taking legal action, such as filing a lien on the property or foreclosing.
Lawsuits are expensive–and usually, the big winners are the attorneys. Filing a lawsuit in these cases often costs nearly what the association winds up collecting. For this reason, it’s a last resort–but sometimes, it’s something that an HOA needs to do, if only to put the fear of God into other members, lest they think of taking advantage of your perceived laxness.
That said, there are a number of other, much cheaper options that you can use to get the point across–and they are usually very effective when dealing with people of goodwill.
Filing a lien is usually much cheaper than trying to garnish wages. A garnishment suit can cost thousands of dollars, and part of those wages are protected from garnishment, anyway. If wages were that high, the member would probably not have fallen behind in the first place! If the owner is pushed into bankruptcy, you’re out the cost of the suit–and you still can’t collect. Wage garnishment attempts should be among your last resorts.
You can revoke the right to use common areas, such as pools, tennis courts, and fitness centers. Generally, you can even do this to renters if the unit owner becomes delinquent on payments. When renters threaten to break their lease because they can’t use the common areas as agreed with the homeowner, you’ll often see the unit owner cave and pay the fee to keep the rental income coming in.
Anticipate Defenses to Foreclosure
Eventually, you may be forced to foreclose on a member’s home. Nobody likes to do this–but if you do have to foreclose, be aware of the potential defenses you’ll have to overcome:
- Fees and charges for late payments are unreasonable. In practice, this means that your total late fees and penalties should be commensurate with the delinquent amount. If you’ve tacked $9,000 in penalties onto a $200 arrearage, a judge may well throw the case out and tell the parties to work it out. (I would.)
- HOA does not have the authority to foreclose. Make sure it’s in your bylaws or CC&Rs.
- HOA’s accounting is in error. This is self-explanatory. Hire a good bookkeeper, and hold on to your records.
- HOA does not have the authority to do a special assessment. Again, this authority is defined in your CC&Rs and bylaws. If it’s not in there, you probably can’t foreclose. Change your documents for future cases, and find another way to collect.
- HOA did not properly allocate payments. If you took a partial payment and the rules require you to apply it to the assessment itself first, before any other type of debt, but you applied it to some other debt, you can’t then try to collect on the assessment.
- Lien was not properly recorded. Check your state’s laws for specific requirements. Some states require recordation, some don’t. This is where a lawyer’s advice on the front end comes in handy. In some cases, failure to record a lien before taking enforcement action can result in giving the debtor a claim against you–potentially costing thousands of dollars, and often more than the amount that you were trying to collect in the first place.
Because the foreclosure process is so expensive and traumatic, don’t proceed unless you’ve covered your bases and checked the possible defenses against the action… but don’t wait too long before taking action, either.
Writing about personal finance and investments since 1999, Jason Van Steenwyk started as a reporter with Mutual Funds Magazine and served as editor of Investors’ Digest. He now publishes feature articles in many publications including Annuity Selling Guide, Bankrate.com, and more.