Newsletter

Given that over 99% of Homeowner Associations (HOAs) waive the late fees and interest that were charged to the homeowner’s account due to non-payment or late payment of the homeowner’s assessments, one might ask “why does the HOA charge late fees and interest in the first place?” Obviously, given the aforementioned waiver rate, it can’t be for revenue generation and although punishing the delinquent homeowner may play a role, it certainly isn’t the driving reason.

Clearly, the reason for this is to get the past due assessments paid and brought current, so when an account is placed at a collection agency, the primary objective of the collection agency is to get the assessments paid in full. Once this objective is achieved and the collection fees are paid in full or settled in full (partial write-off or full write-off of collection fees), the Notice of Claim of Lien for Delinquent Assessments should be released and the account should be closed at the collection agency.

Closing the account in collections does not mean that the homeowner does not still owe the HOA for late fees and interest. It simply means that the collection agency is no longer involved. The collection agency was charged with recovery of past due assessments and that charge will have been satisfied. There are a host of reasons why an account should not remain in collections for late fees and interest only:

1. Federal and State governments take a dim view of third-party collection agencies that collect late fees and interest on behalf of their clients. In many ways, this is the golden age of HOA collections. The passage of SB306 and the Super-Priority covering 100% of delinquent assessments (provided your collection agency has done their job correctly) has made foreclosure virtually unnecessary. The last thing anyone needs is killing the goose with the golden eggs by drawing unwanted scrutiny.

2. If an account is paid in full sans late fees and interest and is not closed, the homeowner will not get a statement. In some cases, the account could stay in collections for months or even years without a single statement going out to the homeowner. Moreover, the late fees and interest are still not getting paid and the homeowner will likely have no idea that they are delinquent and will likely think everything is fine with their account. This can cause bad blood between the homeowner, the management company, the collection agency and the HOA. A homeowner not receiving a statement is bad for everyone.

3. As stated earlier, closing an account with late fees and interest outstanding does not mean that the homeowner does not owe a balance.

4. Third-party collections is successful because of leverage. The leverage in HOA collections is a collection process that leads to foreclosure. Since no one is going to foreclose on a homeowner for late fees and interest only, there is no leverage. If there are outstanding late fees and interest on a property, the HOA can still recover this balance through the enforcement of their lien at the time of property sale if necessary.

5. Red Rock Financial Services routinely writes off a portion of its fees if it means the HOA getting paid in full for their assessments. Your collection agency may do the same, albeit unlikely. Red Rock does this to achieve the objective of getting the delinquent homeowner’s assessments paid in full and get them out of collections. Failing to close the accounts runs counter to this objective.

One last thing that should be considered is the fact that in all other forms of collections with exception of lending, there are either no late fees and/or interest charged by the client or the late fees and/or interest is written off by the client if the account is sent to a collection agency. HOA collections is the only non- lending entity that even remotely expects their collection agency to collect late fees and interest on their behalf. As stated, the normal course of business is to write off late fees and/or interest on any account that is sent to collections. Property management in the apartment industry always writes off late fees and/or interest on accounts sent to collections.

If an HOA does write off late fees and/or interest (the 99%) after the account is closed in collections then it is important that this physically gets done. Better still, write off the late fees and/or interest before it comes to collections. If this is not done, what might happen is the homeowner’s assessment payments may end up being posted to late fees and/or interest causing the homeowner to become delinquent over time on their assessments and end up back with the collection agency. This is tragic for all the reasons previously mentioned.

I bumped what I had already written for the April newsletter because I think this topic is important at this time, however, what I am about to share is true regardless of the current crisis we are all experiencing.  It is the truth and it is said with the utmost of compassion.  Our values at Red Rock are always to collect with honesty, integrity and compassion.

I know y’all have been getting a lot of input as to what y’all should be doing with respect to collecting your assessments from a variety of entities.  I would name them, but blood will just shoot out of my eyes, making it impossible to write this.  All I want is for y’all to consider all of the facts.  The aforementioned entities have a good heart, I do not doubt that, but there is a degree of ignorance because it is based on a false premise.

The false premise is that homeowners do not pay their assessments because they cannot afford it. 

The fact is that only 13% of accounts that come to collections are because the homeowner cannot afford the assessments.  7% of the accounts come to collections because something went wrong with their auto-pay or they just weren’t paying attention.  That leaves 80% for the real reason.

That reason is that the homeowner chose either subconsciously or consciously not to pay their assessments.  This happens because they believe the order of making payment is as follows:

1. Mortgage
2. Vehicle payment
3. Utility payments
4. Other loan payment
5. Credit card payments
6. Cell phone payment
7. HOA assessment payment

They fail to realize that the order is incorrect. It is not until they get to collections that they realize that their assessment delinquency is leveraged by a lien on their property and that in the state of Nevada the HOA is on equal footing with the lender, so they could ultimately lose their home.  The fact is that their HOA assessment should be Number 2 on the above list.

We all want to help the homeowners.  For example, Red Rock routinely writes off a portion of their collection fees to help homeowners even when there isn’t a crisis, including $90,000 in 2018 and $70,000 in 2019.  During this time of crisis, we want to help them even more with payment plan deferments, extended payment plans as well as collection fee write-offs.  However, we cannot do all of this if y’all don’t send us the accounts.

Obviously if y’all vacate the assessments, that would be a real help.  If y’all are not in a position to do that, the next best thing you can do is get them on a payment plan yourselves to avoid collections.  This has been suggested by the unnamed entities.  The problem is that y’all already do that.  You always have.  Your management company sends the pre-collect letter virtually begging the homeowner to get on a payment plan to avoid collection fees.  The reason so many homeowners ignore this plea is because they fall into the 80%.  The reason the state of Nevada created the pre-collect process and put it with the management companies instead of the collection agencies was to help the homeowner avoid collections.  Nothing has changed in that regard.

I want homeowners to avoid collections, but if they come to us, I want to help them.  I want to educate them, so they don’t come back to collections.  I want to give them a break whenever possible.  I especially want to help them in this time of crisis.  Letting the homeowner’s assessments just pile up into a larger balance and then sending them to collections anyway in 90 days is throwing them an anchor, not a life preserver.  Besides, in most cases we are talking about a very small balance.  Postponing $300 in assessments isn’t doing much at all unless it is part of a payment plan.

During and after this crisis, there are going to be more homeowners that fall into the 13% instead of the 80% and they are going to need not just your help, but our help as well.  We intend on being there for them.  The fact is everyone is going to want to get paid when this is over and some homeowners are going to have some tough decisions to make.  I am convinced that it is better that we help them now, not later.  By all means, as always try to get them on a payment plan, but if that fails, send them to collections, so we can help them. (I realize that not all collection agencies conduct themselves like us, so you should take that into consideration as well.)

Stay safe and if you ever need anything or have a question, I am available 23 hours a day, 7 days a week.

As a member of a board of a homeowner association y’all find yourselves having to assess penalties to your neighbors for violating the governing documents.

Fines (non-Health, Safety and Welfare)

The collection process only goes as far as the Notice of Claim of Lien which means that y’all can’t foreclose for fines. Given that people are not as aroused by a lien as they once were it means that there is virtually no leverage.  If you have been reading my previous newsletters you know that without leverage there is no collection.  The majority of homeowners know that there is little you can do to them for non-payment of fines as it is as easy going on the Google to find out this information.

Payment of this debt usually comes if and when the homeowner is trying to sell their property as the violations have to be addressed as part of the closing.  This means that both the HOA and the collection agency are waiting a very long time to get paid and even then the homeowner is likely going to seek a reduction in the balance.  The solution is to attempt to get the homeowner to address the situation sooner, not later.  To that end, our agency for example, encourages the homeowner to work it out with the board and to provide incentive to do so, we offer a 50% reduction in our collection fees.  Professional collections is about leverage and creating a sense of urgency.  Resolve it today, not tomorrow.

Fines (Health, Safety and Welfare)

This is a horse of a different feather.  The collection process goes all the way to foreclosure as Health, Safety and Welfare (HSW) violations are treated for all intents and purposes as assessments.  One important point to be aware of is that the lender is not going to pay the super-priority on HSW which means that foreclosure is the only ultimate remedy which brings up two possible problems at sale.

The first is that HSW balances can run quite high and it is unlikely the property will sell for such a high balance.  Properties with HSW are usually as a result of squatters or some sort of illegal activity.  The solution is to reduce the HSW balance to a more attractive sell point.  The second problem is that because no super-priority was paid by the lender, the individual who purchases the property at the auction is likely going to seek clear title which could cause a problem with the lender and no one wants that.  Before a board decides to sign the paperwork to proceed with foreclosure on a property that involves a lender for HSW only they should seek legal advice from their attorney.

Please note that it is rare for a property to only have HSW as usually past due assessments will be a part of the collection file, in which case the super-priority would be paid by the lender for the past due assessments.  If the board decided to move forward with foreclosure to recover the HSW, the super-priority payment would be cried at the sale and the individual purchasing the property would be aware that they cannot get clear title.  The individual knows that they are acquiring the property only to rent out until the lender forecloses.

This represents an ideal situation as the HOA gets paid, the squatters or drug dealers are booted out, the property is fixed up (violations remedied) and an assessment paying homeowner is now involved.

In April’s newsletter I explained the what and why as it relates to the difference between an HOA collection agency and a traditional third party collection agency.  The differences are significant, so it is important that an HOA consider carefully their choice for an HOA collection agency.

1. You should be looking for a collection agency that actually follows the collection timeline that is used in the industry. Failure to follow the collection timeline will result in less money being recovered for the HOA and will cause significant delay in receiving funds from the agency.  This seems like a no brainer, but I can assure you that this is a “hit and miss” with many HOA collection entities (using “entities” as attorneys are in the collection game too)
2. One of the reasons that the collection timeline is a “hit and miss” is the fact that many collection entities do not possess the collection software system to effectively move accounts through the collection timeline as well as the efficiency needed to recover the money that is owed to an HOA.  You need to ask about the collection software system being used and obtain verifiable proof of said system.  If the collection entity is using a software system designed by Fred Flintstone or worse, using a manual system, you do not have to be a rocket surgeon to know that the collection results are going to be less than good.  You need to make sure the collection entity has the tools needed for the job.
3. You should be looking for a professional collection entity. Collections are a profession. Collections should not be a part-time gig done on the side as part of a larger enterprise.  Your accounts shouldn’t be sitting in a virtual pile waiting for someone to get to them once perceived other priorities are completed.  Your collection entity should be steeped in experience and knowledge.
4. You should be looking for a collection entity that has integrity and shows compassion for your homeowners. Because of the no cost model in Nevada, homeowners pay the collection fees and the collection fees go up dramatically as the account moves through the collection process.  This means that a collection entity stands to make more money in the later stages of the collection process.  In other words, make sure that the collection entity is trying to resolve the debt as quickly as possible with compassion for your homeowners.
5. You should be looking for a collection entity that is following federal and state laws. Say what?  I know of at least one collection entity in the state of Nevada that routinely breaks the law and brags about it.  Do not assume that your collection entity cares about compliance or that because the collection industry is so heavily regulated that all laws are being followed.  Having been in the collection industry in one form or another for almost 30 years, I could tell you some horror stories that would turn your stomach.

Collections should be conducted with honesty, integrity and compassion

The passage of SB306 in October of 2015 changed everything in terms of how HOA collection agencies should be collecting for their clients (the HOA) as well as how the clients and their management companies should be approaching the recovery of delinquent assessments.

What SB306 effectively did for HOA collections is that it made it crystal clear what the lender had to do to protect their first deed of trust on properties that had an HOA with delinquent assessments.  The lender has to pay the Super-Priority, which is up to 9 months past due assessments and up to $1,365.00 in collection fees. If they fail to do this, they are left with redeeming the property after foreclosure or risk their position to be lost to a buyer at the foreclosure auction. Since the passage of SB306, the lenders have been tripping over themselves to pay the Super-Priority quickly as it is their “get of jail free card.”

Typically, after the lender makes the Super-Priority payment, the amount is added to the principle balance of the mortgage loan, so they actually make money off the transaction. The HOA benefits from the fact that the Super-Priority payment is made at the Default stage, not the foreclosure sale stage, as the property should only be delinquent about 7 months at the Default stage. In other words, the HOA will always be made whole and the need to foreclose on properties that involve a lender have gone the way of Fred Flintstone.

The virtual elimination of the need to foreclose by virtue of the Super-Priority being paid by the lender has eliminated the “wrongful foreclosure” lawsuits that we saw prior to the passage of SB306. Note: to my knowledge, there has not been a single wrongful foreclosure lawsuit filed in the state of Nevada for activity that happened after the passage of SB306. Think about it.  Why would the lender sue if their first deed of trust has been protected by paying the Super-Priority?  The investor buying a property at the auction on properties that went to foreclosure over and above the 9 months past due assessments cannot get clear title anymore and they know it. (It is understood that the lenders do not agree that the investors ever had clear title, hence the lawsuits.) The point is that everything is above board, black and white and everyone knows where they stand now.

It behooves the HOAs and their management companies to get delinquent properties to their collection agency as quickly as allowable by law in order to take full advantage of the current HOA collection environment. The collection agency then must get non-paying delinquent properties to the Default stage as quickly as possible to ensure that the HOA is made whole on all delinquencies.  If the collection agency fails to do this, then they have failed.

What I have described above applies to delinquent properties that do not pre-date SB306.  This old inventory must move to foreclosure in order to get the Super-Priority paid if not already paid or to recover any delinquency not covered by the Super-Priority payment through foreclosure. This does not mean that an HOA will have to actually foreclose. In many cases, the lender will pay the balance in full prior to foreclosure. (I am not sure why the lender does this. I just know that in the past year this has become quite common.) Moreover, 93% of delinquent property owners who get to the foreclosure stage either pay in full prior to the auction or put 20% down on a last chance 9-month payment plan.

I reckon this was a lot to digest, so let me bullet point what needs to happen if an HOA wants to significantly reduce their assessment delinquency in today’s HOA collection environment in the state of Nevada.

1. Get delinquent properties to the collection agency as quickly as possible.
2. Make your collection agency accountable for getting the properties through the collection process as quickly as possible within the law so as to take full advantage of SB306.
3. Sign the paperwork to proceed with foreclosure whenever it becomes necessary. Do not give away your leverage!

Again, I am not an attorney. My knowledge is based on firsthand, on-the-ground experience and reruns of “Matlock.” Always consult with your attorney prior to making any changes to your collection policy.

HOA collections and traditional collections are about as similar as apples and bananas.

HOA Collections

1. Virtually no outbound collection calls.
2. No reporting to the credit bureaus (leverage).
3. A lien maintained by the HOA that is the instrument used to foreclose on the property (non- judicial).
4. Actual foreclosure of the property to recover debt owed (leverage).
5. Debt recovery rate in the first 150 days of about 60% (Red Rock rate 89%).

Traditional Collections

1. Multiple outbound collection calls often using a “dialer” (usually 3 to 5 calls per week).
2. Reporting to the credit bureaus (leverage).
3. No legal attachment to debt.
4. Possible judgment obtained through court system.
5. Annual debt recovery rate of about 3%.

As you can see, these two types of debt collection have very little in common in the method used to collect the debt as well as the results obtained.

It is important to point out one fundamental fact about debt collection and that is the fact that that without leverage there is virtually no debt collection.  In traditional collections the leverage is negative reporting to the credit bureaus.  In HOA collections, the leverage is foreclosure.  Without the specter of possible foreclosure, there is virtually no leverage.  Homeowners today are for the most part unaroused by the HOA’s lien unless the HOA is prepared to use the instrument.

Our view of debt and individuals who have debt, but cannot or will not pay their debt has changed dramatically since the days of debtor’s prison and indentured servitude. 

Obviously, accumulating debt and the incentive to pay one’s debts changed and the need for a professional approach to recovering unpaid debt gave birth to the collection industry that exists to this day.  As one might expect, it is a highly maligned industry despite being heavily regulated at both state and federal government levels.  For the longest time, collection agencies would employ any method possible to collect debt for their clients including, but not limited to lying, threats and harassment.  Today, these methods are all against the law and have been for a very long time, but they can still happen.

As usual once government gets involved unintended consequences are bound to occur and today the collection industry is under assault from both government and parasitic attorneys.  The result of this is that it is difficult for collection agencies to operate and ultimately recover debt effectively for their clients.  The collection industry has thus morphed into something quite different and the best practices employed by the industry to deal with government and litigation have created an ugly truth that I will share with you, but first I want to give you two examples of assault by government and attorneys that is germane to Nevada.

First, with respect to government, one of the most prominent politicians within the last 20 years in the state of Nevada (who shall go nameless) stated publically about 5 years ago that it was he or she’s goal to get rid of every collection agency in the state of Nevada.  It was their opinion that all people that had debt and couldn’t or wouldn’t pay were victims and that any entity that wanted to recover debt that was owed to them should be deprived of having a professional debt collector collect their debt.

Second, about 6 years ago an attorney firm in the state of Nevada (who shall go nameless) filed approximately 40 lawsuits in one day against various collection agencies, hitting some of them more than a dozen times.  The accusations were for the most part completely false, but since the goal wasn’t to go to court and prove the accusations it didn’t matter.  The game was and is to settle for between $3000 and $5000 a pop since defense of the accusation would cost the defendant far more.  Do the math.  An average of $4000 a pop times 40 pops equals $160,000.  Not bad for days work, huh?

The aforementioned may indicate that I am trying to make you feel sorry for collection agencies, but I can assure you that is not my intention.  I am simply pointing out the reality that collection agencies face and how this reality influences how collection agencies operate today.  Please note that I am talking about legal collection agencies that are licensed, not the criminals who misrepresent themselves to con the public into giving them money.  I think we have all heard about these unsavory characters who usually prey on the elderly and say they are with the IRS etc.

Non HOA collection agencies operate by collecting money through past due notices and making calls to debtors, using negative credit reporting as the leverage for the collection.  Because every call can result in a potential lawsuit,

reducing the number of calls and increasing the effectiveness of each call becomes paramount, so most collection agencies employ some sort of sorting tool or tools that identify which accounts are most likely to pay.  This reveals the ugly truth and that is that the collection agency is motivated to collect on the accounts that are the most beneficial to the collection agency, not their client.  Not all clients will be treated equally and not all accounts within the client’s portfolio will be treated equally.  The result is what is known as “creaming”.  Collection agencies cream the accounts placed with them which is one of the reasons that the national collection average is less than 4%.  In other words, collection agencies only actually collect less than 4% of all the potential debt given to them.

Please note that what I have described does not apply to HOA collections.  This first part in the series was to provide some information about collections in general as well as provide some context before we move onto the next three parts.

April                “Why HOA Collections are Different”

July                  “Where HOA Collections in the State of Nevada is Today”

October           “What you should be Looking for in a Collection Agency”

When one hears the words “Collection Agency”, the words dread, disgust and dishonest come to mind.  This is not for no good reason as being in collections is not a pleasant experience and the stories most people have heard about collection agencies are virtually all negative.  Because of the negativity associated with collections most people really don’t want to know the nuts and bolts of the collection industry never mind the unique qualities of HOA collections.

Starting with the newsletter this coming January, I will be presenting a four part series on the collection industry and specifically the HOA collection industry in the state of Nevada.

January            “The Ugly Truth about Collection Agencies”

April                “Why HOA Collections are Different”

July                  “Where HOA Collections in the State of Nevada is Today”

October           “What you should be Looking for in a Collection Agency”

In “The Ugly Truth about Collection Agencies” you will become familiar with how non HOA collection agencies operate as well as the evolution of the industry over the years.  You will learn that not all collection agencies are created equal.

In “Why HOA Collections are Different” you will discover that HOA collections are significantly different than regular collections and in the state of Nevada, HOA collections bears little resemblance to its ugly cousin discussed in Part One.

“Where HOA Collections in the State of Nevada is Today”, will give you an overview of the current HOA collection climate as well as how the HOA collection process fits into that climate.

The final part in the series, “What you should be Looking for in a Collection Agency”, will help you with choosing a collection agency as well as examining whether your current agency is right for you.

Yes, this newsletter was one great big tease, but given that this series will be dealing with subject matter that is not for the faint of heart, I thought it best to prepare you.  Some of you may be excited to learn about collections whereas others may want to avoid it completely.  Hopefully, y’all will take the journey!

In the olden days before the Google, most people would balance their checkbook on a monthly basis.  The process was simple, write a check, enter the transaction in their check register that the bank had graciously provided with their blank check order and finally balance that check register with the paper statement that the bank sent out each month. This changed slightly with the advent of the ATM and the debit card, but the principle was the same.  The person would enter the ATM and debit card transactions in their check register and balance these transactions with the paper statements sent by the bank each month.

Today, everything is electronic.  People hardly write checks anymore and cash is no longer king.  Multiple electronic transactions are being made from people’s bank accounts every day, including debit card, bill pay and auto-payments to name just a few.  With all of this activity happening to people’s bank accounts you would think that now more than ever it would be important to monitor one’s bank account and more importantly make sure the bank account balances.  Unfortunately, this is not the case.  For some strange reason people have stopped “balancing their checkbook” because it is all “electronic” now.

10% of the accounts that are sent to us for collections are sent to us because an electronic transaction did not go through as intended and the homeowner never noticed or cared to even look at their bank account.  They were quite comfortable giving a stranger access to their bank account and assume that it was going to be just fine.

These homeowners have no business being in collections.  Collections is for two kinds of people, those that cannot afford to pay or refuse to pay.  It is sad that people end up in collections because of an electronic transaction gone awry.  Even sadder that they are now faced with late fees and collection costs.

I know collection agencies don’t think it is so sad.  After all, these types of collections are a cash cow.  Debtors that have the money to pay and aren’t refusing to pay?  Beautiful!  RRFS is not like that.  We genuinely want to help homeowners get out of collections.  Moreover, once they are out of collections, we don’t want them to come back.  We take the time to educate them and remind them that now more than ever they need to balance their checkbook.  They need to check their bank account each month to make sure their electronic transactions came out of their account and for the correct amount.

It would be my hope that y’all could remind your homeowners in your newsletters or other communications the importance of monitoring their bank account and balancing their checkbook to avoid the unpleasantness and added expense of being in collections.