02 Aug

Risks of Being a Buyer or Seller of a Condo with an HOA under Litigation

Ashley Molson

HOA is under litigationLast week I was speaking with colleagues at a networking event about hot issues in the Hoboken Real Estate Market and a topic came up that is applicable to all real estate transactions across the country.

What should a buyer or seller worry about if they are planning to enter a real estate transaction for the purchase or sale of a condominium where the HOA is under litigation?

Buyer Beware!

When purchasing a condominium, a buyer should determine whether the condominium or the HOA is under litigation.

The type of litigation will determine the size of the risk that the buyer will be taking if they choose to go forward with the purchase of the condominium. For example, the litigation could be as extreme as the foundation sinking on one side of the property, or the litigation could be something as small as a broken seal on the windows.

If the HOA is under litigation, the issues that a buyer will face are as follows:

1. Most banks will not lend a mortgage to a buyer purchasing from an HOA under litigation. This is because most backs intend to sell the loan in the secondary market and the only buyer of these loans is Fannie Mae. Fannie Mae requires certain criteria to be complied with before they will purchase a mortgage on the secondary market and condos under litigation are normally not in compliance with these requirements.
2. Closing time will be delayed and costs will increase.
3. The HOA may not have enough money to cover the costs of the litigation
4. They buyer may have a hard time re-selling the property, depending on the length of the litigation, especially because banks do not often lend on property under litigation.

Seller Stay Put!

When selling a condominium, a seller should determine whether the condominium or the HOA is under litigation.

If the HOA is under litigation, the issues that a seller will face are as follows:

1. Most lenders will not give a mortgage to buyers while the lawsuit is in progress, therefore Sellers will most likely have to accept cash as the only method of purchase.
2. If the litigation does impede successful sales for the Seller, they may be able to enter litigation yourself to collect damages.
3. The Seller and Seller’s attorney or team will have to become an expert on where the suit is, such as the stages and progress, so that the impacts can be assessed.
4. The Seller must disclose the litigation to the potential buyer, even if they are a cash buyer.
5. The litigation might be something that could present itself as a problem during inspection later on.

In sum, it is very important that you seek representation when dealing with the purchase or sale of a condominium. Both parties to the transaction need to be aware of the workings of the HOA, whether it is under litigation or not. Professional accountants are also helpful during said real estate transactions. Knowledge in this scenario, and most others, is extremely powerful.