A Primer on Assessments, Collections, Delinquencies and Foreclosure
Every community association has its own history, attributes and challenges, but all share common characteristics. First and foremost, associations are communities, places where people have chosen to live, raise families and retire. But they are also legal entities, with homeowners contractually obligated to abide by established rules to protect the community and to pay their fair share of assessments to ensure the financial stability of the association.
To lead these communities properly, association board members, together with the professionals who support them, must manage their associations using established business principles. That’s the only way associations can ensure that the interests of homeowners are respected and preserved. This means:
- Collecting homeowner assessments to ensure that services and amenities are funded—and that sufficient funds are set aside for major replacements and repair
- Providing services and amenities that preserve the character and attributes of the community
- Meeting the established expectations of homeowners and non-owner residents
- Taking all appropriate measures to protect property values
Homeowners who serve on an association board serve at the pleasure of the homeowners who elect them to govern the association. They are ethically and legally obligated to protect the community’s financial health. They must adhere to the association’s governing documents and abide by all applicable laws. Perhaps the most difficult aspect of association governance is balancing the preferences of individual residents and the collective interests of all owners. This can be a difficult challenge, especially when prudent business principles dictate difficult decisions based on what’s best for the community at large.
There are a few fundamental principles that guide the community association concept:
- Association homeowners choose where to live and, by choosing to live in a common-interest community, accept a legal responsibility to abide by established policies and meet their financial obligations to the association and their neighbors.
- They have the right to elect their community leaders and to use the democratic process to determine policies that will govern their communities and protect their investments.
- They have the right to take full advantage of the community’s services and amenities.
Association Finances and Assessments
Association board members have no greater responsibility than fulfilling their fiduciary responsibilities to the association. Leaders must establish and enforce policies to ensure that funds are collected and available to meet current and long-term obligations.
Associations rely largely—many exclusively—on homeowner assessments to pay their bills, which can include services like landscaping, security or professional management; maintenance for sidewalks, streets and building exteriors; utilities like street lighting, water or gas; and mandatory expenses like insurance and taxes. For condominiums and cooperatives, assessments cover expenses incurred collectively by all residents, such as building maintenance and repair. Assessments also fund amenities
like pools, tennis courts, playgrounds, clubhouses and social activities. High-end amenities can include golf courses and clubs, marinas, hiking trails and even stables and air fields.
Just like for-profit businesses, association boards work diligently to develop realistic annual budgets. Often with the help of association management professionals and accountants, association boards base their budgets on projected expenses and anticipated income. For most, it’s zero-based budgeting. Short of contributing to a reserve fund for anticipated, long-term repair and replacement, few associations have money sitting around “just in case.”
Prudent fiscal policy is essential—not only to the association at large, but also to individual homeowners whose assessments fund essential services and promised amenities.
Importantly, an association’s financial obligations do not change when some owners don’t pay their assessments. Common grounds must still be maintained. Trash must be collected. Insurance premiums must be paid. Grass must be cut in the summer. Snow must be plowed in the winter.
Assessment Delinquencies
Homeowners who refuse to pay their assessments—as they contractually agree to do when they purchase their homes in an association—are cheating their neighbors, their community and themselves. That isn’t fair to homeowners who do meet their financial obligations to the association. When homeowners are delinquent on their assessments, their neighbors must make up the difference or the association must curtail services and amenities. That affects everyone in the community, perhaps even leading to a decline in property values.
Procedures for collecting overdue assessments differ from one community association to the next depending on established procedures, governing documents and local and state statutes. In addition to being reasonable and consistent, CAI recommends the following procedures for collecting delinquent assessments:
- Begin collection actions early while the outstanding amount is manageable.
- Take an incremental approach. Start with friendly reminders or personal contact, and then follow up with stronger reminders, making sure to provide as much information as possible.
- Consider allowing owners to negotiate payment plans.
- Follow due-process procedures, giving delinquent owners ample notice and an opportunity to be heard.
- Comply with the Fair Debt Collection Practices Act throughout the process.
Liens and Foreclosure
There is no specific point at which a community association should file a lien on the property of a homeowner who is delinquent. (A lien is legal claim that assigns part of the property’s worth as security for the debt owed the association. It prevents an owner from selling the property without also paying the debt.)
An association may have little choice but to file a lien if the owner has failed to respond to repeated attempts to collect the debt. If the debt continues to grow, it becomes a significant liability for the association.
Nobody wants to foreclose on a home—not a mortgage banker and certainly not a community association. Countless Americans lose their homes when lending institutions are unable to collect mortgage payments. In a perfect world, no one would ever face foreclosure—for any reason.
That’s why foreclosure should always be a last resort, applied only when a community association has exhausted other collection options and only when a homeowner fails to remedy a significant debt to the association.
Many community associations use “collection aids” prior to initiating the lien and foreclosure process. For example, they may suspend privileges, such as special parking, or deny access to amenities, such as pools and recreational facilities, for those who are seriously in arrears. Revoking a pool or club membership often gets results when collection letters are ignored. (CAI advises against suspending essential services such as water and utilities.)
While there are isolated instances of inappropriate foreclosure, this action is viewed as a last and unavoidable step by the overwhelming majority of community associations. Knowing that people occasionally face financial hardship—a lost job, for instance—many community associations work with homeowners to develop deferred or special payment plans.
When is Foreclosure Justified?
CAI does not support foreclosure for insignificant sums of money. Even as the debt increases, foreclosure should be considered only after other approaches have failed. In all cases, homeowners facing foreclosure deserve reasonable opportunity to appeal the issue to the leaders of the association.
There is no universal threshold that should trigger a foreclosure. This difficult decision is based on many factors, including the amount of the debt, the financial health of the association, the reason for the debt and the homeowner’s willingness and ability to bring the account up to date. The magnitude of this decision requires an approach that is fair, reasonable and consistent with practices and procedures established by the association’s governing documents.
Above all else, association leaders are responsible for ensuring financial viability of the association and the continued delivery of services to residents in the community. As noted earlier, an association’s financial obligations do not change when assessments aren’t paid. Services must be provided; bills must be paid. With each additional delinquency, an association’s financial position can become increasingly precarious, a situation that is exacerbated in a depressed housing and economic climate.
However, the threat of foreclosure is often the only tangible leverage an association has to ensure fairness and shared responsibility. Placing a lien on property, with the ability to foreclose, is typically enough to get delinquent residents to meet their financial obligations to the community—without the necessity of foreclosure.
Without this leverage, many residents would simply ignore their obligation to the association and their neighbors. How many Americans would pay their taxes if government had no means of enforcement?
A word about priority liens
The vast majority of home foreclosures are initiated by banks and other mortgage lenders—not by associations. When a bank forecloses on a home in a community association—when the lender actually owns the home—who remedies debt owed to the association?
A priority lien simply means that the debt to the association is a priority to be paid before other outstanding debts on the property are settled. Generally, banks will wait until the home is sold, and pay outstanding assessments from the proceeds of the sale. Unfortunately, many foreclosed homes remain vacant for very long periods, during which the community association is left holding an empty bag.
That’s why CAI supports what is known as priority lien legislation, forms of which have been adopted in sixteen states, including Colorado, Florida, Nevada and Pennsylvania. Associations—and the homeowners to live in these communities—have the right to expect debts to be satisfied when the lender takes possession of a foreclosure property.