Delinquencies, Fairness and Keeping One's Word

I've had several conversations after the CAI annual conference.  In an earlier post, I listed the "Education Session Tracks" I attended. These includes presentations on assessments, legal issues and question and answer sessions with the experts.

The education sessions, recent Chicago Tribune articles, and articles in the Chicago Cooperator and Condo Lifestyles, have dealt with the concerns of HOAs, including delinquencies.

In that recent post, I quoted Thomas M. Skiba, chief executive officer of the Community Associations Institute "Nationwide, non-payment of HOA fees is among the top problems facing condo, single-family, and other planned development associations today."

The Source of Delinquencies
Delinquencies are the result of HOA owners who have not paid their fees. I am unawares of general statistics on delinquencies. In the "I have heard" department, I have been told of a nearby condominium association which claims it has no delinquencies. I have also read and as I stated elsewhere, observed a board member at another association pleading for help in dealing with delinquencies. It seems that delinquencies are the rule and no longer the exception in HOAs.

There are different types of delinquencies. Some are basic fees or assessments that an owner doesn't pay. These can be as little as $5. Then there are recurring monthly fees, or special assessments that go unpaid. All can can accrue, and eventually an owner can owe the association thousands of dollars. I think it  might be useful for an association to separate the trivial from the significant when counting delinquencies. However, I don't know if Fannie Mae makes a distinction when it comes time to guarantee home loans.

Usually, when I read or have listened to discussions as occurred at the CAI event, I get the impression that most delinquencies are total suspension of payment. However, it would be possible for an owner to send partial payment each month so as not to fall too far behind. This is generally not discussed, and I guess it isn't the way most people go about this. It seems most delinquencies involving monthly fees are the result of total suspension of payment. That digs a large financial hole for the delinquent owner, and quickly. It will also trip the automatic legal collection system.

Ultimately and for whatever reason, delinquent owners are not keeping their agreements. It may involve other creditors, be it the mortgage, or utilities and cable TV. There are lots of reasons. In the end, the question is "Did you pay your assessments" and the answer provided by delinquent owners is "I did not!" The rest of it is the "story" behind the circumstances. In the end, delinquent owners made a series of decisions and decided not to honor their word. In the end, the other owners continue to pay and the association goes on.

HOA boards are usually not therapists or financial counselors. They are fiduciaries and they have a lot of work to do. It is beyond the scope of the board to provide guidance counseling. I am basing that assertion on the requirement and duties of condominium boards as stipulated in the "Illinois Condominium Act."

I am aware that there have been those at BLMH who don't agree with that. My answer to them is: 1) Pass the hat and put your money in it, if you feel so strongly about helping others. 2) You are free to provide any amount of financial coaching to delinquent owners that you feel you are equipped to provide. 3) The association can't provide those services, nor can we recommend you to the owners at large. 4) The HOA is not responsible for the consequences of counseling provided by others to delinquent owners. 5) Would owners feel their money is well spent if the board used it to assist delinquent owners?


The Consequences of Delinquencies
First, if the number of delinquencies reaches a specific threshold, Fannie Mae will not guarantee home loans. This means that sellers my find it difficult to get mortgage for a unit in that specific HOA.

Secondly, the association must replace those funds from elsewhere. This means short-term borrowing from reserves, raising fees for all owners, or getting an outside loan from a bank. Getting a loan may be more costly or impossible if delinquencies are high. Associations too can be a poor credit risk, and there is a price to pay for that, in other words, higher fees and rates on any loans provided. Of course, delinquent owners who are not paying their fees will not pay a fee increase!  It has been stated that most fees are eventually collected by the association. If true, that means that these fees can be considered to be a "receivable." And as the saying goes, "Some day our ship will come in." However, until that day, those funds must come from somewhere else, because "receivables" are merely an accounting bookmark, an IOU. As we know, associations can't deposit such IOUs at the nearby bank, nor can they be used to pay wages or utilities.  It is also possible that the owner who is delinquent will experience a foreclosure, or will declare bankruptcy. In such cases, any expected collections may be severely reduced.

If an association experiences a high level of delinquencies, it may need to raise fees and/or reduce projects. For example, if an association experienced annual delinquencies of $20,000, where would that money come from? In the short term it would come from those owners who are paying their monthly fees. Faced with an income shortfall, the board, under pressure to keep fees "as low as possible" could curtail or delay certain important projects, such as a roofing project or street project. Temporary repairs could be made until finances stabilize and there is sufficient reserves to deal with these large and costly projects. Of course, even ordinary maintenance repairs cost money, and ultimately a "roofing project" or whatever which is handled this way may cost the association more money; if one delays a new roof a year or two, makes repairs and then does the new roof. Choosing to do so increases the total cost to the association, and the fees of the owners.

Finally, if delinquencies become too high, basic services may have to be curtailed. Such services include snow removal, landscaping, painting and so on.

The ultimate consequence is a reduction in values for the condominium owners. Sales may be reduced, or stop altogether. The question a potential buyer may ask is "Do I want to risk the possibility of large fee increases and/or special assessments?" Buyers will also look at the finances and ask "Is this a financially stable association and are their reserves adequate?"

I think there is another, hidden cost for the association. Dealing with these types of problems, and possibly confronting one's delinquent neighbors, is a task not many have the stomach for. It's perfectly rational for a unit owner to come to the conclusion "Why would I volunteer my time and talents to take on the problems of a group, with no benefit to myself? How will that group treat me? Will they blame me for their problems, and at worst will they slander me and be ungrateful?" Taking on the duties and responsibilities of a board member of an HOA is unpaid work. There is not only the donation of time, there is the donation of gasoline, payment of tolls, etc. I suspect in these very difficult times, many of the best qualified will simply turn their backs. Can I blame them, or can you? So it may be that the association board is under staffed, which of course puts the work on an even smaller body of volunteers. Standards will be lowered, and it will become easier for those who have a personal agenda to become a board member. It is very difficult for anyone to put aside personal feelings and become truly "of service" in an altruistic way, to their association.

Recognizing the Problem
Before attempting to deal with delinquencies, it is essential that the problem be recognized as occurring or having the potential to exist. There are a lot of forces at work that can get in the way of doing so in an association.

Owners want to be able to sell their units, so it might be better as a seller to pretend the problem doesn't exist. The board may prefer to think that they are doing a good job, and inconvenient facts which include rising delinquencies can deflate egos or get in the way of personal positions and agendas. Falling revenues put more pressure on a board to make fee increases, or make other unpopular financial decisions. Yes, Virginia, it is possible that board members may have personal agendas or situations which make it impossible for them to be unbiased fiduciaries in certain matters. Of course, no one wants to be the "bad guy" and be on the board when those letters arrive in the mailboxes of their neighbors and friends, or to be the friends of vocal owners, who just happen to be delinquent owners. When friends turn in friends, some think of it as "betrayal."

Even if an association has bit the bullet and is dealing with delinquencies, since this occurs behind the closed doors of "executive session" owners may be completely unawares that such situations exist. Board members may not reveal certain aspects of what occurs behind closed doors in "executive session" to the general ownership. So, the only way for the owners to know what has occurred is when the delinquent owner raises his/her hand and say "Oops, I've got a confession to make; I'm not paying my fees!"  That is not likely to happen. In fact, people being people, the delinquent owner may even go so far as to promote falsehoods and so on. Because we're all neighbors in an HOA, who is going to ask the difficult question "Are you behind in your fees? Is it YOU?" An owner might respond "I always pay my fees promptly and I follow all of the rules!" Nevertheless, there is always the possibility I might be deceiving my fellow owners. None of us likes to admit failure, or that we have let others down, or made mistakes. Some actually enjoy being dishonest. Most importantly, we might be reticent to admit that we have let our "friends" down in an association, and haven't paid our bills. For the belligerent, there is always the excuse "The association is poorly run, why should I give these people MY money!" By the way, that argument hasn't stood up in the courts, according to the CAI. It all sounds good, and owners can always find a few who will shake their heads and say "You poor dear!" or "Yes, the board is terrible!" However, the agreements to pay one's fees is ultimately with the neighbors', not the board! But some of the neighbors apparently haven't realized that these unsolicited "donations" come out of their pockets! Some of the board may also have difficulty dealing with the current economic reality.

If there is sufficient alignment of all of these forces, delinquencies may not be dealt with effectively. In the extreme, resistance may reach the point where some owners may consider association efforts at collection to be "repression" and "harassment." Some will get attorneys to defend themselves and to "negotiate" on their behalf. Never mind that they are really "negotiating" with their neighbors, with the intention of avoiding keeping agreements! You say I am being harsh? Ok, then you should be on your HOA board and when the time comes, you can vote to waive all fees. However, when an owner in a HOA doesn't pay their fees, hires an attorney and presses the board to make concessions, isn't it the rest of the owners who ultimately lose? I also ask, isn't it a role of the board, as fiduciaries, to protect your property values?

Returning to the core issue, the first thing for an HOA to do is to recognize that there might be a problem. The second thing to do is to develop a plan and methods to deal with the problem, should it occur. Oh, oh! You might be saying "There goes Norm on another planning and preparation lecture!"

As I stated in writing to a previous board, "We can do everything properly and things may go wrong." The question to ask your board is "What have you done?" I would also suggest, that any owner who steps up to the plate and asks that question, ask it of each and every previous board member of their HOA. This economic disaster began in 2007. It would be gross unfairness to hold a current board accountable, unless an owner were also willing to hold any and all boards commencing in 2008 to be also accountable.

Dealing with Delinquencies
Sweeping this problem under the rug is not an appropriate way for a board comprised of fiduciaries to operate. However, people are imperfect beings. I have to assume such sweeping does happen at some associations, and I also assume that some associations begin dealing with the problem when it becomes serious and such a problem that any stigma associated with being the "bad guy or gal" on the board is lifted by owners who flip and say "You are a board member, you've got to do something!" Eventually, when an association is in trouble, even the most complacent and socially conscious owners and board members may realize "Yes indeed, we've REALLY got to do something about this." Hopefully, by that time it isn't too late for the association finances.

I suspect the issues are greater at smaller, self managed associations. Many of these don't have professional management, who sometimes fulfill the role of the light house and warn "Dangerous Sholes Ahead! In a large association such as BLMH our boards have had professional management and legal guidance to draw upon for decades. That is, of course, no guarantee. A board may refuse to ask the hard questions, or cooperate and follow the advice of these professionals. If that occurs, there is nothing the rest of the owners can do, and eventually the association may have substantial and significant delinquencies. As far as I am concerned no association is immune or impervious to this problem. Apparently the CAI agrees.

It is the concern of the financial consequences of delinquencies that propels all boards to deal with the problem. The best boards tackle the problem head on, proactively and soon. Being a board member isn't a popularity contest. It's about protecting the interests of the entire association. Of course, no one likes to be the "bad guy."  I am also of the opinion that no one wants a fellow owner to experience financial hardship, or have to deal with that or potentially lose their home. Nevertheless, the issues of  delinquencies will trigger conversations about "fairness." But in the end, it is about protecting the finances of the association. Isn't being a fiduciary a "real burden?" Yes it is. But as stated in Matthew 22:14 "Many are called, but few are chosen." The chosen few will do their duty. The rest will pander, or waffle, or obfuscate!

Owners might want to become familiar with their association's procedures and this might be an important question to ask of the candidates when it is time for board elections.  Certainly any potential owner should ask these questions. If a board majority doesn't recognize delinquencies as a problem, or includes members who are struggling financially, it may become difficult for a board to remember that it is a business, and it may be difficult for the board to act as fiduciaries. Who can put their personal financial well being aside when making business decisions that will directly affect their finances? It's not easy. Many business owners have had to "bite the bullet" and take reduced salaries when times are tough. Some owners are the first in line when that time comes, preferring to spare their employees who are not directly responsible for the business decisions that led to the current financial events. It's my understanding that most boards are comprised of individuals with minimal business experience. So most board members have never had to make that decision.

There are actually several conversations about "fairness" which collapse into a general one. The first conversation is about how some of us seemingly are healthier, or wealthier, or happier or have fewer problems than others. There is sometimes a conversation comparing these lucky of fortunate people to others who are some considered to be "less fortunate." Then the question may be asked, should the "less fortunate" be given special treatment? Or, should those who are considered in the subjective sense to be "fortunate" be given the same treatment as those who are "less fortunate?" An owner who is concerned should ask the board "What bearing does such personal entanglements have for a fiduciary?"

There is a second conversation, and that's the only one that's appropriate when discussing rules, regulations, and fees in an HOA; that conversation is about association practices when dealing with delinquencies and foreclosures; those practices should be uniform.

When these two "fairness" conversations collapse, it can be difficult to deal with the core issues. For example, here at BLMH back in 2008 the concept of "fairness" and "justice" due to personal circumstance created a firestorm. The issue then was enforcement of rules. It isn't the role of a condominium board to attempt to adjust the circumstances of owners so that all owners are equally "happy" or "healthy" or have equal "wealth."

In these matters, board members should be treated the same as owners and all owners should be treated equally. In fact, as fiduciaries, the board is held to a higher standard. Of course, boards may not agree on a course of action, or the "fairness" distinctions. I'm of the opinion that in the worst situations a covert board group may form for the purpose of running a specific agenda.

I have a story about another interpretation of  "fairness." Some time ago, a dear relative of mine experienced extreme difficulty. At the time, some of her neighbors made said to her "You must have done some very bad things in your life to deserve this from the Lord." These were biting, hurtful comments, but it is something to think about.

What is the Goal for the Board In this Matter?
Ultimately, the goal is a well run association. This has several layers. What does that mean as a fiduciary? I would assume that it may include guiding owners to keep their agreements. In other words and as an example, guide owners to pay their fees. In that respect, firm and consistent rules about fees and good enforcement procedures may not only be beneficial, but may be essential. Having in place a structure that is a deterrent to those who might make poor decisions is a positive thing. Such a "structure for fulfillment" will retain association income, and will keep owners in their "homes." The consequences for the association may be trivial compared to the personal financial failure for an owner who becomes delinquent, goes to court, loses and is evicted from their unit. In fact, it is possible for everyone to win. Gosh! A "win-win" situation!

So I would suggest that it is one of many goals for the fiduciary board of an HOA to convince owners to "stay the course" financially and keep their agreements with the association. In the long run, that keeps owners in their unit and keeps the association finances steady.

I think this is a far more important goal that such obscure or subjective questions such as fairness.  In fact, if a board is successful in this, it has succeeded at all levels. Association finances are maintained, and all owners are taken care of.

I'd suggest that any potential purchaser think about this and interview the HOA board when they are making a decision to purchase. Who knows, some day they may find themselves dealing with extreme financial issues. If that day comes, wouldn't YOU want to know where the HOA board stands in these matters?


So what is a Board to do?
It's best not to get embroiled in personal issues. No one forced me, or any other "owner" at BLMH or any other HOA, to make a purchase. We each did it of our free will. When we did it, we agreed to be a shareholder in our association, and we also agreed to pay our fees and assessments, and abide by the Bylaws and the Rules and Regulations. In other words, this is really about keeping agreements.

Sometimes, that isn't easy. Sometimes, an owner must make choices.

It's really simple. Each and every owner has an agreement with the association, and that is to say, with their "neighbors." When an owner doesn't keep those agreements, it damages their "neighbors." Simple, and honest "straight talk."

This isn't about shame or guilt, so I want to avoid such discussion. When we get embroiled and begin telling our story, it may include concerns about "justice," "fairness" and so on. Such talk is intended to become fine points of argument, worthy of attorneys earning $150 per hour. It can create quite a diversion for a board. It can also cost an owner a lot of money in attorney's fees. The bottom line? Pay my monthly fees and keep my agreements and I can not only avoid those expensive attorney's fees, I can free my time up to deal with other things, or make a contribution to others, such as serving on my HOA board of managers!

When owner's don't keep their agreements with an HOA, there is a consequence for the association. All owners get benefits as shareholders. They get a new roof when it is necessary, the snow gets plowed, electricity and water is provided. "Yes, Virginia," in our association the fees pay for the electricity to operate  each owner's garage door opener! So, if my neighbors decided to stop paying their fees, I might have to open my garage door by hand.

When an owner makes the decision not to pay their fees, they also make the decision to let their "neighbors" pay for the association services. Any owner who is delinquent still gets electricity to open their door! Offsite owners, who rent their units and make the same decision, keep the cash they collect from their tenants and use it for their personal benefit. Yes, life may not be fair.

This may be a formula for mischief, but that is the way it is! It could create hard feelings among owners. The fabric of "neighborliness" may be thin when fees are involved. But this is the way it is, and it does put all kinds of stress on associations. An owner may avoid paying their fees, and then go to the neighbors and badmouth the board. An owner can even get on their high horse and talk about association repression, etc. Why not? These are difficult economic times and there is always evidence that the board of volunteers isn't 100% up to the game. Some of the neighbors will be clueless! They may buy into any argument which is based upon "Oh, our lives are so difficult!" Or, "The world is such a mess, no one is competent!" It's a perverse system in which people get to run their personal agendas. The "volunteers," the people who are fiduciaries and are working to protect the finances of the owners, they get slandered, while others pretend they are the victims. And too many are willing to believe it, or pass the slander around. A few are even willing to blame the board because they can't sell their unit! But very, very few are willing or able to ask the important or difficult questions.

How to deal with this? Well, until the economy rights itself, these problems will continue; there will be no "quick fix" or final solution. There will be no easy way. Some owners will act a facilitators and stir things up, others will join. Many will pay their bills and avoid the politics. Currently, there are a lot of people in the U.S. who feel trapped in their personal situation. Some of these will lash out at any authority within reach, and boards which make unpopular decisions can be a prime target.  Some owners may be willing to take advantage of the situation.

Some owners will make poor financial decisions. Some will get caught up in the problems of this economy, or experience financial misfortune. I am of the opinion this will continue to be an issue for associations and the volunteers on the boards.  Those boards will have to deal with this and make the difficult, and at times unpopular decisions. I suggest they forge close ties with professionals, and use that advice to guide them.

The final question for a board to ask is "Are we doing our duty as fiduciaries?" If there are doubts, talk to management about the concerns. I don't think it's about perfection. Difficult decisions are literally "difficult!" The questions to ask include 1) What procedures should this association have in place? 2) Are those procedures being followed?  3) Are the professionals involved and are they asked for their expert opinions? 4) Are the issues discussed thoroughly and with the entire board? 5) Is all of the foregoing part of the decision making process? 6) Is any single decision for the good of the association?


What's a Delinquent Owner to Do?
First, an "ounce of prevention is worth a pound of cure." So read my next post on budgeting! However, if I found myself to be in financial difficulties and it was possible I would become delinquent, I am of the opinion it would be very prudent to contact the management of the HOA and say "I want to meet with the board and management to discuss a private financial issue." Then, I would schedule a time to meet with the board and management. Prior to a monthly board meeting, or during "executive session" is a reasonable way to do this.

The goal in this meeting is for the owner to get information as a guide in making the best possible financial decision for themselves. When one is experiences serious financial difficulty, there is no perfect solution. Some bills will not be paid or will be delayed. Some personal services may have to be reduced or cut. An owner should be aware of the position of their association as a creditor. Illinois allows forcible entry and detainer. What is that? Do you know?

An owner should figure out their expenses and come up with a plan to pay the critical bills. Protection of assets is important. Their unit is an asset. For many who go down the road of delinquency, it may become a  "downward accelerating spiral." However, it doesn't have to be that way. We read every day in the newspapers about foreclosures and housing that is "underwater." Yet, many people do keep their homes. So getting into financial difficulty does not automatically result in financial failure. However, avoiding the worst does require planning, adjustment of lifestyle and payments to creditors.

An owner can seek legal advice. However, it's important to remember that once lawyers become involved, be it for the association or the delinquent owner, that will result in legal fees for the owner. If the association or the owner uses a lawyer to deal with this, it does require the payment of those legal fees, and in our area these may be $150 per hour. As the treasurer of our association has stated in the association newsletter, she has seen legal fees that became one-half of the amount owed by a delinquent owner to the association. Is that a good use of one's money? I personally prefer to avoid late fees, interest on credit card debt and so on. Of course, some of this cannot be avoided. However, taking on additional debt when one is dealing with excessive debt is a voluntary decision and that can be avoided.

As I stated in a recent post, "A board comprised of fiduciaries is a unit owner's last line of defense. Certainly all of our owners at BLMH know that!" Frankly, after living here for a decade, I have decided that some owners DON'T know that!


"What's the Bottom Line for a HOA board?"
Lead by example, keep your agreements and operate as fiduciaries. There are difficult decisions to be made, and by that, I mean 'imperfect' decisions. When we say it always isn't 'black and white' but sometimes 'shades of grey' that's exactly what I'm talking about. I also suggest that board members remember we are attempting to operate with guide lines set by the legislature in Springfield. Those guide lines don't address every issue, nor do they make the decision making process easy. I guarantee it won't be easy. Some of your fellow owners will enjoy throwing mud at you. However, in the end, you can honestly say "I kept my word as a fiduciary and I did my best." That's the best one can expect.

Notes:
1. I am somewhat tired of people who attempt to blame their association for the way it is.