In the 2018 State of the Industry Report for Closing Due Diligence, respondents listed tracking down associations as their second biggest challenge at work. Number three was unresponsive and unhelpful association managers.
Sometimes the most difficult part of closing on a property in a community association is tracking down all the governing associations’ contact information. A processor or paralegal may hit a wall before they even reach the start line. The legal description in title commitment may give some hints, but the name of the subdivision isn’t always the legal name of the association. It also won't help you find additional associations that do business under a completely different name.
Association Identification is a perfect option for title companies, and real estate law firms with the staff to handle ordering and retrieving documents, as well as upfronting fees to associations and management companies for an upcoming closing, but too busy with other tasks to spend precious time on research that may lead to nowhere. It's also a great choice for investors who are interesting in gathering more information before moving forward with a deal.
When would you want to use Association Identification instead of ordering an Association Estoppel?
- You are an investor or working with an investor on a pre-contract deal.
- You have the resources to work directly with associations but not the time to do the initial research.
- You are an investor that wants to pre-screen a community’s regulations, restrictions and amenities.
- You want to get an estimate on how much to expect in dues on top of the monthly mortgage payments.
- You want to confirm the property is actually in an association.
When you order Association Identification, you will receive all pertinent contact information, like phone number, email, and fax number, as well as ordering directions for all governing associations on the property. Any special instructions or information will be notated, like if there is a voluntary association or the name of the management company to make a request for an official HOA letter or estoppel.
For agents and investors that are strapped for time and need more help, there are other options like ordering an Association Estoppel.
When is ordering an Association Estoppel a better choice?
- You are a title company or real estate law firm looking to improve workflow efficiencies of processors and paralegals.
- You work for a title company looking to increase the volume of closings.
- You work for a real estate law firm looking to maximize other services and billable hours.
- You would prefer to not float fees to the association for HOA letters before closing a deal.
- You would prefer not to waste time requesting refunds from a management company in case a real estate transaction cancels.
- You have determined that outsourcing this task to a specialized third-party will help grow your business.
- You want to work with a partner who will guarantee the information in the report is accurate and current.
When you order an Association Estoppel, you will receive an in-depth report with all information received from the association. The summary page of the report will include any additional associations, dues for each association, and alert you to any violations, if the property is currently in collections or if there are any capital contributions. Any requirements like buyer approval or issues like violations will be notated again on the divider page for each association.
What’s included in an Association Estoppel?
Here is a quick break down of all the typical information and documents found in the report:
- Certified Letter from the association
- Additional Associations
- Association Dues (including frequency and manner in which the fees must be paid)
- Collection payoff letter (when applicable)
- Special Assessments
- Buyer Requirements
- Right of First Refusal
- Utility information (specifies whether the homeowner or association is responsible for establishing accounts for water, trash, cable, sewer, etc.)
- Recreation Leases and Insurance Fund information*
*Some documents or information may not be included if not provided by the association’s certificate. Some may not be applicable or may require additional costs.
There are a lot of things investors need to consider before moving forward on a residential deal involving a community association like an HOA, COA, or CIC. Here are some of the major things to know and do:
Top 5 things investors need to know about buying property in a community association.
- They may be unavoidable in certain markets with low inventory and high rates of community associations.This could potentially work in your favour as the association will make repairs on the home that an investor and landlord would normally foot the bill for. Of course, you will have no control over the cost of the special assessment to pay for such improvements or the quality of the work. The community amenities may also make the property more appealing to future tenants.
- Review the title commitment, but know that it may not be up to date. Associations dissolve, new associations form, and some formerly dissolved association come back to claim unpaid dues. Working with trusted title support companies to confirm all current associations and money owed will mean you have one less thing to worry about after closing.
- Always order an estoppel or certificate from the association and ask if an HOA inspection is required. Whether you do it yourself, your title agent or lawyer does, or a third party title support service provider, this is an imperative part of buying real estate in a community association. The buyer of the property is responsible for any unpaid dues or violations from previous owners’ accounts. It's not enough to get verbal confirmation on the amount owed from the association because that is not legally binding. In most states, whatever is reported on a signed and certified HOA letter or resale package is what the new owner and the association will be held accountable for. Some HOA's will require an inspection of the property for any violations when a property is listed for sale. This is typically the responsibility of the seller or their agent and should be provided in the seller's disclosure statements, but some may not know it's a requirement or the report may not be completed before the closing date is set in a hot market. Be sure to review the HOA's inspection report for current violations if it applies to your property.
- Review and understand all the association instruments like the Bylaws, the Declaration, and the Covenants, Conditions, & Restrictions (CC&Rs). Whether you own one unit in a condominium or multiple homes throughout the country, investors need to be aware of the restrictions placed on the inhabitants. If tenants don’t abide by these rules, the owner is ultimately responsible for settling the fines that may be incurred.
- Review the current and proposed budgets and reserve funds. Is the association budgeting their funds appropriately to pay current bills like water and sewer? Is the proposed budget enough to account for fluctuations in taxes, utility bills, and other maintenance costs? Are there enough reserve funds to pay for repairs from unforeseen natural disasters or will they most likely have to rely on special assessments? Lenders such as FHA will usually require a reserve of 10% of the annual budget.
Whether you are an investor or a title agent or real estate attorney assisting an investor in a closing, there are a lot of options for tools and services to help close the deal faster. Collecting the right data as quickly as possible to help make the right decision is a necessity. Working with a partner who can provide the information you need when you’re struggling to find it will reduce your work-related stress and give you the opportunity to concentrate on your clients and their closing.