When I took a listing on a condo in a San Jose complex with litigation last December, I knew it would be an adventure.
Could we find a buyer who wouldn't be scared-off by a lawsuit between the HOA and the builder/developer? A lawsuit alleging construction defects, no less. Depending on the results of the lawsuit the buyer could be responsible for a special assessment of an unknown amount; not a strong selling point.
If we found a buyer, what about a financing? Nowadays neither Fannie nor Freddie and certainly not FHA will buy loans on condos involved in HOA litigation. We'd need to find a portfolio lender or a low-balling cash buyer. The interest rate would be higher than it would be for a condo without litigation. Again, not a strong selling point.
The listing sold and closed and here's what I learned.
First, I was wrong. The potential liability for the buyer was not unknown. The worst case scenario was explained in detail in the lawsuit. The legal file, which the buyer reviewed, contained contractors' estimates for all the repairs needed to remediate the alleged construction defects. In my case, the HOA was suing the builder/developer for the equivalent of $28,000 for each of the 94 condo units. If the HOA lost the case entirely and was awarded nothing, each homeowner may have to pony-up $28,000 to repair all alleged defects. That's a lot of money, but it's better than an unknown amount.
The buyer of my listing, who was represented by a cooperating agent, approximately doubled the worst case scenario and deducted that amount--$56,000-- from his estimate of Fair Market Value without the law suit. Recent pre-litigation sales averaged about $505,000. After a counter-offer and counter to the counter we settled at a $450,000 sale price; $80,000 less the the seller paid in 2004 when the townhomes were brand new.
My client understood the price was substantially under market value IF there was no litigation. The buyer understood the lawsuit liability and the limited financing options.
The buyer got a 5.0% 30-year fixed rate loan, but hopes to re-finance if rates are still low when the litigation gets resolved.
The only financing we could find was Coast2Coast in Orange County, 400 miles south, despite the fact we have thousands of lenders and mortgage brokers in Silicon Valley. Coast2Coast seems to have a near monopoly on financing condos with litigation, from what I can tell. Sixty days were required to get an underwriter approval. It's private financing so all the HUD Consumer Protection regulations, RESPA regs, Good Faith Estimates, Truth-in-Lending, Reg Z, etc. are not applicable. It's caveat emptor.
Now I think I'll call myself a Broker of Condos in Litigation Specialist (BOCILS).
Lloyd Binen
Realtor/Broker/DRE 572654
Certified Realty Services
19200 Shubert Drive
Saratoga, CA 95070-4046
Certified Residential Specialist (CRS); Graduate, Realtors Institute (GRI)
408-373-4411, or e-mail me
