054 | Maximizing HOA Cash Flow & Minimizing Troublesome Delinquencies

Robert Nordlund: 0:00

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Unknown: 0:31

But attorneys do not do collections. This is a message I'm trying to send out to everybody. They do security interest enforcement attorneys if they do foreclosures in California. According to the Supreme Court of dusky versus McCarthy. They are not doing the practice of license collections. The Supreme Court in a unanimous decision in 2018 said that non judicial foreclosures are not the act of collections.

Announcer: HOA Insights: 1:05

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Robert Nordlund: 1:36

Welcome back to Hoa insights common sense for common areas. I'm Robert Nordlund. I'm here today for episode number 54 with a special guest to talk about maximizing cash flow at your association because your association is a nonprofit run by well, you all know volunteer board members, you've got to be careful to maintain your cash flow. So minimizing your delinquencies and maximizing cash flow helps you pay your bills and make your scheduled reserve transfers. There are things you can do to keep a strong cash flow at your association. So adjust your volume instead let because we're going to provide some answers and some help for you today. Well, we enjoy hearing from you. So if you have a question you'd like us to address, leave us a voicemail at 805-203-3130 Leave a comment on one of the YouTube videos or send us an email at podcast@reserve study.com. Now the question that prompted Today's episode was from George from Cleveland, who wrote is there such a thing as an acceptable rate of delinquencies? And that's a fascinating question. It's certainly not my area of expertise. But fortunately, today we have Mitch Drimmer with us on the podcast, Mitchell Drimmer CMCA, LCAM. And those are manager credentials is the president of Axela Technologies. You can find them online at Axela-tech.com. And that's A X E L A dash T E C H.com. And Mitch is the author of the book The Art of collections for community associations. Next time I see him in person, I'm going to have him sign my copy. Well, with a wealth of experience spanning three decades sounds like me. Mitch has dedicated his career to assisting community associations advocating for a compassionate approach to delinquent assessments. And his position is that is better to work it out, then put them out. That reflects his commitment to finding amicable solutions. Well, I've bumped into Mitch in countless trade shows. And with our reserves study counsel and his cashflow counsel, we seem to have kindred spirits. He's exactly the kind of guy we want to share with our podcast audience. So Mitch, welcome to the program.

Mitch Drimmer: 3:58

Thank you. Thank you very much, Robert. It's a pleasure to be here with you today.

Robert Nordlund: 4:03

So tell me Is there an acceptable amount of delinquencies at an association?

Mitch Drimmer: 4:09

Well, as you mentioned, in your introduction, Association's are a not for profit, which means $0 business, which means that for every dollar that you have budgeted to spend, you have to assess people but you can't do any more than that. So, actually, zero, there is no acceptable delinquency amount. However, the question could be, how can it be tolerated? And how can it be managed? First thing that has to happen is the budget. And if a board of directors budgets for doubtful debt, then the association will not have any shortfalls, the assessments will be higher. You won't have shortfalls. And believe me, the poor pay more. So when you have shortfalls, the association is paying more to function. You're paying late fees to vendors, you're paying insurance premium costs. In other words, you get your insurance premiums now, because you don't have adequate cash, you have to take out a loan, and now you're paying interest on your premiums.

Robert Nordlund: 5:24

Yeah, let me let me stop you right there. I hadn't really appreciated that. I thought this was all about owners. But I think it starts with the board. I think you're right, that if you've got a budget that is just barely hanging on, or in so many cases of associations, it's actually slightly negative. They're in a hole to start with, they've got no margin.

Mitch Drimmer: 5:44

None whatsoever. Now, a lot of people don't understand reserves. And I have a very good explanation for board members when it comes to reserves. Reserves are like your 401 K, you put it aside for your old age, and you use it because a lot of board members companies say to forward not for profit, how do we account for the reserve account? That's a profit? I said da it's like a 401. K. And that's how we should really approach it. Like it's a business and like you're saving for your future. Yeah, right.

Robert Nordlund: 6:16

We, we talk about it as paying the cost of ongoing deterioration. It's not charity for someone in the future. But yeah, it's a bill. The roof deteriorates every month, and it's just as real a bill as the power bill or the water bill or the management company bill. More important as your future. Yeah. Well, let's let's talk about delinquencies. When I think of delinquencies, we deal with clients and their finances all the time. There's a lot that are out there that I wonder, not is it acceptable? Because yeah, you're it's a almost a, what you say, a zero based budget, there's no profit to absorb. But what is, shall we say common? And as long as you're dealing with it, and we'll, we'll talk about dealing with it in just a moment. But what is common? We're talking zero to 3%, zero to 5%. What is common out there?

Mitch Drimmer: 7:15

Oh, you know, you're talking about no ideal in all 50 states. Okay. So we're talking about every region in the United States, we're spanning all demographics, reason, spanning all kinds of psychographics. Because, you know, there are some communities with younger people, and there are some communities with older people, and they think differently. Generally, the delinquency rate during good times, it's not 2008. Yeah, it's around three to 5%. Still on it to unacceptable. But what I see quite often, is that delinquencies just keep getting dragged on and on and on, they do not pull the trigger at some point to resolve the delinquencies our board members.

Robert Nordlund: 8:04

Well, I think that's the key. It's one thing to have a delinquency and I think there's going to be people who go out of town, or they change their credit card, and there's gonna be a bump in the cash flow. And you can say, hey, people in unit number 13, you missed your payment last month. Is there something going on? They say, Oh, totally sorry. Let me let me make it up. So there are going to be well intended, unfortunate mistakes. And so I think we need to allow that. But I like that word that you said the unresolved once, you don't want that 30 days to become 60 days to 90 days and two years.

Mitch Drimmer: 8:41

Right. Where Well, you know, the the policy, or the best policy is, of course, to establish a uniform collection policy. Everybody in your community associations and most community associations have these little three ring binders for California, I'm sure for fire for flood and, and here in Florida, it's for hurricane waters, you have a three ring binder, for delinquencies, for what happens when you have a delinquency. You don't have no plan. Yeah, you trigger points. Exactly. And other words, the only plan is when the board gets together after, you know, sometime not every board meets every month, when they get together, they'll look at the aging and you'll say I'll send it off to the attorney it gets Turth to the attorney. And many management companies are only too happy to do that because it takes it off their plate after they do the first party notifications. But what does an attorney do after all, they do not do robust outreach. They do not engage the owners. They do not find the owners. Maybe they do do a skip trace, but I don't see Community Association attorney or their paralegals picking up the phone and calling people and saying you're delinquent and you've got$50,000 worth of equity. You all the association 3000 Doesn't make sense to make the payment to close. If you don't pay visa, they're not going to take away your home. But the Community Association does have a security interest. And a lot of people you will end up tend to average board members or average community association owners. And as that, does the association have a security interest, can they foreclose on your house for non payment of assessments, seven out of 10 will say only the bank can foreclose. So how is it that when somebody is delinquent? Well, one month like you said, that's actually been that's, you know, that's things happen. Two months, if you're on a monthly pay period of somebody's missed two months, well, now you have more than a technical problem. That's not a delinquency, that's a default. Guy, there's a difference between because there's no attention now of pain. And when that happens, first of all, you have to engage the owner law, of course, you get your first party notifications from your management company. And depending on the state that has many, very complicated what we call condition precedents, for instance, in California, you can't foreclose on somebody unless there were a year late or$1,800. in arrears out. Okay, yeah. So you can put somebody into collections, you saying you don't have to foreclose on them. So why wait all that time. But the thing is, the idea is to engage people and convince them and guess what we do that it's done. It's possible, you talk to people, you engage them, you find them. And that's why our skip trace is very important. You find them you engage them. So why best practices for Community Association is to establish that uniform collection policy. And I have templates, and we'll talk about how I could get everybody some templates, where uniform collection policy that's in Word format, and then you can fill in the blanks.

Robert Nordlund: 12:01

Oh, gee, that that would be that would be gold. Being a board member is hard enough. You're trying to deal with paying the bills, make sure the management company is working, making sure the landscaper is doing the assigned projects, changing seasonal colors, dealing with the people who want convert a tennis court into a pickleball court that there's a million things going on. And Mrs. Jones is barking dog, or and the Smiths, they are new residents. And they have a big dog, Old English Sheepdog. And there's a 30 pound limit in our association. Yeah, it's hard enough. And now we talk about cash flow. And you talked about how expensive it gets it. This is not just a minor thing, because what comes to mind is, when there's one or two people who just aren't paying, then the burden falls on the good guys, the people who are paying

Mitch Drimmer: 12:57

good pay, no one is out to take up the slack. And that's actually a really unfair,

Robert Nordlund: 13:01

that is so unfair, that I like, Yeah, I like when good behavior is rewarded, not punished. And so I like this conversation today. So we're talking about having a nice policy that guides the board. So it is stable from year to year to year to year as the board members change. And one that starts out easy and saying, Hey, you have a problem, because I'm writing notes here, policy that is appropriate. And trying to catch a delinquency before it goes to a default, engage the owner. Talk about the wisdom of the situation, and have it be uniform. Is that where we're talking about?

Mitch Drimmer: 13:41

Well, it's important, yes, it has to be uniform. And it has to be consistent because we have obligations to HUD, you know, some states don't have HOA statutes. So they depend on, you know, the federal government for, you know, the HUD, the the Fair Housing Administration. So you have to be very careful, we got the FDCPA, the Fair Debt Collection Practices Act and mouth here, we've got. So let's say you've got two owners, each one owes $1,000 from the same amount of time. And the board puts one into collections and not the other. Oh, there is a charge of unequal enforcement that you're facing. And that could be a civil rights charge. And if that happens, well, get online, everybody because everybody's going to start suing the Association for civil rights violations. It's going to be like a free a free for all. Well,

Robert Nordlund: 14:36

now I'm thinking that that $1,000 delinquency all of a sudden becomes a very, very expensive legal bill, and you've really shot yourself in the foot.

Mitch Drimmer: 14:44

Very, very true. You look. I move attorneys, community associations are creatures of statute so your attorneys are necessary, but attorneys do not do collections. This is a message I'm trying to send out to everybody. They do security interest enforcement. As a matter of fact, in California, you're in California, right? Yes. Attorneys if they do foreclosures in California, according to the Supreme Court of dusky versus McCarthy, they are not doing the practice of license collections. The Supreme Court in a unanimous decision in 2018, said that non judicial foreclosures are not the act of collections. So why would you say that an attorney is collecting, like I said, they don't have outbound calls, they don't have the technology, they don't want inbound calls facilities, they don't do letter strings, they don't do collections, they swamp up units. Now, sometimes these units have equity. And if you have an association lien foreclosure, you're going to be made whole, but sometimes they don't have equity. But often the attorneys will not advise in advance what the results would be. Yeah, and I believe that you should not enter into a foreclosure unless you know that the property will be purchased in an association lien foreclosure, because if there is no equity, it will not be picked up in a dissociation lead foreclosure, which is okay. But the board of directors should understand that when that happens, in order to monetize the unit, they need to rent the unit out. Now that's a lot cheaper. Now, sometimes, again, one of the biggest problems I see with boards of directors is the kicking the can down the road. Concept, for instance, the Surfside tragedie, Champlain towers, that was the you know, you could say well, it was the structure underneath the pool, it was this it was that it was the Board of Directors kicking the can down on preventive maintenance, structural integrity, reserve studies, knowing what to do we enacted it was the board of directors were who I'm not gonna say was responsible because it's legal responsibility not but that's where the buck stops at the board of directors. And somehow they failed the association. But if you have collections if you have delinquencies, get a collection policy allowed your management company to do its condition precedents. Again, in Colorado, you have to offer a payment plan sampling in Texas, you have to do many things. And then when there's not moving the needle, I believe that should go to collections, allow collections to do a robust engagement with the delinquent owners that are data driven. And after a certain amount of time. I know my company, we're going to say to the Board of Directors, this can continue. It's 126 days we pull we've taught them we're not moving the needles. Now let's discuss foreclosure. Let's review. Let's see how much equity is in the unit. Let's see what the fact pattern is. If there's other liens and encumbrances, let's project what the outcome of this legal action will be. That's that, yeah, yeah. No,

Robert Nordlund: 18:10

I think, you know, my brain is spinning. Because number one, this is not my world. So I'm glad we have you on the program. I think so many board members are probably feeling the same thing that if this person is delinquent, then we call the attorney. And there's all these steps in between, and I'm remembering now, we had some good friends and the husband died of a sudden heart attack, you know, young 3040, something like that. Couple of young kids. And we had just, our company had just, I know, completed the reserves it for that association. And I reached out and I called the management company spoke to the manager and said, Hey, these are friends of ours. Can you give them 90 days of grace, they have money. But we've got a grieving widow here. Just want to let you know, they're probably going to be late for the next couple, three months. Don't Don't give them grief. They've got you know, the husband died. And the manager was like, Oh, I know that couple. They're nice. I'm so sorry to hear. And I haven't thought about that for a decade or two. But I think this whole in between process that you're talking about, reach out, understand what the human process can be. Catch. delinquencies become before they become defaults, find out if you're really dealing with a problem or not, or an accident. And then in my world, we try to make sure our clients are funding reserves that ongoing cost of deterioration with the budget, which is the start of seemingly everything when we try to leave special assessments for the last resort and I think what you're saying also is don't jump to that last resort. The Foreclosure is the last resort. There's so many steps In between,

Mitch Drimmer: 20:01

exactly. And I always like to tell people are your governing documents defines your association. Your budget tells you where your association is going. And your uniform collection policy will tell you how to get there. I like that.

Robert Nordlund: 20:17

Well, Mitch, we've got so much to speak about. I've got a follow up question on that point. But first, let's take a quick break to hear from one of our sponsors.

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Robert Nordlund: 20:57

And we're back. Mitch, I want to come back to that point of remaining fair and dealing with this on a human side and a compassionate side offering payment plans. Those I believe will look different to different people. Is that

Mitch Drimmer: 21:14

right? Accurate, right? Again, there is the right sides of payment plan. For instance, if you're in a community association, that's an HOA that has $150 a year, you don't want to give somebody an 18 month payment plan that's absurd. Give them a six month payment plan, I find 18 month payment plans are a little too long and projected. To me the Goldilocks number, on average is a 12 month payment plan. And, you know, we want for it. And again, we don't charge for it. If your attorney charges for payment plans and maintaining the payment plan. Well, you know what, somebody's down, you don't put your foot on their backs, you give them a helping hand up. And again, once they go with two attorneys, you have just doomed the the owner of the delinquent owner to a huge amount of obstacles in order to make the association whole. Now they have to go to delinquent assessments, plus, they gotta pay 345. I've seen attorney bills go up to 15$20,000 on something so people just can't take themselves out. So what have you just done? You've created somebody who's going to lose their home. And I want to tell you a good piece of advice. And I say this that almost every

Robert Nordlund: 22:38

meeting, not that you're giving bad advice?

Mitch Drimmer: 22:42

an excellent piece of advice. And this is Well, no, okay, how dijamin companies, not just the board members, today's delinquent homeowner, is tomorrow's board president. And they're gonna remember the credit journey, the collections journey, they're going to remember that you sent them to an attorney and you tried to take away their home. But if you engage them and work it out, and help them and lift them up, they will have no reason to run to the board of directors to because once they do get on the board of directors, if they had an unpleasant journey, they'll lead a bowl of crazy wash it down with a glass of stupid and fired the management company, blaming them for everything you want to keep your clients then engage in a reasonable collection program where there's a hierarchy, first party notifications, collection, agency engagement. And then if you have to go legal. Now I want to talk about one thing that's important. A lot of attorneys go for money judgments. That's absurd. The only time money judgments are a good idea is when you have those $150 A year associations. If somebody's delinquent for $150 a year if they go five years delinquent. That's $750. I'm not taking away anybody so I don't want that account. Yeah, yeah. Okay. If you're going to go to court on a muddy judgement for a significant amount of money, why would you get a money judgment when you've got a security interest in the process you've engaged in for 126 days? Thanks. They refuse to pay. Now they deserve to lose their home. I'm sorry. I don't like foreclosure. But I don't like families who have budgeted well and made responsible choices be forced out of their homes because the assessments go up because if somebody doesn't pay assessments go up. Special assessments happen and then people start to disappear. What people disappear. Where'd the security guard go? Where's the doorman? Where's the valet? Where's the services in my building? What happened when my HOA How come the pool green like olives, and that is money judgment does nothing because if you get a money judgment, you gotta go back into court to get a writ of Garnishment or Writ of Execution. You gotta find their money. And then many places have exemptions head of household is famous in Florida. So again, money judgments are not worth it. So if you have any attorney trying to talk you into money judgments, say no, say if you're going to go to court, go to court for a good reason, go to court to foreclose, but only after the hierarchy first party notifications, intensive, robust engagement with the owner, then you can she go legal because now you have the right to go legal from an ethical perspective,

Robert Nordlund: 25:34

Well, we came back from break talking about fairness, again, it starts with a budget, make sure you have a budget that is reasonable. So you're not doomed from the start. But I don't like when the hard working payers on time, may have to face increased assessments to make up for delinquencies. That's not fair. It's also not fair to hurt people when they're down to hitting them with a lot of legal fees. Boy, if I got a letter in the mail from an attorney saying, I've been a bad boy, those are fighting words. And I don't want there to be a fight for just an accident. And so if there's an accident, where someone's out of town, they change their credit cards, or they got a death in the family, or whatever it is, that's an accident. Let's get that resolved. Let's not make a fight out of that. But there's that whole idea of the human element, making the decisions or appropriate decisions along the way, waiting until, hey, if they want to fight if that homeowner is putting up a fight, that's when you give them a good one. Let me have you address the question because I know there'll be some of our listeners out there thinking we can't raise assessments, because that'll push some of our owners into delinquency? Well, from my point of view, I see that board members have to raise assessments, the reality is there's inflation out there, the costs have to go up. And if some people can't afford it, then yes, they can sell. But what else would you say what counsel can you give for board members who are afraid to raise assessments because they think they'll push someone into delinquency?

Mitch Drimmer: 27:16

First of all, a board of directors has to realize that they have a fiduciary duty to the Community Association, and not to the individuals including themselves, when they go into that board meeting. And before they convene it, they should check their personal agendas out the door, because really, you've got a board of seven, let's say, and they're hammering out a budget and what I see all the time and you know, I've been a manager, I've seen it, they start up the assessments and work their way up. So they take that round peg and try and put it into that square hole that doesn't play. That's wrong. If you do not have an honest budget, what are you doing, you're gaslighting yourself, you're doomed from the start, because there is no free lunches, and the chickens will always come home to roost. And when the chickens come home to roost, that makes me glad that doesn't make me sad, because that means that the association has to do something in order to maintain its value. People who live in community associations do not understand that this is about a rental unit, we're talking about inflation and prices going up. Well, if you lived in a rental building, and it was mandated, well, they still have the same price. You got to live somewhere, they still have the same price pressures and prices go up. You're in a in a condo or an HOA, it's an investment. Think of it as a business, I'm talking to the owners out there and assessment is not rent an assessment is a cash call on your property every month to maintain the property so that the values don't go down the curb. The curb appeal of Curb Appeal appeal doesn't lose it. Because a management company has many and a board has many, many responsibilities. But the number one responsibility is to the association. Matter of fact, when somebody goes to liquid and you don't put them into collections, you're not just doing the association a disservice you're doing the debtor a disservice. Because if you allow him to dig a hole, he's going to dig a hole 12 feet deep, not six feet deep. And that's going to be hard for him to handle or to climb out of it again. Collection policy says when they go into collections, how much the late fees and late interests are, you'll find that in your bylaws as a lot of your collection policy can be harvested from your bylaws, articles of incorporation and declaration and all those three parts of CCNRs and ours needed attorney to be changed. But your uniform collection policy is part of your rules and regulations, which the board of directors themselves can make Ah, as long as they're not in conflict with federal laws, state statutes, and the association's bylaws, so it is up to the board of directors to put in rules and regulations, a uniform collection policy, which says when something goes to collections, how it goes to collections, oh, it sent him for collections. And as a matter of fact, my, my company just this week released a new piece of technology, where we have what is known as API's with all the software companies, you know, that syncs the band, it goes the enumerates, the BMS is, I don't say, Oh, well, they're managed, something's gonna trouble built, we have to calibrate. We know, you already knew that. I say numerate already? Oh, yes. So alright, guys, don't get me in trouble. I said all your names. Alright. So we have an API. So we pulled down all the units, we have a resting on our portfolio, and the association management of the board watches them into collections. But we now have a new program where the board could set a threshold. So if a board doesn't meet for six months, they have a uniform collection policy says they have to two months or after $500 or$700, Aido, they set a number, it automatically goes into collections. But we do not take away the agency of the of the Community Association, because we notify them 10 days in advance. These units are staged for collections, because we know where they are. We had their their lectures on our on our portal. And then we said you could pull them out if you want. And if they don't, they automatically go into collections. And we're not going to

Robert Nordlund: 31:42

reach out to the owner and say, Hey, you're my neighbor here. I just heard that you were on the collections list. Is there a problem you want? Tell me about do you want to get that solved before it gets official? And just that, that those in between steps? Well, Mitch, you and I are on the verge of getting ourselves wound up here. So you got to make sure that we

Mitch Drimmer: 32:06

close about Yeah, it is about our business.

Robert Nordlund: 32:09

The cash flow is the lifeblood to an association and the board's can't miss that important. That important concept is running. The association is running an organization but it beats with cash while marijuana thank you for taking the time to join us on today's program. Any closing thoughts to share with our audience at this time? Well,

Mitch Drimmer: 32:29

I it would not be a presentation with with Mitch yes, Drimmer. Without him plugging his book, The Art of corrections for community associations. It's a real book. It's dedicated to board members and, and managers that were trying to make a little better place of their corner of the world. This book with the code of Norlund is free to anybody who sends me an email at mitch@axela-tech.com . Send me an email, and I will send you a copy of my book. You don't need to pay Jeff Bezos, my book, I'm going to send it to you for free. Hey, cos you're with Robert.

Robert Nordlund: 33:14

Mitch. That's generous. And let's make the discount code a little simpler than my last name. Let's just make the discount code mich mit ch. I heard Barnes. There we go. I heard you on the podcast like,

Mitch Drimmer: 33:28

go ahead. If you order now. We'll send you

Robert Nordlund: 33:31

OG for more information or if you have follow up questions. Of course you can reach Mitch at mitch@axela-tech.com . Well, we hope you learn some HOA insights from our discussion today that helps you bring common sense to your common areas. We look forward to having you join us for another great episode next week.

Announcer: 33:58

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