A very important piece of disclosure to a buyer is if the HOA is involved in a pending litigation. What is it and how does it impact a buyer?
Simply said, the HOA is being sued or is suing someone on behalf of the HOA community.
There are two common suits that HOA’s are involved in.
One is towards a contractor who allegedly performed less than stellar work on the property and now there is damage as a result. The HOA attempts to get the contractor to pay to fix the problem.
The second one is against the HOA. An example would be someone is injured on the property, or employees suing.
For example, an HOA attempts to sue a contractor for a large decorative community pond that is failing allegedly well before its life expectancy. This suit settled in favor of the contractor and as a result, the HOA attached a “special assessment” to each homeowner to pay for attorney’s fees AND to pay for the ponds to be fixed. The cost can range upwards to several thousands of dollars per owner over a course of several months to years. Of course, if insurance was involved and paid out a settlement, then most likely those premium will go up as well.
A prospective buyer should be advised of this potential cost if a settlement has not been reached. This prepares them for the possibility of increased HOA dues.
A buyer’s lender wants to know this information as well. A pending special assessment could tip the ratios resulting in an inability to qualify for a loan.
Where to find this information? Most HOA’s are pretty upfront about this and will provide documentation when docs are ordered directly from the HOA. Also check out the HOA Demand (sometimes HOA’s will only release this to an escrow officer), to see if there is any pending litigation or special assessments coming up. I like to have the buyer sign this to ensure full disclosure.
Another area to look for clues about this in in the Real Estate Transfer Disclosure the seller completes. There is a question about known lawsuits against or by the seller or common areas. If the answer is yes, then there should be documentation fully explaining the situation.
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