HOA Collections

Javier Delgado: It is 12:01 and welcome to HOA Collections. Today is October 1st, 2024. If you’re watching this in the future, make sure that you check in with your favorite CHDB Law attorney because, much like the seasons, the law can change. We’re here to talk about HOA Collections. I’m co-presenting today, and I’m really excited to co-present today with my co-host, Charlene Cruz.

Charlene Cruz: Hello.

Javier Delgado: She has almost 15, 20 years of experience, the vast majority of it in HOA Collections. And I say that, Char, because the last year has felt like five years and I see some grinning out there. So for all of you who have some collections experience, ladies, gentlemen, you know what I’m talking about. It’s been a pretty wild year. Let’s get started. Char, would you mind keeping an eye on the chat-

Charlene Cruz: Yes.

Javier Delgado: … while I advance the PowerPoint? Okay, perfect. All right. We’re going to start out with some basics. We’re going to bring in some information about foreclosure. We’ve got a nice size group. If you have questions, feel free to put them in the chat, try to raise your hand. We’re going to do our best to acknowledge them. If we don’t get to them right away, we should have some time at the end, and we would like to answer your questions to the best of our ability. All right. For those of you who are not collections professionals, we got the golden rule. I got it on the screen here, Char. Char, what does this mean to you as you co-head up our collections practice and you’re helping our clients recover their assessments?

Charlene Cruz: Hello everyone. I think the collections golden rule is pretty simple. The longer you wait to get paid or the longer you wait to enforce your collections’ policy, the longer it takes to collect, the harder and more expensive it is, and the worse your results.

Javier Delgado: Yeah, so really you got to move quickly, right Char?

Charlene Cruz: Yes.

Javier Delgado: Because bad things can happen. There are lots of challenges to the way that we recover assessments. People live but they die. People buy homes, they lose their homes. People get jobs, they lose their jobs. So there’s lots of things out there. It’s an art, not just the science, that’s what the law is, but particularly with collections. And so some of this is sort of we’re following the feel, what’s the right fit for your community, for the account and for what’s happening out there right now, not only in the market, but what we see coming around the corner. So speaking of what’s coming around the corner, something that hit us head on just about two years ago at this Prop-209, Charlene, you have been our point person on this. For those of you who don’t have a background in garnishment and why would you? You’ve got a day job. Char, walk us through where we were, where we are now, and how it’s impacting the advice that you are giving your clients on a daily basis in terms of how they should be collecting.

Charlene Cruz: Sure. So in Prop-209, it was a voter initiative in 2022 that started in California and it was aimed at protecting assets from judgments related to medical debt. However, the way it was drafted, it affected all civil judgments, including HOA civil judgments that we would typically get against a homeowner in their personal capacity. We would call them money judgments. So before Prop-209 became effective and we obtained a money judgment against a homeowner, garnishment was our regular method of collecting judgments that owners weren’t voluntarily paying. And at that time, we could collect up to 25% of their wages. The income threshold was easy to meet and, typically, we did an analysis at the time when this log became effective, and the typical garnishment in justice court, which was about $2,500, took an average of three months to collect. But in light of Prop-209, the purpose of it was to shield wages, bank accounts, personal property, and the homestead exemption assets, those assets from civil judgments.

So after Prop-209 became effective, instead of the 25% garnishment rate, it became 10% of what we could withhold or garnish to satisfy a judgment. And that’s after they met an income threshold which was much higher. I think it was double than the prior threshold, and at that time it was about $55,000. So what that means is if you’re making $55,000 or less, here it was $54,600, you’re essentially exempt from wage garnishment. So an owner would have to make that amount first before we can get the 10%. And if they displayed any kind of financial hardship, which the courts were lenient on granting, then that garnishment rate went from 10% to 5%. The key thing is the average salary in Arizona was below that threshold, so close to half the people were essentially exempt from garnishment.

So that garnishment prior to Prop-209, that was $2,500 and took three months to garnish, is now taking at least six years to pay in full. And we also looked into numbers and the average length of employment is two to three years. So even if we were successful in finding employment in two, three years, we might have to restart that garnishment process if that owner changes jobs and we were able to locate it just to satisfy the remainder of that judgment. So I think one of the unintended consequences of Prop-209 is it was pushing us more towards foreclosures because these money judgments that we were obtaining were essentially futile.

Javier Delgado: In short, we for years, I’ve been here 22 years, I can’t believe it Char, 22 years. I know people who’ve gotten married, have kids, have gotten divorced even three times in that time period, 22 years. We’ve done tens of thousands of personal money judgments and tens of thousands of garnishments, but we’re just not doing them anymore. Lost changed. So what are we doing? We’re doing foreclosure and we’re doing a lot of it, because not only is that where the law has pushed us into, but because frankly it works. Charlene and I put together two charts. The first chart on the left-hand side is an amalgamation of foreclosure results over the last 10 years or so. And what you see, is that about a third of the time people are paying before the foreclosure judgment is obtained but after it’s filed. Another third of the time before the property is sold, and then some different things might happen. Again, this is thousands of accounts over the last 10 years. We took a look however at results during this year and it’s probably better to say last year as well because we saw this pattern emerging in early 2023, but it’s been a lot different in a much more positive way. So Charlene, what are you seeing in terms of the differences? In terms of the results?

Charlene Cruz: What I’m seeing more now is … so in the last 10 years on the left-hand side, there was left-hand side, it was pretty equally split where eventually you’d get paid, but it was pretty equally split from after the foreclosure was filed, after judgment was obtained and then a mix of after the sale happened. Now I’m seeing a significant increase in the association getting paid after the filing of the foreclosure lawsuit, but before the judgment is obtained, and it’s about 62% of owners reaching out to us.

Javier Delgado: Sure. I was talking with you Charlene, you were mentioning a story the other day about owners getting phone calls by these third-party investors. I think it’s important for the audience to hear what’s really happening out there in the trenches. Can you share that story with us?

Charlene Cruz: Yes. So if you’ve gone through a foreclosure process with us, I think it’s pretty much known that the people who are at the share of sales are investors. They’re the same people. If you go to these things at the same five or so group of people who represent different entities, and they’re there to bid on HOA judgments at the share of sale. What I see a huge uptick in now is part of our process when we do a foreclosure, because it’s a judicial process, we do record what’s called a notice of lis pendens, and that’s recorded with the county, and that puts everyone on notice that there is litigation regarding this subject property. And so that gets recorded when we filed it. Immediately after we filed the lawsuit gets the case number, we go to the county recorder and we record it.

Before it’s even getting served, these investors are scouring through the recorder site and picking up recorded lis pendens and then reaching out to that homeowner before our process server is even making attempts to serve them with a lawsuit. And so an owner reached out and said, “Hey, and someone called me and there’s a lawsuit regarding our house and I want to pay.” So they’re reaching out to us immediately after the lis pendens is filed recently and offering to pay immediately. So I think it’s really helping with these investors who are looking up recorded notice of lis pendens and reaching out to these homeowners. They’re prompting them to reach out to us to either pay in full, or offer a settlement of some kind of resolution for the board to review.

Javier Delgado: You used to go downtown and attend these share sales, but it doesn’t sound like you’re going as much as you used to. Is that right, still?

Charlene Cruz: That’s correct. So even if a lot of them are paying upfront, there is still a few that we end up at the judgment, and very few now we’re setting the sale. And even if the few instances that there is a sale the day before, even the morning before the sale, the sheriff’s office is contacting us saying, “Hey, someone came and paid in full. Sale’s canceled.” So ultimately, the outcome is the same where in most cases with foreclosures, even though it’s aggressive, the association gets paid. But what the biggest trend we’re seeing now is you’re getting paid much sooner in the process than it has been in the last 10 years.

Javier Delgado: We’ve thought it was important to share this information with you all because we know that a lot of you are trying to figure out, “Hey, what are my best options here? Are there alternatives to foreclosure?” And there are. You can sue someone, you can garnish their wages, you walked us through how that’s just more complicated. It’s slower, it’s a lot riskier. So there are options, but would you agree that there aren’t any great options compared to foreclosure?

Charlene Cruz: Correct. I agree. In the big picture, it’s really simple. Owners get it, they just say, “Foreclosure,” they say, “Okay, fine, I get it.” Most of those homeowners don’t dispute, they owe assessments, they know they haven’t been paying. So they’re coming forward and offering to pay. There’s some questions here, Javier, in the chat that I’m just going to jump into before we move further if that’s okay?

Javier Delgado: Sure.

Charlene Cruz: So someone’s asking, “Well, I know we cannot lean for fines. I feel it is important to collect fines as it puts the teeth into the compliance. Is there best practice for a minimum amount to go after, $1,000, $2,000, $10,000, $20,000? And in what court do we go after them? Would it be fair for the good people to pay their fine and then just basically forgive all the fines for the naughty people who do not pay and just rack up fines?”

So my response to that is you’re right, fines aren’t secured by the lien. I think my general answer to your question is it depends on the amount of the fines and it depends on the violation, but more importantly, if the fines remain outstanding. We’ve had some situations where owners want to collect, the violation wasn’t in dispute, and the owner, they racked up $30-$40,000 in fines, for example, for short-term rentals. But it’s our experience if the violation has been cured and that those fines are just to motivate compliance, it would be difficult from our practice for a judge to award fines and legal fees if the violation has been cured. But it would be, I recommend reviewing that on a case by case basis. Typically, the amount, if it’s over $10,000, it’s a jurisdictional issue. So that would go to superior court. Anyway, to answer your question completely, and even if the fines aren’t paid, it’s not that the good people are paying, it’s not hard money incurred by the association.

So even if you write it off, it’s not like the association is losing money if those fines are written off. The second question here is what if you have a board that is adamant that they will never take someone’s home and will not sign off on foreclosure? I’ve tried to explain the new legislation that makes foreclosure the best option. How would you combat that? My simplest answer is over 90% of the time, these people want to keep their home. They’re going to get paid. And from our experience, homeowners associations aren’t in the business to get people’s homes, it’s to collect the money. And foreclosure is just a tool, especially since Prop-209, that is successful in collecting those assessments.

And my experience, from the slide here, less than 2%-3% of the time, the association’s going to end up with that home. It’s a very, very small chance that the association will end up with a house, or even it’ll get sold to a third party, because it’s our experience that the owner comes forward and does want to pay those delinquent assessments and avoid foreclosure. Either they’re living in it, there’s equity in it, it’s a rental property. I just don’t see a situation where people are easily giving up their home. And then the third question here, what about garnishment of rents on investment owners that they don’t pay? That’s still allowed, but that’s also the threshold for rental garnishment I think is also different and was affected by Prop-209. And my experience is even if you could do it’s hard to time the garnishment, because my understanding is the court process requires it to be served when the rent is due in order for the order of continuing lien or the judge to sign off and order the tenant to pay. And another hurdle is to get the tenant’s information in order to file the garnishment. And I think from everyone’s experience, landlords are hesitant to share tenant information. Yes, tenants always do not participate willingly. And that’s … Yes, correct.

Javier Delgado: All right, well let’s talk about some of the technical aspects of foreclosure. Just by way of background for our audience members, it’s been this way for quite a number of years. For those of you who aren’t familiar, there is a requirement that as of the date that the foreclosure lawsuit is filed, a slight clarification as part of this year’s big changes to the law household 2648, the law did clarify that you have to owe a year’s worth of assessments or owe $1,200 worth of pure vanilla, no chocolate chip fines, no late fees, just assessments only, as of the date that the foreclosure lawsuit is filing. There are some considerations, however, if you’re not familiar with foreclosure. And so what we’re really talking about are, in my mind, red flags. The first one being, is there a trustee’s sale going on with regards to the property? For our audience members, Charlene, would you just briefly explain to those audience members, what’s a trustee’s sale? Why is it a concern?

Charlene Cruz: So trustee’s sales, so if an owner has a first mortgage or first deed of trust in covering their property, they make their mortgage payments. But in the event that they fall behind, there’s something in their agreement with the bank or the lender that says if you miss X amount of payments, usually it’s like 90 days, then that lender can essentially set it for sale, a trustee’s sale. In most cases it’s a nonjudicial process, and they would sell the property for … If the loan’s not negotiated, then they would set it for sale. And it’s important because the first mortgage’s encumbrance on the property is senior in terms of lien priority to the association’s lien. So if that trustee’s sale does happen, it would wipe out the association’s lien.

Javier Delgado: Now, Charlotte, if there was a trustee’s sale that was occurring, would the association typically receive notice? How would they know, or how would their attorney know if there’s one going on?

Charlene Cruz: Yes, so there’s a requirement that the first mortgage, if they’re going to notice a trustee’s sale, they pull a TSG, their title guarantee, and they would send a notice to everyone who has an encumbrance on the property. And that would include the homeowners association.

Javier Delgado: Okay. What about other things? Does it matter if there’s a big first deed of trust, first mortgage, or reverse mortgage, or unpaid property taxes, or unpaid … maybe someone got sideways with the IRS, maybe they just didn’t pay for a couple of years. How does that impact foreclosure decision-making processes by boards?

Charlene Cruz: I think if there’s a substantial first deed of trust, reverse mortgage, I think those take into the consideration of whether there’s equity in the property. If there is, whether there’s going to be a likelihood of a third-party investor at the sale. If there’s unpaid property taxes, property taxes are senior also to the association’s lien. In most cases they might be … they’re not as high as of course the first deed of trust, but that’s something that the association can think about paying in order to preserve their lien priority. And then IRS liens for income taxes. I think since about 2021 we’ve been naming the IRS and, depending when those taxes are assessed, sometimes they will stipulate or agree to lien priority allowing us to proceed with our share sale and they would take a junior position. But that depends on the type of taxes and when they’re assessed. But it’s all part of the consideration of moving forward with foreclosure process.

Javier Delgado: Do you think of these reverse mortgages equivalent to a first deed of trust if there’s no other mortgage on the property?

Charlene Cruz: If the reverse mortgage is the same as the first deed of trust? Yeah, well it is the same in terms of lien party, but the problem is, in most cases, the balance on that reverse mortgage is higher if not equal to the fair market value of the property. So in those rare instances where, and that would come up on a litigation guarantee, people sometimes ask, “Is there a reverse mortgage?” We wouldn’t find that out until we get a litigation guarantee, but if it does, it would probably indicate that there’s probably little to no equity in the property.

Javier Delgado: All right. And we’ve already talked about alternatives and you’ve already walked us through that, so thanks for doing that. Is there ever in your mind a strategic justification, like let’s say someone’s just not taking care of their property and they’re violating multiple parts of the used restrictions, and they’re not paying. That might be a situation where maybe you foreclose and you do something else, or maybe you just foreclose. Is that right?

Charlene Cruz: Yes. In some instances when the owner’s not paying and there’s violations of the use restrictions, we will file a lawsuit that seeks foreclosure for the unpaid assessments and also requires a court order for the owner to bring the lot into compliance.

Javier Delgado: Okay. All right, so you got questions about any of those issues failed to put them out there.

Charlene Cruz: Yeah. There’s a quick question here, Javier, it says-

Javier Delgado: Oh, please.

Charlene Cruz: Does this also apply-

Javier Delgado: Love questions.

Charlene Cruz: Does this also apply to accounts that are currently in the foreclosure process? I think that was regarding when we were talking about, I’m not sure, maybe lien priority, but all of the things that we just talked about, if you’re currently in the foreclosure process, we’ve already gone through the litigation guarantee, the board of directors, if it was with our firm, we give a foreclosure memo that sets forth the encumbrances on the property and lists them so you would know if there’s a first or a second, or other judgments.

Javier Delgado: All right. Well, thanks. If you’re wondering, “Hey, what does this look like?” If I was to draw a picture, because obviously Charlene and I are big on pictures, here’s what you’re looking at. You’ve got the HOAs lien in the middle, you’ve got the first mortgage of first deed of trust at the top because they’re ahead of everybody. And then below us we’ve got second mortgages, credit card judgments, pretty much anyone else. Charlene already mentioned that with regards to certain things like the IRS and she’ll talk about unpaid property taxes too, that can come into play as well. So there’s just some information there. And we do have this example for you if you’re like, “Hey, I’m still not getting it, what does this all mean?” Look, here’s an example. We’re using numbers now from a property that’s upside down. But I think there’s no better example out there to use examples from a property that’s upside down, because it does show you the magic of foreclosure.

And here’s the magic. In this example, we’ve got a first mortgage, we’ve got our HOA lien, we’ve got a second mortgage, we’ve got a Visa credit card bill, it’s a judgment now, it’s recorded against the property, fair market value is there on the screen. This property’s upside down by $19,000. This property is not getting sold in 72 hours, like those commercials on TV. The only way it’s getting sold is if there’s a short sale occurring and someone’s taking a haircut. But behold the magic of foreclosure. Is the first property, first mortgage there? Yeah. That deed of trust is there. Is the HOA’s lien there? Yes it is folks, but what’s not, that second mortgage, that Visa credit card judgment. What did we do? We just freed up some equity. This property’s now got $66,000 of equity. So I think this is a really key concept to understand why is HOA foreclosure so powerful?

Because you’re going to court and you’re getting the court’s permission to strip secured creditor interest away from the property. You get to go in there and you get into the juicy part, which is the equity, you’re freeing it up. Look, foreclosure is a multi-step process. We’re here to talk about collections today. Got to go to Superior Court, you got to file a lawsuit, got to serve everybody. Are there any considerations right now, you’re in the trenches, Char, anything that our audience members should know about any changes at this point in the process that you’re seeing?

Charlene Cruz: No, not in the process for foreclosure.

Javier Delgado: Okay. All right. So if you’re familiar with foreclosure, got to get the lawsuit, got to serve it, got to go to court. Still needs some hearings. We got to do that. Got to make sure we serve everybody. Serving is probably the toughest thing, but it gets easier all the time. The next step is once you got your foreclosure judgment, you sell the property. Now we talked about the fact that few properties are reaching this stage of the process, most people are paying before this. But for those that do, I’d like to just get your input, Charlene. If the property is sold, and if it’s sold for more than the association’s judgment, which is the bid, is the association likely to get its money back?

Charlene Cruz: If it’s sold at a sale for higher than the judgment amount, the association gets what it was entitled to the judgment. And anything excess of that, other lien holders including the owner, can request the court release that to them. So the association would get paid only the amount, nothing more, than what’s secured by the judgment.

Javier Delgado: But at least the HOA is in good shape at that point.

Charlene Cruz: Yeah.

Javier Delgado: Right. Okay. Now, if no one bids on the property, then the association would not be likely to get its money back unless what? Maybe the owner goes back and somehow works something out with the sheriff’s office or something, is that right?

Charlene Cruz: Correct. So if they have the redemption period where they can pay, but ultimately if it doesn’t get redeemed during that redemption period, then the homeowners association becomes the record owner of the property. They don’t get the money, but they do get the property for setting the sale.

Javier Delgado: And if there is no bidder, and if the association doesn’t get its money, would you, as a general rule, recommend that the association obtain a deed and insure the property, or would you wait out the redemption period?

Charlene Cruz: I would wait out the redemption period to give the owner the opportunity to redeem it and then, after that, I would get that the deed and then insure it because now it’s homeowners association’s property and they got to insure it.

Javier Delgado: All right, and the owner does get that second bite at the apple as well, right?

Charlene Cruz: Correct. During the redemption period. So if they live in it, they get six months. If it’s vacant, they get 30 days to redeem, or if it’s vacant land.

Javier Delgado: Okay. All right. We talked a little bit about trustee sales already, so I’m going to skip over that. I’d like to just jump real quick ahead to property tax foreclosures. This concept that some people not only don’t pay their HOA or their mortgage, sometimes they don’t pay the government. That’s generally a no-no. Al Capone found that out the hard way as he got caught up not paying his taxes, I think, if I’m following my history correctly. What happens if you don’t pay your property taxes? Can you lose your home? How does that impact the HOA foreclosure process?

Charlene Cruz: So the property taxes are above even the first mortgage. If there’s no first mortgage on the property, that’s typically when we see it. The next in line is the HOA. There will be a notice of delinquent taxes and the county will sell certificate of tax liens. So it’s February of every year they’ll sell or delinquent taxes, and then the owner who bought those taxes has three years to foreclose. The association, if they’re also owed money, they have the right to redeem it because they have an interest in the property. But there could be some risk in doing that. We would evaluate that if that becomes an issue for the association. And there is a new procedure that passed this year as well. Before, if no one redeemed the taxes, there’s no sale. It’s just at the hearing there’s a trustee’s deed that is issued to the tax lien purchaser. But now there’s a new procedure where the homeowner or someone with an interest in the property can request from the court. It’s essentially like an excess proceeds from a tax sale.

It’s a court process. And essentially, what would happen, there’s a hearing about costs and the value of the home and, if the court agrees, there would be a sale for the property that’s in excess of the amount of the taxes. And so essentially, there’s excess proceeds generated from a tax sale that didn’t happen before. That’s new this year as well.

Javier Delgado: There’s lots of changes that sounds like. One thing that hasn’t changed fortunately is bankruptcy. And in fact the four reasons that people file for bankruptcies has really remained pretty consistent over the years. It’s still excessive medical debt, maybe losing your job, death in the family, I guess would be the fifth, credit card debt and divorce or separation of family. So we’re still seeing really low bankruptcy rates. So at the moment, not a major consideration as it was, you saw, during the great Recession, 2009 to about 2014 or so, depending on where you like your numbers at. But for those of you who are not familiar with bankruptcy and, frankly Charlene, a lot of people might not because they just might not have dealt and seen a lot of bankruptcy filings. If they receive a bankruptcy filing, should they go ahead and write off the account?

Charlene Cruz: No. If you receive a notice at a homeowner file for bankruptcy, I would wait for the bankruptcy process to go through because sometimes they don’t get discharged. And the purpose of the bankruptcy is to relieve the owner from their personal obligation of the debt. And so I would wait for a court to determine that they are in fact discharged from any pre-petition debt. So pre-petition, meaning any debt that was accrued from the date they filed the debt and prior to.

Javier Delgado: I know that there are multiple chapters of bankruptcy, and talking about a bankruptcy is like talking about insurance. It’s a necessary evil, but I’m not going to do an hour of that today. So don’t worry folks. But are you seeing a lot of 7s or 13s right now?

Charlene Cruz: So now we are seeing 13s, mostly. It used to be 7s, where Chapter 7 was a type of bankruptcy where there’s a threshold, you didn’t have a lot of assets to pay off your debts. And ultimately it’s a quick process. The debtor is discharged of the personal liability. On the other hand with a 13, there’s some assets and they reorganize all their assets and the intent is to pay all creditors over a five-year plan. So even if there is some bankruptcy filings, there’s an increase in 13s. So that’s another reason why I wouldn’t write it up because, ultimately, they do intend to pay the HOA during the Chapter 13 plan.

Javier Delgado: If someone receives a bankruptcy filing, Charlene, what should they do? Should they give it to their attorney?

Charlene Cruz: Yes, I recommend giving it to the attorney. If there’s a 13, even a 7, we would evaluate it and see if it’s in the best interest of the association. If we should file a proof of claim, which is essentially telling the bankruptcy court, “Hey, we have a claim against the assets, the assets of the debtor that needs to pay the association.”

Javier Delgado: So if you get a bankruptcy, say something, make sure you get it followed up on, and watch out for those discharges. But in the meantime, the keys to monitor, monitor, monitor. All right, let’s switch texts. Let’s talk about 2648. We talked about foreclosure, we talked about Proposition 209, we talked about some market conditions out there and now we’re going to get to really the meat of today, which is … I must be hungry, Charlene. I have been talking about food nonstop, and 2648. What’s happened with regards to the statutory lien before and after? How does 2648 change the landscape for everyone?

Charlene Cruz: So 2648 adds certain qualifications I would say to what’s included in the new definition. They say it for both condominiums and planned community is the common expense lien. So before we all knew that the statutory lien was for assessments, late charges, collection fees, and attorney’s fees and costs. Now post-2648, the common expense lien or the statutory lien is assessments, which is the same as before, but now late charges only if authorized by the declaration. So that now requires associations to look in their declaration to see if there’s express authority to levy late charges, reasonable collection fees incurred or applied, that’s now part of the common expense. Not much of a difference than before. Another big difference is reasonable attorney’s fees and costs are secured by the common expense lien only if awarded by a court. So any pre litigation, or even during a lawsuit prior to a judgment, any legal fees and costs incurred are not secured by that common expense lien unless and until a court awards them in a judgment.

Javier Delgado: Now that doesn’t mean someone’s not responsible for them, right, Charlene?

Charlene Cruz: Correct. So the owners remain personally responsible for them, but you just can’t include them in a lien. The common expense lien amount, that’s secured against the property.

Javier Delgado: Okay, we put together this matrix just to show you that much like a transformer, there’s a lot going on with 2648, more than meets the eye. For those of you at home who have not been spending the last six months studying 2648, I should have mentioned that this law went into effect on September 14th. So we’re about two weeks into this as of today’s presentation. And what we did was is we brainstormed, we thought of all the different categories of charges that exist out there, and whether or not they are secured by the common expense lien, as Charlene told you, the new term, the technical term for the statutory lien, or if they are not. And if they are not secured by the common expense lien, they may be secured by what’s referred to as the unit owner expenses or member expense lien. In some cases they are not at all. So I’m going to go point/counterpoint with you, Charlene. Assessments, are these generally or almost always secured by the common expense lien?

Charlene Cruz: Yes. Or plan committee as defined by the CC&R’s, but HB 2648 creates a definition of assessments for condominiums, but those would be secured by the statutory or common expense lien.

Javier Delgado: All right, and we talked about late fees. So late fees, Charlene already mentioned are provided for by the common expense lien so long as they’re provided for in the declaration. And by the way, if you’re not sure about whether or not your declaration provides for these charges, we do recommend, we’ll talk about this some more, but reach out to Charlene and her team. They’re gangbusters on this, they know this stuff. They’ve been looking at lots of assessments. Speaking of which, Charlene, percentage-wise, what’s your sense? How many declarations do not provide for late fees?

Charlene Cruz: We’re surprised at how high it was. It’s about 20% that don’t have a provision or language in the CC&R’s that authorize late fees.

Javier Delgado: And we thought it was actually just going to be older CC&R’s, but it turned out to be not the case.

Charlene Cruz: Mm-hmm.

Javier Delgado: I think some people were just relying on the statute and, hey, if you’re a developer attorney, I have lots of things to say about them. I wish they would write better CC&R’s. But on this one when the been that way for as long as I can remember, I guess it is what it is. What about collection fees? We’re talking about non-attorney collection fees. We know lots of you work with your management companies. Are those generally the same as before? Treated the same?

Charlene Cruz: Yes. They’re the same as before, treated by the lien.

Javier Delgado: Okay. What about prejudgment interest?

Charlene Cruz: That I think it doesn’t expressly say.

Javier Delgado: So. In fact, it’s interesting. I think we were looking at this and prejudgment interest, it’s not provided for by the common expense lien. And so that’s an issue. So if you’re used to including those in your escrow payoffs, or to title companies, yeah, that’s a thing you’re going to have to watch out for that. You’re going to want to make sure you do not include that. And we’ve talked a little bit about fines, but there are other types of charges like self-help [inaudible 00:38:18] charges. And would you agree that that’s something where we’re just going to have to look at those on a case-by-case basis, Charlene?

Charlene Cruz: Yes. Because I think it depends really on the language of the specific CC&R’s.

Javier Delgado: Yeah. So lots of traps out there. Speaking of traps, there is a communication requirement. If you’re not doing this, we would bet 95% of you are already. So this may be old news, like yesterday’s paper. But for those of you who aren’t, what does an HOA have to do before filing a foreclosure action?

Charlene Cruz: They now have to exercise … So two things. Exercise reasonable efforts to communicate with the homeowner, and also offer a reasonable payment plan. But like I said, I think most are doing that with their pre litigation letters.

Javier Delgado: It doesn’t really matter where, what letter you put this stuff into. Would you agree, Charlene?

Charlene Cruz: I agree. It doesn’t specifically say, it doesn’t define what these means. I think it’s pretty general and I think if it’s in a letter, I think it’s easy to overcome a challenge to this statute.

Javier Delgado: I think it’s also important to emphasize, look, we threw this language together, this is just sample language. It doesn’t have to say one year. It could be whatever you feel is appropriate. We thought one year made sense just as a default because that’s when the law says you can foreclose, but you could make it shorter. And in fact, if you have a community that has what we would refer to as ultra-high assessments, downtown Phoenix, downtown Scottsdale condominiums, you know what I’m talking about. You’ve got those $2,000, to $5,000, to $10,000 a month assessments. Waiting a year for your assessments probably is not going to fit for you. So make sure that you work with your collection team and your attorneys to figure that out. Any questions out there, Charlene, from our audience?

Charlene Cruz: Yes, I have one here. Does the association pay a front for collections or did the fees get collected at the end of the process?

Javier Delgado: Yeah, so on that, we’re going to talk about that. We’re going to talk about what we’re offering. We can only speak about what we’re offering, and we’ll talk about that in just a minute. What else do we have out there, Charlene?

Charlene Cruz: Thank you, Javier. It’s what about block wall or view fence, shared expenses with the HOA that we’re noticed and then expense to the homeowner’s account. Can we still proceed with collection for this expense on the account via collection process but not include them in the common expense lien? How would you collect this expense legally? I think you could collect it, whether it’s secured by the lien. I think we would require a review of the language of the CC&R’s. Do you agree, Javier?

Javier Delgado: Yeah, I’d agree with that. Keep in mind folks, there’s change to the definition of assessment applies to condominiums only. So with regards to a planned community, it’s just what your documents say. But as you are aware, sometimes charges develop over the years that don’t neatly fit within the documents. And so that’s something that’s going to require some examination. So definitely reach out for specific guidance on those types of issues. Anything else, Charlene?

Charlene Cruz: Yes. One more. What if a new owner moved in and they did not provide any contact information? Phone number, email, and have no way to get a hold of the owner other than mail, they are not reaching out. I think you just mail it to them. If they don’t provide an address to the association, the statute that requires homeowners associations to send a 30-day notice is to mail it to the address provided by the homeowner. If it’s not provided, I wouldn’t probably send it to the property address, or even look on the treasurer’s site to see if there’s an alternate address.

Javier Delgado: Yeah, pull a deed, that sort of thing. We’re pretty good at finding people, I’d like to think. Yeah. All right. Anything else?

Charlene Cruz: That’s it for now.

Javier Delgado: Okay, awesome. All right, well then let’s talk about, speaking of questions, collections, policies. It’s surprising to us that not everybody has one. You’ve spent a lot of time over the past couple of months in terms of implementing HB 2648 and in helping boards revise their collection policies. Why is that more important than ever, Charlene?

Charlene Cruz: I think it provides structure and consistent enforcement of collecting assessments and a framework on how to reduce delinquencies. It’s a collections tool. I think it’s … And as boards change, you want that consistency when board members change and the delinquency is collected. And-

Javier Delgado: Think about late payment agreements. What if one month the board’s like, “We want everything paid in three months,” and the board changes and now it’s like 45 days or no payment agreements. That feels weird. Yeah, we like consistency. What else, Charlene?

Charlene Cruz: After reviewing a few over the past couple of months, I think the considerations are, because of HB 2648, you want to look at your declaration to see if late fees are authorized, how fast you are sending a file to for further collections. In some cases, a lot or a unit or a home might be foreclosure eligible much quicker than in other associations. So I think that’s because the trend is towards foreclosure. I think honestly, that would have to be taken into consideration when you’re doing these collection policies. Pre-judgment interest, is it worth posting? Like we mentioned before, it’s not expressly included in the common expense lien, but authorized in most cases in the declaration and by statute. So that would remain the owner’s personal obligation. It gives you leverage to negotiate the remaining balance. It allows for payment agreements, monitoring it is the key. And you want a collection policy that fits your association, like an active adult community would be different from communities with a lot of first-time buyers. And you want a policy that reflects current laws and current market conditions.

Javier Delgado: Now think about if your collection policy was set up at the height of the great recession, where you said we’re going to just wait absolutely to the last minute to foreclose. Well, here’s the problem with that. The problem is that the statutes change with regards to how long assessments are secured. If you wait too long, you can lose assessments. What are we showing you right now under current market conditions? We are seeing, the majority of our clients are seeing phenomenal results with foreclosure. So pursue foreclosure now. May not be the case three years from now, right?

Charlene Cruz: Mm-hmm.

Javier Delgado: But right now you want to make sure you want to strike while the iron is hot. All right, and other changes with regards to 2648. I know that there’s been some changes with regards to how payments may be applied. This seemed like this was a big deal to the legislature. One of the few times, if not the only time I think we’ve ever seen the term attorney in the collection statutes. So what’s happened here and how has it changed how you can apply owner payments, Charlene?

Charlene Cruz: So the owner payments, regardless of what agreement you have with a contract with an attorney, payments have to be applied, on the right-hand side, you’ll see unpaid assessments, assessments that are due but not delinquent, unpaid late fees only if authorized by the declaration. Then to the next category, unpaid reasonable collection fees that are incurred or applied by the association, so those are management collection fees. And then collection-related attorney’s fees and costs if awarded by the court. And then after that, the last category of charges, if there’s still money left over at the end of that other unpaid fees charges and monetary penalties, or interest in late charges on any of those amounts.

Javier Delgado: A lot of changes here because there have been in the industry a proliferation of no-cost, no-fee type collection arrangements. And they worked to a large extent because you were able to shift that risk that the provider was not going to be successful in collecting by shifting it among the 10,000 delinquent accounts. But this statute really changes things and this statute says, “Hey, we don’t care what kind of agreement you have, we don’t care what the management company and their collection provider came up with. Here’s what we care about. We want things to be applied in this litany if you don’t do it that way. And the only way you can’t do it this way is if an owner directs otherwise.” But I will tell you folks, owners, they’re not big on communicating when they’re being pursued by an HOA collection attorney. Charlene, how hard is it to get ahold of people in general?

Charlene Cruz: Well, pretty hard until you file the foreclosure lawsuit. But yeah, they’re very-

Javier Delgado: Then they want to talk, right? Then they want … “Let’s be friends.”

Charlene Cruz: Then we find them.

Javier Delgado: Let’s purchase out. Yeah, exactly. But yeah, they’re not directing, “Oh, do it this way, do it that way.” No, they’re saying, “Hey, I’m going to call your bluff, foreclose, and then let’s talk.” So we just don’t think it’s realistic. There were some technical modifications as well. You’ve got to disclose judgment liens as part of payoffs, so don’t forget about that. A judgment lien would be an example of maybe that question we had earlier, right, Charlene? With regards to the enforcement judgment that was obtained for fines, how would that work, Charlene?

Charlene Cruz: So it becomes a judgment lien once it’s recorded, but you can’t foreclose on it. You can request it upon sale of the property.

Javier Delgado: And we have people, investors who, from time to time, have reached out to associations saying, “Hey, do you have anybody who owes assessments? I will buy them on the dollar, pennies on the dollar,” or maybe even full amounts because they’re just trying to get ahold of that equity that’s in the property. How does the law change those types of arrangements going forward, Charlene?

Charlene Cruz: Well now it prohibits associations from … and the key term is transferring ownership or control of the debt. So we even had at one point before this, past tax lien holders reach out to us. And like I said earlier, because associations aren’t in the business of taking houses from homeowners, a lot of times if there was no first mortgage on the property, these tax lien holders would say, “Hey, we’ll pay what’s owed to the association so they don’t redeem the taxes, so we can foreclose on their tax lien foreclosure.” But now I think that would prohibit that would be considered transferring ownership or control of the debt that’s prohibited by HB 2648.

Javier Delgado: Yeah, absolutely. So a lot of risks here. What are the risks of getting it wrong? Look, we put our heads together. What do we know? We’ve seen that insurance is one of the biggest increases that associations are seeing this year, but it’s not just because of things like the surf site tragedy. It’s because owners are becoming more litigious. People have money in their pocket, and when they have money in their pocket, they’re ready to fight about things. And so, one of the things that we are concerned about is getting it wrong. I think that there’s this misconception out there that, hey, there are a lot of these to the statute and it’s just the attorney’s risk. I couldn’t disagree more. I respect that view. Intelligent people can have different views, but I think we’re all in this together. And when I say that, I mean it because I believe that there are owners’ attorneys out there, people that represent disgruntled owners who want to get their retirement funded by mistakes.

And what they’re looking for are associations and their collection providers that do it wrong. And if you do it wrong, what do we think you’re risking? We think there’s a potential risk of losing your common expense lien rights. It’s entirely possible we could see a wave of class action litigation. “Hey, you misapplied the owner’s payment. Now you owe me for what you did plus the attorney’s fees, and I want my damages as well.” ADRE claims, those are heirs of the Department of Real Estate claims for alleged violations of the law. And of course, if you’re a collection provider, you’re always trying to be careful to avoid unintentional violations of the Fair Debt Collection Practices Act. But there are other things too. You’ve got this Federal Consumer Financial Protection Bureau, depending on which way the election goes, we could see increased enforcement there. But at the end of the day, there’s just a lot of risk.

We’re attorneys, and we’re in the business of minimizing risk. So what we really want you to do is just to understand the laws has changed, and because the law has changed and how owner payments can be applied, and because of the risks in applying it the wrong way have changed, our programs changed. And so, for those of you who have been using us or are using us, we do have a new collections program. I’ve got a QR code here and a link here. But it is compliant, it is low risk, it includes deferred fees. And for the vast majority of our clients who have been using us and will use us, we don’t think there’s going to be a significant out-of-pocket difference or look and feel. Why? Well, because as Charlene and I told you at the beginning of the presentation, people are paying in response to foreclosure.

We’re doing a lot of foreclosure and it’s really, really successful right now. So if you got questions about that, reach out and let’s talk about that offline. Hey, we’re just about out of time today. I want to share some resources with you. I know there may be some additional questions out there in the chat. Just quickly, the statute books are here if you need one. They’ve got these lovely new covers, email moc.w1760278677albdh1760278677c@ofn1760278677i1760278677. Those are always free. We’ve got our new law guides that summarize this year’s changes in the law. This one pager. We’ve got a collections services summary. So if you’ve got someone who has questions about collections and they don’t want to sit through a hopefully entertaining and informative one-hour presentation, then we got a handout for that as well. We’ve got a foreclosure overview. See if you’ve got questions about how foreclosure works. And then finally, don’t forget folks, that June 30th, 2025, deadline or hold your parking vote is coming up. So reach out. We can help you with that, because if you’re a planned community with pre-2015 documents and if your documents regulate the streets, that does have the potential to impact you as well. So with that being said, I’m going to terminate my screen share and allow for any additional questions out there in the chat. So back to you, Charlene, for any questions.

Charlene Cruz: There’s a question here. What about collections on delinquent water bill accounts? I think in most cases there’s language in the declaration that includes those in assessments, but I would check. Another one here in terms of how payments are applied. Are they the same for accounts in collections versus not in collections? I think you apply the payments, whether it’s in collections or not in collections. In most cases, if they’re not in collections, they probably just … They’re paying the assessments anyway. But yeah, if there’s fines that are outstanding before an assessment is levied and they make a payment, unless otherwise directed by the owner, you would have to apply it pursuant to the statute.

Javier Delgado: Any other questions about collections, or frankly anything else, in our last few minutes? And hey, if not, that’s okay too. For those of you who are collections professionals with your management teams, if you feel like you’d like some additional one-on-one with Charlene and her team, please reach out to her, reach out to myself, and we’d be happy to schedule some time to go over any additional thoughts, any operational concerns that you might have, anything that we can do to help, we’re here to partner with you, so appreciate your time today.

Charlene Cruz: Thank you everyone.

Javier Delgado: All right, well, thanks. Have a great week, folks. Thanks for your time today.