May 2010

Would the electronic transfer of money due to your condominium or homeowners association enable you to collect more money in a more timely way? Maybe. Here we explain the pros and cons of implementing an automatic withdrawal system and offer tips to keep in mind if you're about to arrange for one.

Full or Self-Service?

You can arrange a system for automatic withdrawals of members' assessments and even other dues in one of several ways. Your management company may offer the service to individual homeowners, or you can turn to a local bank to oversee an association-wide process.

"We offer it, and there are typically no fees to set it up," says Duane McPherson, the San Rafael, Calif.-based division president at RealManage, an association management firm that oversees properties in Arizona, California, Colorado, Florida, Louisiana, Nevada, and Texas. "Owners have to physically sign up by inputting their bank account number, and then we pull the funds when assessments are due. It's the same process for owners when they have an electronic funds transfer with their utility or any other company. They physically sign up by filling out the form, and probably about 10 percent of owners request that. It's a great method for those who are into that kind of thing."

You may incur fees if you set up a system with a local bank, but in some cases, banks will waive setup or ongoing fees. "For most associations, if they develop a banking relationship with banks that know how to handle homeowners association business, that's offered as part of the process," says Debra A. Warren, principal of Cinnabar Consulting in San Rafael, Calif., which provides training and employee development services to community association management firms and training and strategic planning sessions for association board members. "Banks get money in their accounts more quickly, which they like, and if the association is large enough, that helps the bank manage its own cash flow."

Before you agree, make sure you can meet the bank's requirements. "Some financial institutions will say, 'We want you to move all your accounts to us,'" explains Elizabeth White, a shareholder and head of the community associations practice at the law firm of LeClairRyan in Williamsburg, Va. "We had an association agree to do that, and then the board realized it already had a loan with another bank that required all the association's accounts to be at that bank. That resulted in renegotiation and repricing of the electronic fund transfers. The bank said, 'We based our price on your association moving your $10 million in reserve accounts to us; if you can't do that, now we'll reprice the services.'"

Tips for Arranging Electronic Payments

If you rely on an electronic payment system, you can still encounter glitches. Here are tips for avoiding common problems.

• Ask the bank to list every possible fee. "There may be additional fees that the bank takes out of what's collected or accounts back and says it's entitled to," says White. "Maybe there were miscellaneous fees the association didn't ask about."

• Ask for examples of the reports you'll receive. The bank or management company's reports may not mesh with your accounting system, says White. Make sure you ask to see sample reports, and if they don't match your association's accounting system, work that out before you sign up.

• You must still oversee the process. "I think the big obstacle for a lot of associations is making sure they understand the types of safeguards that need to be in place," says White. "There have been instances in which the financial institution that oversees the accounts hasn't accounted appropriately to the association. Those tend to be accounting issues, and human error is common even when something is automated. But you still have to reconcile your records to be sure everything's accounted for."

• Understand the difference between electronic checks and withdrawals. An electronic fund transfer happens instantly. The money is moved and credited in one fell swoop. However, some institutions offer electronic checks, which simply allow your owners to electronically arrange for a paper check to be generated and mailed.

  "With electronic withdrawals, you never have to worry about late fees," says McPherson. "But if owners do electronic checks, they need to allow extra days for their bank to send it to your association, and checks may not arrive until as many as six days later. A lot of associations consider payments late after the 15th of the month. So someone may send out an electronic check through their bank on the 11th and expect it to go straight through, but there's no guarantee it's going to get there on time. You may have to go back to owners and ask them to arrange for checks to be sent earlier."

"A lot of these glitches seem to come up the first time the association puts this kind of system into place with the financial institution," says White. "It's important to sit down and have a very full understanding of how this is going to work, what reports are going to be generated, and what kind of checks and balances will be in place."

Will Your Collections Improve?

The big question is whether an electronic payment system will simply allow members an easier way to pay or whether it will improve your collection rate. Warren thinks it achieves both goals.

"You'll get money in your accounts much faster, so your association can count on the fact that it'll get X amount of dollars by the 15th," she says. "It may also eliminate that, say, 10 percent of owners who intend to pay on time but don't count on the time to mail and process their payment and therefore get assessed a late fee and end up in a dispute with the association. I do think it will help with that group of people, and the association may carry fewer late fees that it doesn't know what to do with."

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