Note: This article has been updated since it's original publication.
Homeowner Collections is an unsavory topic. It's no fun to be 'THAT guy' who is going after down-on-their-luck neighbors and demanding money. Of course, in a homeowners association, you always have the nuclear option for collections—the home lien—but that should really be a last resort.
The surprising truth is that the vast majority of late assessments can be collected long before you reach that critical mass, and you don't have to be a jerk to get the money the association is owed.
The Community Association should already have an approved Delinquency Policy so you have a uniform process for handling delinquent homeowners. Now you need to create a series of demand letters that are part of the collection process.
Striking the Right Tone
Communications are very important to the success of your collection process. You have to strike the right tone in these letters to encourage the delinquent homeowner to make payment.
Collection letters should always be business-like. They should avoid any personal attacks or wording that can be taken as casting an aspersion on the delinquent homeowner. Don’t give the homeowner any fuel to come back against the community.
Properly worded collection letters are an effective tool in collecting past due assessments. They should be written like a call to action to motivate the delinquent homeowner to pay all past due amounts. Letters that play on the delinquent homeowners conscience, like pointing out that that community relies on each homeowners prompt payment of assessments in order to meet its obligations, are most effective.
Sample Collection Process
I favor a 4-step collection letter process to give the delinquent owner ample time to pay and ample warning of the consequences if they do not pay. Here are the steps I have found successful in the past:
- Late Notice Letter - Usually, the first letter is a simple reminder that the homeowners’ assessment payment is late and a late fee charged. This letter should be brief and to the point. It should show the amount past due along with any late fee that was charged.
- First Warning Letter – A more serious and demanding letter than the Late Notice. It reminds the owner of the amounts past due and the late fees. It mentions the consequences of not paying all of the past due assessments and late fees, such as filing a lien.
- Second Warning Letter – A stronger letter in its wording than the First Warning, it is a more serious and demanding letter than the Late Notice. It again reminds the owner of the amounts past due and the late fees. It mentions the consequences of not paying all of the past due assessments and late fees, such as filing a lien. It mentions the owners appeal rights in the case of financial hardship.
- Final Warning Letter – This letter assumes the community files liens to protect it’s interests when a homeowner becomes seriously delinquent and has ignored previous warning letters. This letter reminds the owner of the amounts past due and the late fees. It mentions that legal action, such as a lien, will be initiated next and that additional collection costs will be incurred. It gives a firm deadline when payment must be received before legal action is taken. It also mentions the owner’s appeal right in the case of financial hardship.
If All Else Fails...
The unhappy fifth step in this process is the big bad itself: taking legal action. If you threaten it, you must be committed to following through. If the owner does not pay their past due balances, or contact the community to appeal or work out a payment plan, then you must take legal collection action, usually by filing a lien or turning the debt over to your attorney. [Note: In some states, only an attorney may take this action.]
Consult Your Attorney
Some states have laws that limit the ability of a community or their management company from sending collection letters. For example, Maryland requires management companies to be licensed as “collection agencies” in order to send demand letters like the ones outlined above. You must check with a local attorney to make sure you understand any requirements or restrictions in your area relative to sending collection letters.
Once you've got your letter templates ready, it's also a good idea to run them by your attorney to be certain you are within the law.
In a Community Association, every member of the association (the homeowner) is responsible for their small part of keeping the organization up and running efficiently by paying their association dues in a timely manner. If even one member does not pull her weight, the other community members have to pick up the slack. That's why a delinquency policy and subsequent collections strategy is such an important part of your CAM accounting cycle.
I am including a sample set of 4 collection letters matching the recommended steps above. Feel free to download them and customize them for your community. When drafting your letters, make sure they follow the process laid out in your delinquency policy.
*Image credit: Michal Jarmoluk via Pixabay