Browsing through real estate terminology can be like navigating a maze. With terms constantly changing from one region to another, it can become overwhelming. Last week, we discussed how the term "tax certificate" can have different meanings depending on where the homebuyer or real estate expert resides and works. Another term often mentioned is estoppel.
In a broader legal sense, estoppel is the "principle that prevents a person from asserting something contrary to what is implied by a previous action or statement of that person or by a prior judicial determination."
What Does Estoppel Mean in a Real Estate Transaction?
There are two types of estoppel commonly encountered in a real estate transaction: association estoppel and tenant estoppel.
In this article, we will focus on association estoppel, which is defined as a legal document obtained from a property management association, a condominium owners association, or another community association, and it displays all unpaid fees or fines as of a specific date.
While this term is often associated with condominiums in Florida, every state has regulations requiring associations and management companies to disclose information to prospective residents regarding their fees, assessments, internal regulations, and other important details.
Essentially, the estoppel letter you receive from the association's management company or from the association itself is a legally binding document, listing the fees, assessments, and other charges you will be responsible for after the transaction concludes as the new owner and the current owner's existing debt.
In most states, there are laws preventing the association from adding fees after the transaction concludes if you have this document. They are "estopped" from retracting their commitment to collect additional funds from you. In Florida, if a clerical error is found in your estoppel letter, they must adhere to the provisions found in the state's regulations to rectify those mistakes within a certain timeframe. Otherwise, the letter holds legal value.
Without this document, the homebuyer or investor will be liable for any unpaid fees from the previous owner. Purchasing a property in an association auction may seem like a great deal, but it can also lead to unexpected hidden costs if the proper real estate due diligence is not conducted.
Other Terms Related to Association Estoppel
The terms associated with association estoppel vary by state. Here are some other terms used in different states by experts to describe the same concept as association estoppel:
- HOA Certification
- HOA Status Letter
- HOA Closed Report
- HOA Estoppel Package
- HOA Certification of Assessment
- Demand Letter
- Preliminary Closing Letter
- Estoppel Certificate
- Sales Information Package
- Estoppel Certificate
- Condominium Certification
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How to Obtain an Estoppel Letter for Your Transaction?
If you are interested in purchasing a unit within a community association, simply calling and requesting verbal confirmation of your potential transaction is not enough. You need to have the association's verified information to confirm the existence of any unpaid fees.
Typically, this document will be included in the closing costs of a regular transaction and is usually considered a seller's expense. The closing agent will collect this report along with other items listed in the ownership commitment and closing contract, such as a boundary survey and title search.
For those looking to skip regular closing transactions and research this information for an investment property, it may be found at a distressed auction controlled by a Civilian Homeowner Association. The initial research work can often be done online.
Here are some steps you can take to properly request a Civilian Homeowner Association's closing report:
- Use the legal description of the property to get hints about the property management associations.
- Search for association business information and contacts on your state's online business database.
- Reach out to the association, management company, or their attorney to request this document.
- Confirm the address of the unit falls within their jurisdiction.
- Inquire about fees and timeframes for providing the information.
- Be sure to ask if any related associations are associated with this address.
- Check whether the buyer needs prior approval before closing. If so, request a copy of the approval letter to initiate the process.
- Find out if the property is on any delinquency list. If so, inquire about the attorney's contact information.
Finding the Legal Description
The legal description identifies a property using physical boundaries that describe its size and location. Legal descriptions can be found in deeds, purchase contracts, ownership commitments, and on property appraisal agency websites.
Unlike mailing addresses, legal descriptions are entirely unique to each property. They are designed to eliminate any confusion about the transfer of ownership rights to the new owner.
A legal description can be as simple as listing a lot and block number and a subdivision name or, for non-subdivided properties (vacant land), it can be quite complex and detailed, listing nearby rivers, roads, bearings, and latitude and longitude coordinates and other geographical markers. In particular, this legal description is known as "metes and bounds," describing how to trace the boundaries of land with its starting point, its endpoints, and its angles.
Finding and Contacting the Association
After finding the area name, enter that into your state's registered business online database. In Florida, you can find this information on Sunbiz.org. In New York, this information can be found in the Department of State, Division of Corporations, State Records, and UCC.
A list of all registered companies in the state with the same name will appear. In this case, there are several companies registered with a similar name. This is where you have to sit down with your laptop and click through to learn more.
Clicking on each entity will display who the registered agent is. Here, a management company is listed:
Search "Resort Management" in your browser to find a phone number. Call that number and confirm if the unit address falls within the jurisdiction managed by that association or management company. Be sure to call all entities listed on the registry until you have confirmation regarding the management association and, when applicable, the management company, and eliminate any remaining relationships for second, third, or subsidiary associations.
Some properties may be managed by multiple associations, so part of the real estate due diligence process is not assuming there is only one association.
Additional Questions to Ask
After confirming that the address belongs to an association, here are some additional questions you can ask:
- How much is the estoppel fee?
- How long does it take to complete?
- Is expedited service available?
- What is the mailing address for the estoppel (not the association's fees)?
- Is there any other association related to this address? If so, gather their contact information.
- Does the buyer need to be approved before closing? If so, request a copy of the approval letter to begin the process.
- Is the property on a delinquency list? If so, what is the attorney's contact information?
Management Company vs. Self-Managed Associations
A Homeowners Association (HOA) is not the same as an HOA management company. Some communities may opt to hire a management company to assist with daily operations, implementing HOA policies, communicating with the board and residents, and ensuring continuous maintenance of common areas.
Not every community will hire a management company, so they are considered self-managed. Typically, there will be a Board of Directors or a President at the very least. Although sometimes finding a point of contact for a self-managed association can be challenging and time-consuming. Unlike a management company, overseeing daily activities and responding to requests is not a full-time job for those on a self-managed association's board.
What to Expect in an Association Estoppel
As mentioned earlier, every geographical region has different terms and requirements for an HOA estoppel letter. However, there is some information that every homebuyer should be aware of if they decide to live in a community.
An Association Estoppel should include most of the following information:
- Any secondary associations managing assets outside of the association in question, including master associations, golf clubs, or subsidiary associations.
- Any current violations of the association's rules and regulations.
- Any upcoming fees to be paid to the association, including the frequency and method of payment for fees (e.g., monthly, quarterly, annually).
- If the property is subject to enforcement with outstanding fees, an attorne's demand for payment of the fees and/or accrued interest should be included.
- Any anticipated special assessments and outstanding balances for a unit's share of community improvements.
- Buyer requirements necessary to complete closing for the buyer, including security screenings and/or an application for approval.
- If the association has the Right of First Refusal that allows them to purchase related property, under specified conditions, prior to the owner selling the property to a third party.
- Identification of whether the homeowner or association is responsible for setting up and paying accounts such as water, trash, cable, and/or drainage systems.
- Any additional member-required fees or assessments for amenities such as fitness rooms, swimming pools, or golf courses.
Homebuyers should also inquire about the association's Reserve Study, if available, to determine if a special assessment may be necessary to fund future projects. Furthermore, be sure to review all Covenants, Conditions, Restrictions (CC&R) of the community so that when you decide to paint your front door with a flashy purple, the next fine won't come as a shock.
What Happens if Your Transaction Falls Through?
In some states, you will receive a refund if the real estate contract is canceled. Consult a local real estate expert to find out if this applies to your state. In Florida, there are specific provisions that every association and management company must adhere to regarding estoppel requirements. This includes an option to request a refund of the fees paid for the HOA estoppel letter.
Of course, this may not apply to your area, so before requesting or making any payments, make sure you know what the rules are. Otherwise, you might lose hundreds of dollars for information about a property you don't own.