Given the state of today’s economy, Associations are facing increased delinquencies. Proceeding with a lawsuit after an owner has failed to respond to the attorney’s thirty-day demand letter is not always the best option. For example, the property may be owned by an entity such as an LLC, which may be difficult to collect from. Associations are therefore looking to alternative methods of collecting unpaid assessments. A receivership is an example of such an alternative method for collecting delinquent assessments.
At a minimum, the requirements for a receivership action are:
- The property must be vacant or tenant occupied;
- The owner is delinquent in assessment payments; and
- The property is in danger of being damaged.
FACTORS TO CONSIDER PRIOR TO INITIATING A RECEIVERSHIP:
Although there are many instances where a property meets the above requirements, an association should not rush into a receivership action based solely on affirmative responses to the requirements. There are additional questions to be asked and further investigation required. A few of the factors to consider include :
- Has a public trustee foreclosure action already been initiated by the mortgage company? If the property is currently under a foreclosure action it is wise not to proceed with a receivership action. This is because there would unlikely be enough time to process the receivership action with the court in order for the receiver to be appointed and place a tenant in the property to recoup the receivership fees, legal fees and delinquent assessments. The typical processing time for a receivership action with the court is between three and four weeks. The receiver then needs time to examine the property, make necessary repairs, list the property and locate a suitable tenant.
- What is the condition of the property? It will be easier for the receiver to place a tenant in the property if it is in good condition. This will also allow the receiver to obtain “top dollar” for the lease period. The condition of the inside of the property is typically unknown, but a lot can be said for the condition of the inside of the property just by examining the outside of the property. Is the yard neat and tidy? Are the windows all in place? Is the property boarded? Is the fence in good condition? Is there trash lying around the property?
- Is the Association willing to front repair/replacement costs? There are instances when a receivership property is in such poor condition that new paint and a thorough cleaning will not make the property marketable. There are conditions such as mold, missing or broken appliances and water damage that must be repaired or replaced before the property can be listed for rent. These costs are initially paid for by the association. If the receivership is successful, the costs will be paid back to the association. However, there is a possibility that the costs will not be recouped.
- What is the average rent for the development? The delinquency amount, plus legal and receivership fees should be compared to the average rental price for the development. This will provide an estimated length of time needed by the receiver to recoup the fees and delinquent assessments.
- Are there a lot of properties already for rent in the development? There is currently a low vacancy for rental properties in Denver and the surrounding areas. This is beneficial for the receiver and should not cause an issue in the renting of the receivership property. However, if the market drastically increases it could result in the receiver competing for the available tenants.
- How long does it typically take to rent a property in the development? This is more of an issue when the rental market is saturated by vacancies. Fortunately, or unfortunately depending on how you view it, this is not currently the case.
- Is the property listed for sale? In order to convey clear title to a new owner, the association’s lien must be released. This requires payment in full at or before closing or the association and current owner can negotiate to settle for a lesser amount. A sale therefore may be an easier and quicker way for an association to recoup delinquent assessments than a receivership. However, in light of the current market issues a sale is not guaranteed to occur.
- How much is currently owed to the Association? In order to justify the expense of a receivership action it is recommended that the delinquent assessments be at least $1,000.00. This is not a hard and fast rule and each case is to be evaluated individually.
- Does the Board understand the role of the receiver? A receiver is a disinterested, third-party to the transaction that is appointed by the court. The receiver is not an employee or agent of the association or management company. The receiver does take into consideration the association’s wishes, but he/she is not obligated to follow instructions received by the board.
- Is the community facing a construction defect issue? Any disruption to the development may make it more difficult for the receiver to rent the property and may lower the price of the rent.
These are just a few of the additional questions to ask prior to proceeding with a receivership action. Our firm has extensive experience with receivership actions and we know the questions to ask in order to determine if the property is a viable candidate for a receivership. We welcome the opportunity to explore receivership actions with associations. Please call us at 303.432.9999 with any questions about receiverships.