Why do some HOAs sue their builders especially in the first 10 years?
I’m not an attorney on this subject, but I’ve had closed sales with various litigation circumstances at different stages. I’ve been told directly from property management companies and HOA Board Members (who voted for the litigation) that it’s in the association’s best interests to try and maximize the repair of construction defects that inevitably show up. The builder’s warranty either expires or becomes very limited after 10 years, so might as well try to avoid using HOA reserves. In many cases where I’ve personally seen the communications, the same law offices are showing up and they seem to have good track records for either winning or getting a significant settlement.
If the HOAs don’t sue, they might be forced to spend hundred of thousands of HOA reserves and that will usually trigger a special assessment or significant due increase. Insurance always seems to try to deny these claims.
It doesn’t sound like a slam dunk decision and I don’t envy the HOA Boards during those times.
I’ve been wanting to see an impact of litigation on condo associations in the LA and Orange County areas for quite sometime now. In cases where the lawsuit is formally filed against builders for construction defects, I’ve seen many listing agents and sellers limit their sale to “CASH ONLY” which obviously reduces the amount of buyers who can purchase the condo.
My first instincts were that I would see a significant impact on:
- Days on Market (the time it took to sell)
- Selling Price
- Number of Listings Sold
- Amount of Listings that did NOT sell
I decided to look in-depth at 3 litigation events nearby: BLU in Long Beach, Stadium Lofts in Anaheim, and Aqua in Long Beach. I mention other nearby buildings such as Marquee in Irvine and Glenoaks in Anaheim who also had litigation events in the last 10 years.
Check out this video and interview I did with lender Tommy Evans regarding the impact after reviewing the data:
What I discovered
When I initially reviewed the data, I was expecting to see huge discrepancies for the time the litigation was being disclosed on listings vs. when it was known the litigation was not being disclosed or after settled. I was surprised to see the lack of a price impact — even on cash sales. Especially in the case of Aqua in Long Beach, many listings are referring to specialty lenders who can finance in the buildings. I ended up calling several of them and was surprised to see one of the names I recognized on the list: former in-house lender of Prudential California Realty, Tommy Evans.
Personally, I have sold and was able to secure financing in various litigation stages: including BLU in Long Beach, The Domain in Anaheim, and a few in Orange and Anaheim Hills. The solution varied from limited or (having exempt) condo review, declaring the property a “site condo” (classifying the condo as a house when fully detached), or getting financing from a special lender. For cash buyers, it was a disclosure made to the buyer and they had the option to investigate further.
WHAT?? No Impact?
In Blu, Stadium Lofts, and Aqua Towers, the sales where the lawsuit was formally disclosed didn’t appear to be any different in terms of sales price. While several of them did sell to cash buyers, I suspect the larger buyer pool of offers with specialty loans created bidding wars in some cases. Some even sold above asking price.
However, beyond the numbers I’m certain the experience for a buyer and homeowner would be MUCH different. I’ve represented both in these cases.
There are no numbers to take into account the following:
- Number of buyers who became disinterested after litigation was disclosed
- Number of sellers who decided not to sell due to litigation
- Number of listings that did not sell due to litigation – when listings area cancelled or expire, the specific reason is rarely stated.
The bottom line: The chances of selling at market value increases when you consider buyers using financing.
Click here for a printable flyer special financing for condos in litigation.
