In the tough economic environment we've been struggling through over the past few years, many condo owners have faced job loss, pay cuts, or just financial uncertainty. Unfortunately, the sign of the times sometimes leads to an owner not paying their common charges.
“I definitely say that in the last five years, owners not paying assessments and being delinquent has become a problem,” says Gail Filkowski, CMCA, director of sales and marketing at American Community Management in Schaumburg. “Five years ago, management companies were inundated with requests for paid assessment letters and sales packets. Today we are constantly sending out late notices and records to the attorney for collections. And if you even wanted to go back 5 to 10 years ago, I didn't really see many line items in budgets for bad debt, while today we have to encourage a lot of communities with high delinquencies to budget for an amount that they simply aren't going to get in assessment payments.”
A tough job market may be the biggest reason for late or skipped payments.
“I think that job loss is the most common reason for people to stop paying assessments,” says Filkowski. “They're kind of forced to choose what bills to pay, and assessments are at the bottom of the list after groceries, utilities, and car payments. Also today with so many foreclosures happening, homeowners will frequently just stop paying assessments as well. They think making an assessment payment might be pointless if they're eventually going to lose their home to foreclosure, which is frustrating for a property manager because a lot of homeowners don't quite understand that, actually, the consequences of not paying your assessments can lead to the association obtaining an order of possession, and if they actually want to follow through, evicting that homeowner a lot faster. Then, that homeowner might lose their home in a foreclosure,”
Communication & Consistency
Associations should have a written procedure that is disseminated to everyone so that residents know exactly the way things are done—and more importantly, that things are done consistently for all unit owners.
“The association has to have a set policy,” says Scott Seger, property manager at Forth Group in Chicago. “And that's what we stress to our managers and our properties, too, is not to sort of randomly say, "Okay, well for this guy, we're gonna do this. And this guy, we're gonna do that." The policy is this; at 45 days this happens; at 90 days this happens. If you want to have a payment plan, this is the payment plan. So the board's not sort of arbitrarily deciding those things, saying, 'Oh, for this guy we'll do this thing, and this guy we'll do that thing,' because they could get sued for that.”
Each association may have a different procedure in place for notification and collection of late payments. It is crucial that communities communicate to residents of the consequences that exist for delinquencies.
“I think communication is really important even before an owner misses a payment, communicating is key,” says Filkowski. “We publish community collection policy by distributing it to owners in a newsletter, or on their website—just reminding owners what can happen if they fail to make their payments. That might prevent the delinquency and encourage owners to contact property management if they think they may become delinquent. So, if you're a homeowner who has lost a job, call me and let's establish a dialogue and reach some sort of an agreement before you get too far behind to catch up on your assessments.”
“Our advice to most properties is to definitely have late fees right away every month. It's up to each property to develop their policy, but it has to be consistent. Our recommendation is after 45 days, that they have some kind of a letter going out, or possibly a collection service get involved,” suggests Seger.
Once you approach 90 days without any success, it is time to utilize legal resources.
“When the amount starts building up to higher amounts and you get into the 90 days or greater, that's when we advise them to sort of get their attorney involved and start a legal action to collect the debt,” he says, adding that associations should act right away before the balance gets too large. “Let's say you let people build up a big balance of $2,000 or $3,000—then it becomes less likely that they're ever going to pay it off. Whereas, if you stay on top of it, it's more likely that they'll pay the association; maybe not pay somebody else.”
Cause & Effect
An association’s best method for striking fear into a delinquent payer to collect common charge arrears is filing a lien against the unit and foreclosing on it. After all, once filed, the lien will protect the condo by blocking the unit owner from selling or refinancing their unit without first paying off his or her arrears to the condo association.
When a condominium's lien is filed, the condominium becomes a secured creditor under the Federal Bankruptcy Code so if the delinquent unit owner files for bankruptcy, the condominium will ultimately get a higher percentage of the debt paid as a secured creditor than if it didn't file a lien.
Even the best run condos will most likely face delinquencies and both Seger and Filkowski observe that high-end and luxury condos are not immune from the problem.
“I don't think really any community is immune from financial distress today,” observes Filkowski. “The possible difference between a luxury and a non-luxury property would be the services that could potentially be cut out. Like a downtown luxury property with high delinquencies might say let's cut back on door staff, whereas I've seen some communities in the suburbs scale back on landscape enhancements. So I see those differences, but definitely not a difference in who is being hit with delinquencies.”
Seger notes that the smaller (rather than the more affluent) associations are the ones having more difficulty keeping up. “If you have smaller buildings that are newer and people got in over their heads with mortgages, it has a much bigger impact. So if you're a 20-unit building and five people aren't paying, it's 25 percent—and that's a big part of the budget. If you have a 200-unit building and 10 people aren't paying, it's not such a big deal. So, it just property by property. For some properties, they definitely have very difficult financial situations that have definitely impeded their ability to build reserves, do projects, keep their property maintained. And it puts a lot of burden on the people who are paying, because it really shifts the burden onto them,” he says.
With a sluggish economy and just recovering job market, it is probable that unit owners may have difficulty making payments. As an association, it is crucial to develop and communicate a uniform collection policy that will aid residents and the community in getting back on track financially.
Keith Loria is a freelance writer and a frequent contributor to The Chicagoland Cooperator. Editorial Assistant Maggie Puniewska contributed to this article.