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Do you understand the financial arrangement with your law firm?

By Sean Galaris
President, LM Funding

Members of condominium boards are, perhaps, among the most well-intentioned individuals. They selflessly serve on boards so that neighbors’ homes can retain value, resulting in lifestyles that can be maintained during what continues to be an extremely difficult financial time for most associations.

In many cases it is a thankless job. The board is charged with not just dealing with maintaining the property, but also with trying to collect assessments. Due to the financial crisis most associations are experiencing, the board also finds itself immersed in a legal collection maze that is at times confusing, frustrating and unexpectedly expensive.

This is new territory for these volunteers. It is clear that their roles have become more complex. They must now deal with unpaid assessments, under-water property values, cut services, and perhaps the biggest challenge is responding to unhappy neighbors whose expectations of their communities have diminished.

Faced with these problems, associations turn to law firms for guidance and assistance with the collection process However, many of these firms come recommended by neighboring association boards or managers. This can often result in the recommended firm immediately being considered a “trusted advisor” rather than a vendor looking to win new business. The following are among the questions that should be posed to a law firm prior to signing the engagement letter:

  • Is this a “deferred” or “contingency” billing arrangement?
  • What is your firm’s philosophy on collecting all delinquent amounts after a bank or new owner takes title?
  • Can billing amounts exceed the amounts collected per file?
  • Do any lawyers in your firm also represent banks?
  • Can we speak to other association clients (both present and former) that you have represented on collection cases to understand their experience with your firm?
  • How much will it cost the association to foreclose on a unit?

 

There are many relevant factors that go into hiring the correct legal counsel. These include documented expertise in the matters that affect association business, litigation experience with documented results and the overall philosophy of the firm and its partners. Perhaps one of the most important things for board members to understand is the billing procedures, fees and expenses related to this engagement. At the core of the relationship between associations and attorneys is a clear understanding of the “contingency” agreement.

By definition, a contingency fee agreement requires the desired result being produced in order to earn payment. However, in most cases, these relationships are not pure contingency, as the board may have been led to believe. Rather, most relationships involve “deferred” billing. This is an important distinction, and one that boards should clarify prior to retaining a law firm. As its name implies, a deferred fee agreement simply defers payment of legal fees and expenses until

the matter is closed, regardless of the outcome.

Associations either on their own or with direction from their CPA have recently begun to budget for bad debt. While they also budget for legal fees, in many instances the board does not know the amounts outstanding to law firm at the time they adopt their budget. It is often only when a bill arrives that the board recognizes the potential debt that exists to its law firm. In turn, this creates more budget deficiency and more financial trauma for the association.

The first thing association boards must understand is that law firms will get paid whether they win, lose or draw in the collection process. While these fees come due after a collection, they are usually much higher than anticipated. It’s not unusual for legal fees and expenses to significantly exceed the amount collected through resident payment or the statutory Safe Harbor amount given to the true first mortgage holder, successor or assignee. So while the debt may have been collected, there are many times when associations don’t realize the financial benefits.

            So, what can an association expect in terms of fees?

Here is a breakdown of fees associated with the legal collection process:

  • Flat rates for standard collection letters, pre-lien notices, title searches and other “point, click, and print documents”
  • Monthly monitoring charges for review of files
  • Monthly reporting charges for producing a status report of delinquent units for clients
  • Hourly billing rates that generally ranges from $225-$450 per hour for answering bank foreclosure complaints (when association is named in complaint), drafting and filing foreclosure complaints, representing the association when foreclosure defenses are raised, etc.
  • Expenses and costs for photocopies, envelopes, labels, postage, filing fees, travel expense and other ancillary fees

 

Associations must also be made aware of the business costs for association foreclosure. In many cases, it does not make sense because of the expenses associated with foreclosure, both direct and indirect. We’ve found that the average legal cost for foreclosing on a unit is approximately $4,200. However, the greatest cost associated with any foreclosure is the lost opportunity to collect all of the outstanding maintenance fees.

Association foreclosure wipes out all prior debt owed to it in favor of getting title to the unit. In theory this sounds reasonable, because the association believes it will be able to rent the unit and recover a significant amount of the delinquent fees. However, the reality is that it usually takes less than six months for a bank to foreclose on the association, once they have taken title. This is the unintended backfire that associations don’t consider or anticipate. ultimately, the bank will take possession of the unit, both limiting the rents available for collection and eliminating the association’s ability to collect delinquent maintenance fees. All of this without even consideration of the cost to prepare the unit to rent, marketing, real estate fees, liability insurance and other costs associated with unit rental. As we know, associations are not-for- profit companies and were not set up to rent or own real estate.

The bottom line is that associations should understand the financial ramifications of every action when retaining a collections law firm. There are many fine law firms, but others are taking advantage of the financial crisis and boards that don’t understand the process. We most often find the problem in understanding the difference between “deferred” billing fees and “contingency” billing agreements. Regardless of what model you are currently using, board members should require an invoice be sent to them monthly so the association always understands its financial liability.

These are difficult times for condominium associations throughout Florida, and one key to ongoing solvency and survival is to understand, in detail, the financial relationship with the law firms pledging to help them emerge from this financial morass.