A Misunderstood Opportunity: Condos In Litigation

Kim Condo 1The only thing worse than a missed opportunity – is a misunderstood opportunity! This week I wanted to address a common occurrence in the real estate industry that pertains to the purchase of condominiums, especially ‘newer’ complexes (10 or less years old). When I show my clients a condo to purchase that is in litigation, I often hear fellow Realtors utter phrases such as “Oh no!”, “Stay away…” or “Not litigation….”.

When I hear these expressions of doubt and fear – I can’t help but wonder why. Why DO some real estate agents shy away from selling a condo that is in litigation? Could it be that they take longer to sell? Could it be the fear of the unknown outcome? Could it be uneasiness with calculating a purchase price that represents fair market value and accounts for the unlikely potential of a pending repair cost? Could it be a discomfort level with fully explaining the pros and cons to their buyers and finding it simpler to pass on the property?

Let’s start by defining exactly what a condo in litigation IS: This is when the homeowners file a claim against the builder/developer of the condominium project for specific repairs within the first 10 years of the new development. The official name and process is known as Senate Bill 800 (SB800), the Builder’s Right to Repair Act. SB800 provides a home builder/developer the opportunity to make certain repairs up to 10 years after the homes are built. It is not unusual for some construction defects to occur (or projected construction defects to be identified) once the units and community are lived in and fully-utilized. Typically, the HOA and homeowners try to work out a repair resolution first. If a mutual and timely direct solution cannot be reached, then the homeowners have the right to file a claim against the builder. The claims process is outlined very clearly in SB800 and includes written acknowledgements, preliminary inspections, mediation proceedings, etc. The result of a SB800 claim may be an early agreed-upon resolution, a court mediation or ultimately litigation. In the event of litigation, a trial will determine who is responsible for the repairs, the builder or the homeowners.

Given the time frames required to initiate the process, allowances for response times from both parties and the comprehensive gathering of information about the repairs – it can take months, though more likely years, for the dispute to be resolved. In that time, homeowners may wish to sell their unit due to any number of normal life circumstances. During the process, all residents are given semi-annual updates on the status of the process as well as the potential impact to HOA dues. This same information must legally, not to mention ethically, be disseminated to all potential buyers of units within the complex. Different buyers can view this same information very differently.

Kim condo 2I’ve seen many investors, and even a few personal clients who actually PREFER to buy a condo that is in litigation. This is because the cost of the unit may be more attractive and slightly below market value while the dispute is in process. A lower sale price means not only reserves intact for potential repairs, but also a higher upfront equity gain if the builders assumes responsibility for the repairs.

Other buyers fear the outcome of litigation and hold off even considering the purchase of a property with repairs in dispute. The alternative is to pursue the purchase of a regular (non-litigation circumstance) but HIGHER priced condo. The oft-overlooked ‘pro’ is that within the first 10 years, homeowners have the BIG benefit of the Right to Repair Act which allows for a skilled attorney on to be on their side and their homes and investments to be fairly protected by the SB800 process. Buying in an older complex or one not in litigation means you don’t have access to someone fighting to save your HOA dues from going up and advocating the builder correction of repairs. Yet we all know that homes of all types require constant repair and maintenance – so the home buyer purchasing a ‘regular’ condo retains the high likelihood that they’ll pay for their own repairs through newly raised HOA fees. In the circumstance of purchasing in litigation, the home buyer could lose the litigation if it is deemed not a builder defect – but also offset the cost of these repairs with a lower purchase price – making the cost benefit analysis identical.

Put it this way – you can pay less for a home knowing that you might pay more for repairs later, or you could pay more for a home with no possible builder resolutions for repair and look forward to higher HOA dues sooner. So which would you rather buy?

Please note: The information above is for informational purposes only. Information is deemed accurate but please consult with a real estate attorney for specific questions on the SB800 process.

Knowledge Is Power. Helpful Questions To Ask When Considering A Condo In Litigation: Is the defect related to my unit individually or the common area as a whole? Have I seen the defect with my own eyes and read the improvement information (available though the HOA association) to make my own assessment of the 'damage'? Would the repairs in question limit my enjoyment of the home or community in any way? Does my agent know a reputable and successful lender in financing condos in litigation? When can I expect a resolution to be reached and how does this fit with my timeline of how long I plan to live in the home? 

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