Courts many times have characterized receiverships as a drastic, extraordinary remedy. They have called it a powerful weapon that should be used sparingly and only where clearly necessary. It follows naturally from this common judicial view that an association should carefully approach the question of whether the uncommon remedy of a receivership should be used as a collection tool. A careful analysis and review of the facts and circumstances of any collection matter should be performed so that the association can make an informed decision about whether to pursue this extraordinary measure.
A receivership is the court ordered appointment of a rental agent for a property within the association. The Receiver (rental agent) must be a person not affiliated with the association who prepares the property for the market, manages the rental of the property and collects and disburses rent pursuant to the court’s order. The purpose of all of this is for the rental payments to satisfy the debt owed by the owner of the property to the association. Once the debt is satisfied, the Receiver is discharged from his/her obligations and the receivership is dismissed (terminated).
There are two major criteria that need to be satisfied before an association can even consider petitioning the court for a receivership:
- The property owner must be delinquent in the payment of assessments.
- The property must not be owner occupied (i.e. it must be vacant or already occupied by a tenant).
If the two criteria above are satisfied, the association now faces the tougher challenge. The optimum conditions for a receivership encompass a rare combination of timing, market factors, property condition, financial ability, willingness, and resolve.
Timing is a crucial consideration. If a homeowner is delinquent in paying his/her assessments to the Association, chances are he/she owes money to others as well. It may not be long after a homeowner stops paying assessments that the mortgage holder forecloses on the property. In the event of foreclosure, the window for the appointment of a receiver and repayment of the association’s debt becomes much smaller. The board should make itself aware of the status of the homeowner’s mortgage prior to making the receivership decision.
A related consideration is the market conditions of the community. Are there a lot of rentals in the community already? How long do homes typically stay on the market before being rented? The association can count on it taking at least that long to rent out the receivership property, plus the time it takes to prepare and file the court paperwork and obtain a hearing (anywhere between 30 and 60 days, depending upon the court’s calendar).
The property condition can also have a great impact on the feasibility of a receivership. The association must keep in mind that the receiver’s job is to make the property marketable. If substantial repairs are needed, the association is going to have to pay the money to make those repairs. This will delay the entire process in general, and the Association’s receipt of rental profits.
If more than minor cosmetic repairs are needed, the association may be faced with the classic situation of “throwing good money after bad”. In such case, the association may wish to consider pursuing other avenues. Either way, it is important for boards to do all they can to pre-screen condition of properties before spending any money on receiverships. There is a bright side to all of this, however. If the property is a blight on the neighborhood and is in danger of falling into further disrepair, a receivership gives the association an opportunity to cure the dilapidation and ultimately charge that cost back to the homeowner.
Repairs, receiver fees, marketing fees, attorney fees, and court costs can all add up to a substantial sum of money. Ultimately, if the property is rented and the receivership is allowed to run its course, these costs and fees can be recouped by the association. But the board has to ask itself, is it in the position to spend money in order to recoup money? The total cost of pursuing this extraordinary remedy (including attorney fees, receiver fees, and court costs) can run between $750 and a few thousand dollars. But the good news is that once the receivership is in place, the receiver is charged with the responsibility of collecting and disbursing the money. Literally, the association just collects its check every month for as long as the property is rented.
The association must be willing to take a bit of a risk in exchange for a greater reward. If all of the above factors point favorably toward trying a receivership, the association is advised to authorize it. The payoff is payment in full from a property that was otherwise a drain to the financial resources of the association, and sometimes the improvement of the property’s condition. The association must also be willing to take a homeowner’s property rights away from him/her, albeit temporarily. The association is more familiar with the payment or non-payment patterns of its members than any attorney or court. The ideal candidate is an owner who is perpetually delinquent, and/or owes a relatively large amount of back dues to the association.
The receivership road can be longer and bumpier than the expressway of standard collection lawsuits. However, if all of the conditions examined above are more favorable than not, the association with the ability to maintain its resolve can employ receivership as a very effective collection tool. It is not for every association, or every situation. But it is frequently feasible and does present a truly extraordinary option.