The Gulf Coast’s Collections Conundrum
While the collections outlook is improving, many associations still face an uphill battle.
By Selena Chavis, Condo Owner Magazine, April 26, 2013
In any homeowner’s association, there are always those few members who must be chased down, hounded and, in some instances, sued to ensure their financial obligations are met for dues and assessments. Unfortunately, it’s almost expected that some owners will be delinquent or will try to bypass their responsibilities.
And while many condo associations recognize this reality, few were prepared for the ensuing storm of collections problems that followed the collapse of the housing market several years ago. In fact, many are still trying to shore up some of the losses and continue to face the lingering effects of lost revenue.
According to John Cottle, an attorney with Becker and Poliakoff law firm in Fort Walton Beach, the problem was exacerbated by the sheer number of foreclosures that had to be sorted out before dues could be paid. “It used to be the case that [associations} almost always got paid,” he said, pointing out that typically, there would be some equity in a unit that could be drawn from. “When the bubble burst, there were all these units worth far less than the debt.”
Daniel Craven, a Gulf Shores attorney who has worked with associations for the past 18 years, said that before the market collapsed, his organizations would typically have 25 to 30 open collection cases. “When the economy tanked, we reached a point where we had 200 at one time,” he recalled.
In both Alabama and Florida, the financial obligation as it relates to dues and assessments becomes the bank’s once the institution forecloses a property. In Florida, banks are required to pay an association 12 months of dues and assessments or 1% of the mortgage. In Alabama, the foreclosing entity must pay six months of dues and budgeted assessments to the association.
The problem in Florida, according to Cottle, is the time is takes to get properties through the foreclosure process. If an owner has decided to let a property go back to the bank, but the bank does not move forward with the foreclosure process rapidly, then the association is left without much recourse for securing payment for dues and assessments.
“It’s grossly unfair because other owners are paying extra, and it’s the bank’s collateral,” Cottle pointed out. “Judges in the panhandle are generally in tune with this situation and try not to let these foreclosures linger in courts.”
In 2009, there were more than 7,220 total mortgage foreclosures across Okaloosa, Walton and Bay counties. In 2011, the foreclosure rate had improved decreasing to less than 2,900, but 2012 saw a jump again across the three counties to 4,170. “I think it’s indicative to what’s happening in the condo industry,” Cottle said, noting that he expects that collections will remain an issue through 2013. “The same ratios would likely apply.”
Craven said that the Alabama condo industry is not burdened by the foreclosure process the same way as Florida. Florida requires foreclosures to go through the judicial process; Alabama does not. “It’s much more efficient,” Craven said.
In fact, according to Rachel Aho, a paralegal in Craven’s firm, the outlook for collections has improved in the last eight to 10 months for condominium association clients along Alabama’s Gulf Coast. She pointed to better rental income in 2012, a positive outlook for 2013 and the fact that many owners have received money from BP as reasons why the situation is not as dire.
Both Craven and Cottle noted that once banks proceed with the foreclosure process, it’s typically not too difficult to collect the missing revenues required by law. Craven pointed out that working with some of the larger banks can be a little more complicated when payments are delayed, but once the “right vice president” is located, it is relatively easy for condo associations to get their money.
Cottle agreed, adding that it has been rare to run into a situation where a bank simply would not pay. “For the most part, they will pay if a little pressure is placed on them,” he said.
Once the bank pays, an association often still faces a shortfall since the legal responsibility only covers a portion of what may be due. In these cases, Aho noted that the firm still has to try to recover missing funds from the owner. And while the firm has been able to sue owners and successfully collect, she added that the process can be frustrating. “Right now, people just honestly don’t have the money,” she said. “We’ve seen a major rise in bankruptcies.”
Cottle said that associations have more recourse now to take “rights” away from owners who are delinquent and waiting on foreclosure proceedings. In recent years, associations were given the right to dismiss privileges for “amenities” in these cases. “Previously, there was no legal basis for that,” he emphasized.
In the wake of extended foreclosure proceedings, many associations have made the decision to move forward with their own foreclosures on delinquent units as a way to generate cash flow and income. “In some cases, we have foreclosed the association’s lien and gotten the title,” Cottle pointed out, adding that the association can then rent the unit and make up for some of the losses. “The idea is to squeeze all the rental income we can until [the bank foreclosure] happens.”
Craven said while some associations along Alabama’s Gulf Coast have done the same thing, each situation has to be considered on its merit. Sometimes it may take too much investment to get a unit “rent ready” for an association-led foreclosure to
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