Condo law firms make a lot of money on collections of past due assessments. Associations pay them a lot of money, because the associations expect to collect the past due assessments, and be able to charge back the legal fees to the delinquent homeowners.
If you ever heard a condo lawyer seeking an associations business, explain how they handle collections, it seems like they will save the day, and help the association collect past due assessments. If you have the opportunity of picking up the pieces, you see can see it is not that straightforward.
The law firm’s sales pitch will make it sound as though if you give the collection business to their firm, they will do a couple of simple things, and the delinquencies will be a thing of the past. In one of the more compelling presentations, an attorney explained to an association with a lot of delinquencies, how the law firm could provide bulk pricing, since they would not be individually processing the collections, but that one person would go to court with a stack – which would save money.
One would think that eventually word would get out, as to the problems with the condo collection process, but probably due to board turnover, and other factors, few have the perspective to give a frank evaluation of the collection process and operations.
There are some really good collection situations that work in accordance with what lawyers typically present. One of the best we can share relates to a new association, where the developer was not paying on 18 units. The units were rented out by the developer, but the developer was not paying assessments. The association’s lawyer told how they might be able to get possession of all the units, and have the rent paid directly to the association. That is exactly what happened, and the association collected all of its past due assessments, and legal fees.
Other good collection outcomes include associations that initiated legal action after homeowners who did not want to lose their home, and had the resources to pay, and before the legal fees mounted, the homeowners paid up.
Two other valuable services that condo law firms relates to informing the board about bankruptcies of the owners prior to court filings and foreclosure status of units – if the law firm can determine that. If the homeowner is in bankruptcy, the law firm usually alerts the management company / board, and which helps in knowing that the likelihood of a collection may be slim, or will be through the bankruptcy court, in the case of a chapter 11 bankruptcy. Also, it is helpful when the law firm notifies the association if there is a foreclosure on the unit, as if the owner is gone, the bank may need to winterize the unit, to prevent pipes from freezing – which could cause major damage to not only the vacant unit, but also to other units below. Law firms may notify the bank that the bank needs to winterize the unit.
This is the good.
The bad is not usually well explained by law firms. The bad is — what is the likelihood that the association is throwing good money after bad? What if the collection does not work out as expected? Law firms are not always forthcoming about the real likelihood of recouping all of the legal fees, or exactly what the factors that need to be in place to collect the money. Included in the factors not usually discussed, is the amount of management and resources needed to rent out a unit taken over in the process, and what the risks associated with the eviction are.
The condo collection process is predicated on the idea that after the legal proceedings, sometimes costing about $2500, that the association will be able to get possession of the unit, and be able to rent it out to recoup past due assessments and legal fees. Sounds easy enough, but the practice can be more complicated.
Associations are at high risk for not being able to recoup collection legal fees under two very likely scenarios involving foreclosures. Consider the case of the condo building that has high property values, but the owner is under water on his or her mortgage. Mortgage companies may accelerate the foreclosure process – leading to a foreclosure sale in just a few months. Thus, the association, following the advice of its legal counsel, spends thousands of dollars on legal fees, does a lot of work fixing up and renting out the unit, and then shortly after the eviction on the unit, the unit is sold in a foreclosure sale. After the unit is sold in the foreclosure sale, the association has 30 days to get the tenant out.
Thus, the success of the collection has much to do with timing – the timing of the legal collection process against the owner, and the timing of the foreclosure sale – orchestrated by the mortgage company. In the real world, going through the collection process may mean that the condo association and management company are simply working on behalf of the new owner to clear the unit. In other words, while the condo association is spending thousands of dollars and months of work to get possession, the mortgage company is doing their best to sell the property at a foreclosure auction, and the only opportunity the association has to rent the unit out, is in the time before the unit sells. So, after months and about $2500 in legal fees, the association gets the condo vacated for the new owner.
Now, sometimes the legal fees can be recouped with the 6 months recoupable after a foreclosure sale – but not all units go to foreclosure. Sometimes, the unit goes to a short sale just before the auction, and the association may be faced with an offer to take half of the past due collections, or only get the 6 months. Thus, the legal fees have been a total waste.
There are other times when the association goes through the entire process, and then takes over a unit that is in such poor repair, that it is not feasible to rent. It does not make sense to put $20,000 into fixing up a unit when there is no realistic chance of recouping the money. And, that happens in the real world. This can happen in luxury condo building, where the owner strips the units of cabinets, appliances, flooring, and plumbing on the way out. And, even in units that are not completely stripped, things like appliances frequently move out.
So, assuming that everything goes well, and the association takes possession an estimated 6 months ahead of the foreclosure sale, who wants to move into a unit knowing that at any time, they can be forced to move with 30 days’ notice. In view of this, the rent will likely be discounted, and then the unit fixed up to make it rentable, and then shown to prospective tenants, and then the tenants start calling the management company about all of the little things that go wrong, etc.
If the property is high value, the bank may move the foreclosure sale quickly. On the other hand, if the property is heavily depressed in value, the amount of rent the association can get can be seriously limited – though the bank may not be in a rush to sell it. And who are these tenants who might move in for a cut rate, knowing they may have to move on 30 days’ notice? Maybe not the ideal tenants. After a bad experience, the board has to waste time interviewing each prospective tenant. It goes on.
The bottom line is that there is a lot more to this story than the condo attorneys may tell you.
Condo board members are supposed to use “business judgment” and do “due diligence” in making decisions on behalf of their association. However, condo law firms have lobbied for legislation, and tell boards to follow what they say with respect to collections – regardless of whether or not it makes business sense. At least one attorney told a condo board that to not act as directed by the law firm, would be “negligent”. So, what is an association to do to in the case of a short sale vs. foreclosure sale? If the unit goes to a foreclosure sale, the association’s lien on the property is extinguished – and they can only collect 6 months past assessments. On the other hand, if it is going to a short sale, the purchasers may offer to pay a significantly higher amount if the association will settle with them.
The 2014 Illinois Supreme Court Decision in Spanish Courts effectively took away many defenses that homeowners used to try in opposing collection actions. Today, it may not be uncommon for law firms to rack up legal fees out of proportion to the amount due. Does it make sense to make a homeowner who is not in foreclosure and is only $500 behind on their assessments cough up an additional $1400 for legal fees? That is a business decision – but is it really helpful? Was there any real concern about the association losing money under such circumstances? Further, in such a circumstance – assuming there was a concern about collecting the assessment, if the association expends legal fees to collect it, and then the owner files for a Chapter 7 bankruptcy, all the money is gone – both past due assessments and legal fees.
Condo lawyers are in business to make money – and seem to do especially well on collections. But the condo law firms’ objective and the recommendations they make with respect to collections may be beneficial to them, but not necessarily the condo associations they are serving. There are times when engaging a law firm to pursue collection actions is the best option – but not always. The real task for condo boards is to get sufficient information about both the collection process and the particular circumstances of the collection action in question, and make decisions that will benefit the association. Some money will be lost either way – through written off legal fees, written off past due assessments or both. More information is likely to be helpful. The most fruitful beneficial collection policy may be one that both follows well thought through policies and that use a decision model to determine when to begin and continue legal collection actions.