December 30, 2011 – In this week’s tip, we answer a question vexing an HOAleader.com reader. Our reader reports that his new homeowner association management company wants to change the wording in the HOA’s 10–day demand letter so the HOA would get an automatic judgment, not a lien, when a home owner doesn’t pay.
What’s a lien, and what’s a judgment? “A lien is a manner by which to collect against a property, and a judgment is a manner by which to collect against a person,” explains James R. McCormick Jr., a partner at Peters & Freedman LLP in Encinitas, Calif., who represents associations.
The management company is probably interested in getting a judgment because it’s enforceable without having to take another step. If an HOA files a lien against a property, it must then file a lawsuit to foreclose on the lien, which takes time and costs money.
The drawback of a personal judgment, however, is that it’s not secured by anything; a lien is secured by the property against which it’s filed. “You can get your judgment, but how are you going to collect it?” asks Jenny Key, Austin, Texas–based vice president of RealManage, Dallas, TX based, association management firm that oversees properties in Arizona, California, Colorado, Florida, Louisiana, Nevada, and Texas.
“The advice we give our boards when they ask us about personal judgments is that we’re not in favor of them,” says Key. “Boards are taking a secured obligation and turning it into an unsecured obligation, and collection rates are fairly low on personal judgments. You also have to pay a bill collector, whose fees typically include keeping 50 percent of what you’re seeking to collect. It seems like a much safer strategy to keep the lien.
“It’s true that a judgment will affect an owner’s credit, which some boards feel is the way to go,” concedes Key. “Board members see new cars in an owner’s driveway and think if they hit the owner’s credit, he’ll pay. But many delinquent owners are probably already getting dinged on their credit. There may be a little personal humiliation there—maybe the owner won’t get that Best Buy card approved—but does it really make owners pay? I’ve not seen personal judgments have much success in making people pay.”
Matt Humphrey is president of the Alameda, California-based HOAleader.com, from which this article was adapted.