Real estate can be complicated. It doesn’t help that the lingo changes frequently from one region to another. Last week, we mentioned how the term “tax certificate” can take on different connotations depending on which state a homebuyer or real estate professional lives and works. Estoppel is another such term.
In the broad legal sense, an estoppel is “the principle that precludes a person from asserting something contrary to what is implied by a previous action or statement of that person or by a previous pertinent judicial determination.”
What does estoppel mean in a real estate transaction?
There are two types of estoppel commonly involved in a real estate transaction: association estoppel and tenant estoppel.
In this blog, we’ll be concentrating on the association estoppel, which is defined as a legal document obtained from a property’s governing homeowners’ association, condominium owners’ association, or some other common interest community, and shows all outstanding fees or fines due as of a certain date.
The term is most commonly associated with HOA properties in Florida, but every state has requirements regulating how associations and their management companies share information with future residents regarding their fees, assessments, by-laws, and other important information.
This simply means that the estoppel letter you receive from the management company of the association or the association directly is a legally binding document that lists what dues, assessments, and other fees you will be responsible for after closing as the new owner and what the current owner owes.
In most states, there are statutes that restrict an association from adding additional fees after closing if you have this document. They are “estopped” from going back on their word to assess you for more money. In Florida, if there is a clerical error found in your estoppel letter, they must follow protocols found in state statutes to amend those mistakes within a certain time frame. Otherwise, the letter is legally binding.
Without this document, a buyer or investor will be responsible for any unpaid fees from prior owners. Buying a property during an HOA auction may seem like a good deal, but it can lead to shocking hidden costs if proper real estate due diligence isn’t done.
Other terms associated with an Association Estoppel include:
Real estate lingo varies from every state. Here are some other terms used in other states by professionals that express the same idea as an Association Estoppel.
- HOA Letter
- HOA Status Letter
- HOA Closing Statement
- HOA Resale Package
- HOA Certificate
- Demand Letter
- Current Dues Letter
- Resale Certificate
- Resale Disclosure
- Resale Packet
- Estoppel Certificate
- Condo Certification
Need help with association information? Download this cheat sheet to see if outsourcing is right for your title company.
How to get an estoppel letter for your closing
If you are interested in purchasing a unit within a community association, it’s not enough to simply call up the association and ask for verbal confirmation regarding your potential purchase. You must have the certified association information to confirm if there are any outstanding dues.
Typically, this document will be covered in the closing costs of a traditional closing and will usually be considered a seller’s cost. The settlement agent will gather this report along with other items listed on the title commitment and closing contract like the boundary survey and municipal lien search.
For those looking to skip the traditional closing and wanting to gather this information on their own for an investment property that may be found at an HOA foreclosure auction, the initial research can typically be done online.
Here are some steps you can take to properly order an HOA closing statement:
- Use the property’s legal description to get clues as to which association(s) govern the property.
- Find the association’s business and contact information in your state’s online business entity index.
- Reach out to the association, their management company, or attorney to request the document.
- Confirm that unit address is within their jurisdiction.
- Ask what the fees and turnaround time is for the information.
- Be sure to ask if there are any other known associations affiliated with the address.
Find the Legal Description
The legal description identifies a property by its physical boundaries describing its dimensions and location. The legal description can be found in deeds, sales contracts, title commitments, and on the property appraiser’s website.
Unlike a mailing address, the legal description is completely unique to the property. It’s intended to eliminate any confusion over which property’s title is being transferred to a new owner.
It can be as simple as listing the lot and block number and the name of a platted subdivision or for unplatted properties (vacant lots), it can be as convoluted and detailed as listing bodies of water, nearby roads, directionals and longitude and latitudes, and other geographic markers. The latter is known as “metes and bounds,” which describe how to trace the boundary lines of the land with a starting point, its terminal points and angles.
An example of a legal description common for a vacant lot on a warranty deed.
An example of a legal description from a warranty deed of a single-family home located within a community called Reflection Lakes.
Find and Contact the Association
After finding the name of the subdivision, enter the name into your state’s online database of registered corporations. In Florida, this would be Sunbiz.org. In New York, this information is found in the Division of Corporations, State Records & UCC.
A list of all known corporations registered in that state with that name will populate. In this case, there are several registered companies with a similar name. This is where you’ll have to put down your laptop and pick up the phone to do more digging.
Clicking on each entity will show who the registered agent is. Here, a management company is listed:
Type “Resort Management” in your search browser in order to find a phone number. Call the number and confirm if the address of the unit is within the jurisdiction of an association they manage. Be sure to call all the registered entities on the list until you have confirmation on the governing association and, when applicable, the management company and ruled out all others for a second, third, or sub-association.
Some properties can be governed by multiple associations, so a part of real estate due diligence is not to assume that there is only one association.
Additional Questions to Ask
After confirming that the address falls under an association, here are some follow-up questions to ask:
- What is the fee for an estoppel?
- What is the turnaround time?
- Is there a rush option?
- Where is payment for the estoppel (not association dues) mailed?
- Are there any other associations affiliated with this address? If so, obtain the contact information.
- Does the buyer need to be approved prior to closing? If so, request a copy of the application to start the process.
- Is the property in collections? If so, what is the attorney contact information?
Management Company vs. Self-Managed Associations
A Homeowner’s Association is not the same thing as an HOA management company. Some communities may choose to hire a management company to help with day-to-day operations, enforce the HOA’s policies, communicate with the board and residents, and perform ongoing maintenance of common areas.
Not all communities hire a management company, so they are considered to be self-managed. Typically, there will be a Board of Directors or a President at the very least. Although sometimes finding the point of contact for a self-managed association can be incredibly difficult and time-consuming. Unlike a management company, overseeing the daily operations and responding to inquiries isn’t the full-time job of those on the board of a self-managed association.
What you will find in your Association Estoppel
As previously stated, every region is different in terminology as well as requirements for an HOA estoppel letter. There are some items, however, that every buyer should be familiar with if they choose to live in a community.
An Association Estoppel should include most of the following information.
- Any additional associations governing the property outside of the designated HOA or COA including master association, golf club, or sub-association.
- Any current violations of the association’s rules and regulations.
- Any upcoming fees that must be paid to the association, including the frequency and manner in which the fees must be paid, i.e. monthly, quarterly, annually.
- If the property is in collections for unpaid dues and fees, there should be a collection payoff letter from the association’s attorney that includes a breakdown of fees and/or interest that has been incurred due to default.
- Any upcoming special assessments and the remaining balance for a unit’s share in community improvements.
- Buyer requirements necessary to finalize the closing for the buyer, including background checks and/or buyer approval applications.
- If the association has Right of First Refusal that gives them the option to purchase the subject property, according to specified terms, before the owner is entitled to sell the property to a third party.
- Information specifying whether the homeowner or the association is responsible for establishing and paying utility accounts such as water, trash, cable, and/or sewer.
- Any additional required membership fees or assessments for amenities like fitness centers, pools, or golf clubs.
Homebuyers should also ask about the association’s Reserve Fund Study, if available, in order to determine if there may be a needed special assessment to fund projects in the near future. Also, be sure to review all the Bylaws and Covenants, Conditions, and Restrictions (CC&Rs) of the community, so that if you decide to paint your shutters purple, the subsequent fine doesn’t come as a shock.
What happens if your deal falls through?
In some states, you should receive a refund should a real estate contract cancel. Ask a real estate professional in your area if this is the case for your state. In Florida, there are specific guidelines that every association and management company must follow regarding the estoppel request. This includes an option to request a refund the fee paid for the HOA estoppel letter.
Of course, this may not be the case in your area, so before making any requests and sending any payments, be sure you know what the rules are. Otherwise, you may find yourself out of several hundred dollars for information on a property you don’t own.
