How to Sell Your Home When Your HOA Is Involved in a Lawsuit

There’s nothing that throws a wrench into your plans quite like prepping your home for sale, only to find out your homeowners association is in the middle of a lawsuit.

There are an estimated 345,000 to 347,000 community associations in the U.S. as of 2017, according to the Community Associations Institute. And 26.3 million households and roughly 69 million residents live under homeowners associations, according to CAI's 2016 numbers.

A lawsuit can stem from unpaid member dues, spats between board members or construction defects from either the original developer or a contractor who worked on the project. Not every lawsuit causes a major problem for home sales, but if the HOA board is unable to function peacefully and effectively or the structural integrity of the building is called into question, buyers and lenders may steer clear of the development.

Hopefully your HOA doesn’t find itself in the midst of a lawsuit just as you’re getting ready to sell your home or while you have it on the market, but it’s certainly possible. In the event that does happen, here’s how to proceed.

Disclose what you know. Disclosure laws vary by state when it comes to real estate transactions, but that doesn’t mean you should ever hide what you know – especially if it’s something that could turn off a potential buyer.

“The last thing you want to do is have them feel like they’ve been duped in a way,” says Nick Gross, a licensed real estate salesperson for full-service real estate firm Triplemint in New York City.

You certainly don’t have to shout “pending litigation” from the rooftops, and there’s no need for a real estate agent to include it in marketing materials. But when a buyer is interested, providing the information is important.

By providing information on a lawsuit first, you have the ability to frame it with proper context – for example, when a settlement in favor of the HOA board is likely to happen soon.

Talk to your HOA board. While you should always err on the side of transparency when you risk sending up a red flag for a potential buyer, you should also be in communication with your HOA. The board may be sharing information with other potential buyers on the situation, and it may be tasked with providing such details instead of you as the seller.

In Arizona, for example, the responsibility for disclosure of a lawsuit or potential lawsuit varies depending on the size of the association, says the Mark J. Bainbridge, an attorney specializing in real estate law and homeowners association litigation based in Phoenix.

“If the association is comprised of more than 50 units, then the association actually is the party required to do the disclosure,” he says. “But if it’s less than 50, then it’s typically the seller’s obligation.”

Accept that some buyers will be turned off. The litigation may be no fault of yours, but you should accept at the start that some buyers will have a blanket “no” policy when it comes to active litigation involving the association. “Some people hear lawsuit, and they just walk away,” Gross says. Your pool of potential buyers shrinks when certain issues exist, due to restrictions with their lender, how quickly other houses are selling in the neighborhood and how competitively your home is priced. Just like some buyers don't want to renovate a kitchen, others don't want to deal with a condo association involved in a lawsuit.

Expect most major lenders to say no. A key factor contributing to many buyers’ attitudes toward litigation is the mortgage lender they’re planning to use. If you’re selling a condo, pending litigation means Fannie Mae and Freddie Mac won’t purchase the mortgage in the aftermarket, making the condo nonwarrantable – so most major banks won’t approve the loan.

“Certainly the big banks, like a Wells [Fargo], will just say nope – no chance,” Gross says. A lender may also turn down a loan for a single-family house due to pending litigation if the lawsuit threatens or calls the value of the property into question.

If the lawsuit is based on some form of construction defect, Bainbridge says, “It’s going to be very difficult for a lender to lend on that property in that scenario. But usually, the litigation isn’t typically that serious where it’s something fundamentally wrong with the building.”

Smaller banks, credit unions and some nonbank lenders may be more likely to consider the property based on the circumstances of the lawsuit, negotiated price, down payment and other conditions. Of course, it’s up to the buyer when it comes to deciding which lender to work with. An all-cash offer does help you avoid the lender hurdle, although the price may require a bit more negotiation in exchange for the smoother transaction.

Be willing to go lower on the price. Unfortunately, an active lawsuit involving your HOA may mean you have to price your property more competitively. With a lower asking price, you’re more likely to attract serious buyers who are willing to look past the litigation and consider the other positives.

Gross is in the process of purchasing an apartment in a cooperative in New York City in which the co-op board is currently undergoing litigation. After conducting research, he determined the lawsuit wasn’t a concern to him, and the “softer price” of the unit made it more enticing.

Consider waiting out litigation. If you're in a time crunch or in need of the profits from a sale, you may not be able to wait, but consider your options. Consider renting out the condo or house for a year or two so you can collect rent to cover the mortgage while litigation plays out.

Keep in mind that any lawsuits involving HOA, condo or co-op boards can be fairly simple. Bainbridge says the most common form of lawsuit he sees HOAs involved in is pursuing delinquent dues from members, followed by action against the developer for defective construction or, typically in an association of single-family homes, enforcing construction restrictions among members.

As Gross notes, litigation doesn’t go on forever, but it may take a couple of years. In the meantime, you may simply need to frame your property differently to attract a buyer that won't be spooked by litigation. In his experience, Gross says a property with an active lawsuit is worth a second look to buyers: "A lawsuit doesn't mean look away, a lawsuit means look further."

Source: US News.com