There are over 351,000 homeowners associations in the United States. That means that over 40 million households, or 53%, are governed by some form of association. That’s huge. If you work in residential real estate, that means that your next closing has a 50/50 of requiring an estoppel letter.
HOAs are like pineapple on pizza. Most people have VERY strong feelings about them, and they aren’t afraid to voice them. Whether in favor or against, the reviews usually boil down to costs of living in these communities in exchange for the amenities. Everyone is eager to argue about the perceived value that these communities bring to potential buyers, but the costs associated with closing on a property for settlement agents and sellers are often overlooked.
Here are some of the hidden costs and issues facing settlement agents, and how finding a due diligence partner can help alleviate these problems.
Costs of an estoppel letter for settlement agents
An association estoppel letter is a necessary piece of due diligence for any property located in a community association. Settlement agents know that in order to write an accurate title report and issue a comprehensive policy, all known associations with the right to lien need to be listed. But we do this work every day, and we know that it’s not always as easy as a quick phone call.
Three major costs settlement agents face dealing with associations include:
- Time spent on research and outreach
- Refund refusals from the association
- Paying out title claims and/or court costs when an association with liens and other fees are missed
Research and reaching out to associations
Any governing associations should be listed in the title report or the closing disclosure. Yet, some details on a property can be difficult to find. Missed second, third, and reinstated associations are a huge issue for title agents. It’s important to remember that the report is not a binding agreement like the title commitment, so if errors go undetected by the title agent and a lien is missed, they will have to deal with the title claims to follow.
Even when the title commitment lists an association estoppel as a condition for issuing a policy, it’s not always clear whether other associations may have the right to assess the property for dues and subsequently lien or how to request that information.
Most of the title commitments our estoppel analysts receive simply state there is an association with no further details on the names of Master associations, sub-associations, if there are pass through or separate fees, who to order from, and how.
Researching, requesting, and following up with associations and their management companies can take a good amount of time away from a team trying to focus on growing the company's client base. Obviously, the biggest cost here is having a team of closers and processors that is already stretched thin spending time on tasks that don’t help a deal closer faster.
How does a title company cope with this?
For a processor or paralegal who is new to the process of doing this research, here are some tips to remember when getting an estoppel letter for a closing. If the time and resources that your company has are exhausted by side tasks like combing through online databases of registered associations and email and calling unresponsive management companies, outsourcing this work to a due diligence company may prove to give you a better return on your investments.
The Homeowners’ Association refuses to give a refund
Not every state has rules enforcing refunds, but in the state of Florida, Statute 720.30851(3) gives title agents, real estate attorneys, homebuyers and other third-parties who order this information the right to request a refund should the real estate deal fall through.
In order to obtain the refund, a written request accompanied with documentation showing the transaction didn’t occur must be sent to the association or management company no later than 30 days after the closing date for which the estoppel letter was created.
Unfortunately, this process isn’t always so easy and some associations, despite the existence of the statute, ignore these requests for refunds. Leaving title companies and real estate law firms with the option to either eat the costs or pursue legal action in court.
How does working with a third-party like PropLogix help?
When you partner with a company like PropLogix, requesting refunds from associations is no longer a concern for you and your team. We handle any issues that arise from a canceled deal. Once we receive the cancellation of contract from our clients, we immediately make the requests and follow up with the associations. In fact, in order to keep one association accountable to the law, we took them to court for refusing to give a refund for an estoppel letter. Regardless of what happens between us and the associations, our clients are always reimbursed for canceled transactions when they provide the proper documents within the 30 days.
Paying out title claims for missed associations
Recently, a resident in Skokie, Illinois, filed a lawsuit against a real estate law firm alleging that they failed to perform a proper search of money owed to her condo purchased in October 2016. Two months after moving in, she received notification that nearly $50,000 in special assessment was owed to the association. Homebuyers trust the title agent or real estate attorney to uncover and disclose all information regarding known, anticipated and pending special assessments, liens, capital contributions, and code violations from the HOA.
Of course, every settlement agent is working to do the best due diligence and issue sound policies to homeowners and lenders, but not all property history’s are easy to research. Mistakes happen and an association that’s been inactive for years or even decades can be difficult to detect. That’s one of the many reasons why title insurance exists!
Still, handling claims or being taken to court because of an oversight is something every agent and attorney wants to avoid. While paying out claims is relatively low compared to other types of insurance, it can still affect a company’s daily operations, reputation, and morale.
Should any issues arise after closing due to a missed association or outstanding fee, we’ll work to resolve the issue. This is one more task that’s removed from a title company’s plate when they partner with a due diligence company. We’re confident our growing database of association information, detailed research process and the expertise of our analysts will add value to any settlement agent’s operation. If you want to learn more about how our services can help streamline your title company’s operations, take a look at our ordering platform!