What is an estoppel certificate?
An estoppel certificate (sometimes referred to as an "estoppel letter" or "estoppel agreement") is a document used in real estate and mortgage activities. It is generally completed by two parties and then confirmed by a third party to ensure everyone understands and agrees to the same terms and conditions.
As a property managager / investor, I use the estoppel to confirm important information before transferring the property between owners or property managers. Many Landlords keep terrible records or have nothing in writing. Tenants are also forgetful or they try to take advantage of a new owner's limited information. Rather than take them at their word about lease terms, security deposits, and other pertinent information, I have all parties sit down and confirm - in writing - what terms are in place at the time of purchase.
I recently bought an apartment complex and many of the tenants had no written agreements. I created an estoppel agreement and required each tenant to fill it out to the best of their ability. It included their move-in date, current rent rate, security deposit amount (if any), any appliances that belong to them, any verbal or written promises made by the Seller, etc. After the tenant completed the form, I took it to the Seller and had him verify the information and sign it. Then I signed it as the buyer, signifying that everything agreed to my satisfaction.
In some cases, the information did not match. One tenant claimed to have a deposit but the Seller said she did not. She also claimed her rent was 25% lower than what the Seller claimed. When there is a disagreement, the Buyer has to sit all parties down and come to an agreement that satisfies all parties or use it as an opportunity to walk away from the deal.
Here are some examples of things going wrong when an estoppel was not used:
1. New owner tries to collect rent for the first time. Tenant states they don't have to pay rent because the previous owner gave them three months free in exchange for doing some work around the property. New owner calls the previous owner and is told they "forgot to mention it" during the sales process. Say good-bye to your rent!
2. Investor bought a single-family home with existing tenants on a verbal lease agreement. They move out two months later and demand their $2,000 security deposit back but the previous owner told you they didn't have a deposit. Say good-bye to your $2,000!
3. The sales contract includes a fridge, stove, washer, and dryer. Six months later the tenants move out and take the washer and dryer with them. You call and they show receipts that they had purchased the items when they moved in a year ago. Unless you take the seller to small claims court, say good-bye to your washer and dryer!
Due diligence is not an option!
Failing to nail down this critical information can cause serious problems, cost you tens of thousands in lost revenue, or even result in the failure of your investment. If you are purchasing a property with existing tenants, use an estoppel certificate to verify the terms and conditions of their tenancy and protect yourself from forgetful (or unscrupulous) Sellers and Tenants!