Under Development

Access Management Group received the following message from a homeowner living in a developer-controlled community (that we do not currently manage):

I am a concerned resident at the ABC Homeowners Association.   I was under the impression that the recent Annual Meeting was to discuss the budget.  Instead, it was a hodgepodge of resident complaints, an attempt to dispel rumors and issues related to the turnover and an attempt to clarify who and what the developer is responsible for and what the county and the residents are responsible for as it relates to the turnover.

I recommend that we have a series of annual meetings each year, with one specifically addressing the budget.  In that meeting the residents would review the budget line by line.  The other meetings could possibly cover specific homeowner concerns.  

I do not in good conscious approve the proposed budget.  In order to prevent the residents from this sub-division from going into debt, I am proposing a "secured funds" budget.  Using only those funds received between the day the HOA assessment notices are mailed to residents to the day the pool opens each spring.  Those funds received after the pool opens to year end, and funds from previous years would be placed in a "Catastrophic/Emergency" fund in the event of a major sub-division crisis.

I am also asking for guidance in how the budget is created, developed and implemented by a vote of the residents and proposing a change in the charter or governance of how the budget is created, developed, implemented and approved as outlined above.

Our response to this homeowner was as follows:

Thank you for reaching out to us.  As we weren’t in attendance at the meeting and do not directly manage the community, we can only speak in general terms about processes and procedures, and defer to your community manager to answer particulars.

Our understanding is that your community is still under developer control.  If this is true, the process for budgeting is limited:  The developer may construct a budget with or without the input of appointed homeowners.  The developer has final say in the nature of the budget, and is not obligated to hold in-depth discussions or justify processes.

Once control of the association has been turned over to the homeowners, they may elect Board members responsible for drafting future budgets.  This Board may choose to establish a temporary budget committee composed of a few homeowners to put together a proposed budget, but it is ultimately the Board that has the final say.  A budget committee is the appropriate forum for the line-by-line review as requested in your letter.

While the Board may choose to call for a community-wide budget meeting, this is not part of the annual meeting, which is reserved for only high-level business items (electing Board members, and possibly a community vote on budget approval if the documents permit it).   The annual meeting usually lasts perhaps an hour, as is not designed to tackle contentious issues.  It is the one meeting most homeowners choose to attend each year, and the best way to drive up community apathy is to host unpleasant annual meetings.

In many communities, only the Board votes on the budget, with homeowners having the option to vote it down only if a majority of all homeowners call for a vote and vote against it.  Again, your community manager will be able to address particulars on your association’s budget.

Homeowners and Board members frequently do not have a frame of reference for what is “normal” when running a community association.  When working up a solution for a problem in your community, it is always best to first gather information about the typical processes and procedures observed elsewhere.  A great venue for gathering this information is to attend meetings hosted by Community Associations Institute (CAI) –you can use the internet to locate a chapter of this organization operating near you!

Pay Up! (Or At Least Budget For It)

Boards of Directors often wonder how their community's budget compares with those of other communities.  They face constant pressure to keep assessments low, to the detriment of reserve (capital project) accounts.  Anemic budgets are then further aggravated by the issue of homeowners not paying their assessments. Delinquencies are the driving factor when forecasting next year’s budget!

Reviewing nearly a tenth of the communities in the Atlanta Metro area (of the approximately 3,000 homeowner associations/condominiums in this region per the Georgia Secretary of State) yielded interesting results.

 

Communities like to spend as little as possible in collection activity, but even when plans call for only spending one or two percent of the annual budget in this area, a community often ends up spending between four and six percent.  For communities with very high nonpayment rates, it is common to see ten percent or more of the budget allocated to collections.

When it comes to delinquencies (defined as a homeowner past due at least $500), there was no correlation between size / type of community and delinquency rate.  While a handful of communities had zero delinquencies, the majority are experiencing between seven and twelve percent of their homeowners in arrears.  Some communities actually are running above a seventy percent delinquency! 

Obviously, this situation was exacerbated by the Recession beginning in 2008.   Reviewing data trends from 2008 through 2012 revealed that:

• At the start of the recent Recession delinquencies typically ranged between 3 to 15%
• In 2012 this range had increased to between 3 and 38%
• Annual budget increases directly impacted delinquencies & home value
• Those Boards that continued to increase budgets to keep up with inflation (3% to 5%) resulted in an average 10% drop in home value
• Those Boards that chose to freeze all increases saw an average 18% drop in home value
• Communities that slashed budgets by 5% budget averaged a 25% drop
• A 10% decrease averaged a 33% drop in home values
• Compare this to the Case-Shiller Index in 2012, showing a drop of 39%
• Deferred maintenance, neglecting curbside appeal and faltering collections lead to these results
  

  

  
  

As of September 2013, the average (both mean and median) delinquency rate for condominium homeowners was $4,800.  Surprisingly, those living in detached single family homes also showed high delinquencies:  The average mean was $3,145 / median was $2,585 for delinquent homeowners.  266 homes were identified as owing over $10K, with 42 of these owing over $20K.  Delinquencies in some homes exceeded $60K!

In light of the above, it is critically important that Boards budget for nonpayments to avoid shortfalls in their communities.  Money not set aside for this contingency will result in neglecting maintenance needs, or requiring the use of special assessments or savings set aside for capital projects, which is never a good choice.

$Money$, $Money$, $Money$

A homeowners association looking to change management companies recently reached out to us.  In our daily lives, we often hear about problems with time management and stress management, but with Boards of Directors - it is really all about expectations management.   This particular community summarized their current situation as follows:

Our dissatisfaction mainly rests within the lack of aggressive follow-up with those homeowners who are behind on their association dues.  Our current management firm basically takes the approach of sending out delinquency letters over and over again, with no further consequences (besides late fees and/or common area access restriction). This pattern, in some cases, has made matters worse since many homeowners believe that they can just stop paying because no further action/consequences will follow.

We need reassurance that a new property management company will perform at a much higher level.  Please provide details on how you would take immediate action with specific individuals and plans for others who may not be as delinquent, but still pose a risk to our community’s financial health. We recognize that some homeowners may not end up paying.  If this is the case we need reassurance that non-payment will, at a minimum, result in swift consequences to the full extent allowable by law.  

Access Management Group has very strong feelings about the homeowner delinquency issue, and it is frustrating to us when a client refuses to take a firm and fair stance when addressing it.  To be successful, a Board of Directors must draft a resolution outlining what the steps are in collections (we assist with this), which they provide to management and to the collection attorney, and then the Board steps out of the process to avoid having homeowners attempt to play different parties against each other.

The most effective process we’ve seen outlined in a resolution is as follows:

A late notice is sent by the third week of the month to any who failed to pay by the due date.  A second late notice is issued the following month, and then the account is turned over to the collections attorney.  Once in the attorney’s hands, the homeowner is only permitted to communicate with the attorney until the debt is resolved (i.e. requests for payment plans must go through the attorney, who forwards to the management company).  The Board of Directors provides the management company general guidelines to use in making some decisions on payment negotiations.  For example, any payment plan for a period longer than 12 months is automatically barred unless the amount is greater than $5K, in which case the Board must be consulted.

The other key component is to have the correct law firm to handle collections.  An association can choose to have one law firm handle all of its legal needs, or can choose to delegate collections to a separate firm.  From our thirty plus years of experience in the Atlanta market, we have identified those firms which are the most effective in obtaining collections results, and would ask that the Board consider one of these if they are unhappy with their current firm. 

All the nuances of collections are easily a two hour conversation, but Access Management Group has a handle on this and our clients can rely on us to push for the best results.  To provide a  recent example:  A community that came on with us at the start of the year switched to a firm we recommended, and has collected nearly $100K as of September – with another $150K being setup on payment plans.  Other financially distressed communities that have been with us the last few years have seen collections of $100K to $200K each year.  We take this matter seriously.  If you have any questions about this matter, we are always available to consult.

Bank-Held Properties

One of our managers will be addressing a national gathering of representatives from FDIC, FNMA, FHLMC, HUD and various rating agencies.  The purpose of the symposium is to help these agencies understand the impact of their policies and processes on the homeowner association industry.  Our speaker will be discussing delays in obtaining homeowner assessments from bank-held homes.  Below are some key points from this presentation.

Too often, a home will be abandoned but not foreclosed for long periods of time.  Three, six or even twelve years may pass before the bank moves to foreclose, leaving the homeowner association without the needed funding for the most basic services.

While an Association may foreclose on unpaid assessments, the entire process takes six or more months.  For banks, Georgia has one of the fastest non-judicial foreclosures at 37 days:  An Association will incur five to ten thousand in legal fees, only for the bank to immediately foreclose afterward.  The Association’s fees in this instance are often unrecoverable.

To complicate matters, frequently fraudulent deeding of property occurs.  Combined with spurious bankruptcy filings, homeowners can string out the foreclosure process by five years.
Often, an Association has no idea of a fraudulent deed until discovered during a bank foreclosure, when the Association has already incurred time and expense pursuing a debtor.  To avoid this, the homeowner association should be included in bank foreclosure suits (for notice purposes only), so the association is aware of the situation well in advance. 

In some instances the lender takes possession of a home without actually foreclosing.  It sends in a vendor to change locks, pay property taxes, winterize plumbing, etc.  Without an actual foreclosure, the bank is not liable for assessments except in a handful of states

operating under “super lien” laws.  Unless the Association is constantly pulling tax records, it may not discover this situation for years.  To combat this, one item being contemplated is for the Association to file an abandonment claim against the lender for failure to maintain (homeowner assessments, landscaping, etc.).  This potentially leads to the Association gaining title to the property, with legal costs a recoverable expense against the lender.

Once a home has been foreclosed, it is difficult for the Association to track down the lender representative tasked with making assessment payments.  Lenders often outsource property maintenance to third party companies, making things more difficult for the Association.  It is not uncommon for an Association to wait until the bank-owned property sells to a new homeowner, before collecting unpaid assessments from the lender.

If neither the bank nor its servicing agent noted that the home is part of a homeowner association, assessments may not be collected at closing, leaving both the bank and the purchaser jointly liable for the delinquency.  This is not a good introduction for the homeowner to the community.

Some servicers hired by lenders have become proactive in tracking down homeowner association representatives, setting up payment plans.  However, the banking system is so fragmented that two different servicing agents are assigned the same home, with both paying past due assessments.  While this might sound ideal for the Association, it creates problems when the bank attempts to collect overages a year after the home has sold.  The new homeowner may believe the additional funds applied to his account are rightfully his, creating needless conflict.

The banking industry requires a process that, prior to foreclosure, will accurately identify homeowner association contacts.  Similar needs for handling property taxes and hazard insurance are already in place, but the challenges of connecting with 350,000 homeowner associations, many of them self-managed, are formidable.

The Price of Avoidance

Recently a client community directed it's management to offer a settlement of 50 cents on the dollar to a delinquent homeowner:  This despite the fact that the debt was recent and had never been pursued via collections.  The Board just didn’t want the hassle and felt that too much money would have had to be spent in legal fees in order to collect.  This type of action (readily caving in to delinquent owners) sends a message to other homeowners about paying assessments.  Those who normally pay will be angered that they are subsidizing others.  Those who don’t pay will be emboldened to push for further concessions.

Another client community also didn’t want to “be mean” to their neighbors, and opted to only file a lien in the courthouse records rather than taking delinquent owners to court.  However, a paper lien is only good for four years, after which the money is barred from collections.  The delinquent homeowners need only wait out the statute of limitations to avoid paying their obligation.  For instances where judgments were obtained (by the previous Board), the current Board refused to garnish wages, bank accounts, rents, or other assets.  Again, the reason given was that this was “too mean”. 

In both of these situations, the Board is violating its fiduciary duty to the Association, and insurance may refuse to cover the Directors if an angry homeowner decides to file a lawsuit.

Instead, these Associations should seek a collections arrangement where the attorney’s fees are paid on a contingency basis, with the attorney retaining a fixed percentage of what is collected.  The Associations will still come out ahead, perhaps collecting 80 cents on the dollar when all is done. 

Community cohesion requires discipline, and unfortunately some homeowners choose to avoid their obligations to their neighbors, whether it is financially or perhaps via a rules violation.  The price of not fully pursuing these matters is greater than any short term savings of Board inaction.

On Shaky Ground

“Earthquakes” are not something that we generally associate with the state of Georgia.  However, earthquakes do occur in our area - and also regularly occur in 38 other states.  The initial thought when contemplating earth movement is its impact on buildings.  However, we also need to be mindful of the supporting utility services that provide gas, telephone, and electricity to those buildings. Properties also can sustain significant damage to equipment, windows, partitions, ceilings, and lighting fixtures. Because Georgia earthquakes typically rate relatively low on the Richter scale, these secondary items can be more likely to pose danger than an actual building collapse.

Associations containing multi-story buildings are natural candidates for coverage, and contributing factors - such as tunnels and storm drain systems located beneath buildings - need to be discussed with the association's insurance broker to address realistic scenarios.

Federal disaster assistance (usually in the form of loans or grants) is only available if the damage is widespread, very serious, and the area must be declared a disaster zone by FEMA (Federal Emergency Management Agency).

Standard insurance policies do not generally cover damage directly caused by earthquakes.  You can often obtain earthquake coverage by adding an endorsement to the Association’s policy. The Association also has the option of exploring a stand-alone policy, dedicated specifically to an earthquake event. As with any type of insurance, associations need to check with their insurance agents to ensure that the coverage realistically meets their exposures.

It’s important to know how “earthquake” is being defined to ensure proper coverage. Although one insurance company may define “earthquake” as an occurrence being caused by seismic activity, often earthquakes or earth movement definitions exclude similar events such:

1. Any earthquake or volcanic eruption that begins before the inception of the insurance;
2. Earth movement (other than coverage  provided  by  this  optional coverage), such as landslide, or earth sinking, rising or shifting;
3. Fire, explosion (other than volcanic explosion), tidal wave, tsunami, flood, surface water, water which backs up or overflows from a sewer, drain or sump, water below the surface of the ground (including that which flows, leaks or seeps on or into covered property), mudslide or mudflow, release of water impounded by a dam, even if attributable to an earthquake or volcanic eruption.

The Association should review earthquake coverage with its insurance agent when determining an acceptable level of risk and weigh the costs to obtain the additional coverage. 

Lean on Me...and Your CAM too!

Overheard between two IRS agents talking about a tax code provision:  “Just because you don’t understand it and I can’t explain it doesn’t mean we can’t enforce it.”
While the above might be an argument for “limited government”, when it comes to community governance, Board of Directors should never demonstrate such narrow thinking.  In fact, just the opposite is the best way to address - If the purpose of a rule can’t be explained to your neighbors, it’s either a bad rule that needs to be reworked, or the Director has failed in his/her obligation to self-educate on community association governance.

 
Not only should a Board member be able to reasonably support the governing documents, but he or she should proactively see that homeowners are constantly made aware of key components of communal living.  Consistent newsletters and email blasts are a regular feature of well-run associations:  Usual topics include pet ownership, water damage and insurance, pool rules, and collections. While each Board member can not be expected to be an expert in every aspect of the community's covenants - it is their responsibility to educate themselves, ask questions, and get answers. The Board has many resources to do so - attorneys, vendors, and most importantly - its community association manager!

Your community association manager (CAM) is a great resource for obtaining article ideas, and may be able to provide fully-formed articles ready for use!  They are also there to help and support you when such issues arise.  In addition, Community Associations Institute (CAI) provides copyright free newsletter articles to members of their organization – at least one of your Board Directors should be a member of this entity to access valuable resources for the benefit of your community.  You may find details at www.caionline.org

While some members may grouse at the effort involved informing the community on regulations, such proactive measures greatly reduce the stress, anger and confusion that otherwise occurs when a homeowner is suddenly faced with community rule.  The best enforcement action is the one that never has to occur!