Estoppel letters and real estate investing go hand in hand. Here is a very sad but true story about an investor who did not know what an Estoppel letter was and the importance of getting one up front.
First of all, what is an Estoppel letter?
Essentially an Estoppel letter is a document that provides an accounting of “all assessments and payments due”. It should include monthly obligations and the accounting of the position of a particular property. This document will give you clarity if the property has all of its fees paid up to date and are current, or if there are any moneys due (in arrears). Often these outstanding charges are missed by a closing agent.
Tragic story (but true)
I met a real estate investor at a café with a client of mine. This investor recently went under contract to purchase a second home / investment property in a stunning town home complex. This place was a place I knew well as it was a highly sought after, 3 story town home on a river leading out to the Gulf of Mexico. This beauty came complete with a boat dock and everything. This investor got a great deal on the property as it was a foreclosed property and the bank was ready to move it off of its books.
When doing the final walk through, he saw his soon to be neighbor washing his boat so he went up to say hello and introduce himself. During the conversation, he learned that the property had $40,000 worth of back payments due to the association. Stunned by this info, he started making some calls as he was on his way to the closing table later that day. He learned from the closing company that the home owners association was advised by their attorney not to submit an Estoppel letter (the quintessential red flag). Many phone calls later, they are now in negotiations to settle this $40,000 shortfall. At the time of this post the situation has not been resolved.
The moral of this story, however, is that it is paramount to receive the Estoppel letter for any buyer of a home owners association (H.O.A.), also known as a (common interest community). Never close on a property without having this Estoppel letter and understanding the financial position of the property as it relates to the obligations of its H.O.A.
Once you own a property, the obligations of the unit you purchased becomes your responsibility. In the case of this investor, he would have been responsible for the $40,000 in arrears. Fortunately he learned of this BEFORE closing and had the leverage of not closing the deal as a tool to get it negotiated up front. Once he closed, he would not have any leverage and he would have instantly been $40,000 in arrears.
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