Monday, February 22, 2016

There's a Sucker Born Every Minute-Just Make Sure Your Association Isn't One of Them

P.T. Barnum is widely quoted as having said that "there's a sucker born every minute" and that was well before the Great American Recession which resulted in countless community associations assigning their bad debt over to creative collection companies or law firms touting themselves as super aggressive in the collection arena.
While the vast majority of shared ownership communities can never count on collecting 100% of their assessments at any given time, the Recession produced crippling levels of delinquencies in many associations. It was understandable at that point in time if a community decided to give up quite a bit in terms of its real property rights to have a collection company or law firm pursue those delinquent accounts at no apparent charge to the association. However, there is another old saying "there is no such thing as a free lunch" and that is true in this arena as well.
There is always a cost and if a company or law firm tells you there is not, then you are compelled to dig deeper. The companies and lawyers pursuing your association's bad debt are not doing so on a pro bono basis; there is money to be made or they would not be in business for very long. Typically, their profits come from the excess amounts they attempt to collect from banks (interest, late fees and costs) and obtaining the right to purchase or lease the delinquent property once the foreclosure is complete. However, there are also plenty of costs built directly into the business model including significant administrative and other processing fees added onto the delinquent owner's ledger and, in one contract I reviewed, the right for the collection company to receive 10% of any insurance proceeds the association may receive in connection with a windstorm or other casualty loss. Was the client shocked to learn that they will have to pay this collection company a hefty price should they suffer a loss due to a hurricane? You betcha they were shocked. Other uncomfortable surprises can include the association being sued by a third party as a result of amounts being demanded by the company or lawyer which are not really owed and/or a nuisance tenant or new owner who takes up residence in the formerly delinquent property because the association has waived its approval rights in connection with the assignment of debt on that property.
Collecting the assessment stream which funds your community's essential services is a cost of doing business. Period. Yes, it is a plus if there is sufficient equity in a delinquent property to allow the association to collect without having to come out of pocket. However, even in circumstances where there is no equity, the Board not only has a fiduciary duty to collect outstanding amounts owed, it also has a fiduciary duty not to utilize risky or ill-advised collection tactics. Mapping out a reasonable, customized collection strategy is the association equivalent of old-fashioned blocking and tackling. It might not be as sexy as the 'Hail Mary' pass but it comes with a lot less risk.
Now that the Recession is largely past us and most real property values are not only stabilizing but increasing, there is no longer any excuse for associations to take the easy way out, particularly as it usually turns out not to be so easy or so cost-effective in the long-run.

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