Question with potential condo purchase with pending litigation

[Jason Sterling]

All,

Looking at my first deal, an investment that I would look to rent out.

Potential cash purchase, and it is an enticing deal that I could get relatively good value on, but the issue is such - there is pending litigation against the HOA for mold ( not my unit, or even my condo section). However, even if I wanted to go through traditional financing, i could not because of this issue, which is probably why there is good value.

As I am new to the investment world, and this situation seems a little hairy, has anyone run across similar circumstances? I dont know what my potential liability is if there is a large settlement ( does HOA have insurance themselves to cover most of it), what would happen if it bankrupted HOA? Does community go to sh*t?

Would love any insight, and thank you!

Jason

[Steve Racicot]

@Jason Sterling These are very good questions.   Did you reach out to the Property Manager with these questions?   Also, did you get a copy of the insurance policy declaration (usually it is a 1 page summary). You should find out the specifics of the lawsuit?  You will be then be able to determine if you got a good deal.  Did you get financials (2 previous years and current budget)? This would also tell you the financially stablity of the association, as it seems from your questions, you dont know. 

Normally, the HOA will have insurance to cover most damage minus the deductible, assuming the BOD and Property Manager are on top of things (which unforunately is rare these days).

If the association would lose the lawsuit, and it was not covered by their insurance, then the BOD is more likely to special assess each unit to resolve the debt.  

[Rich Weese]

I've owned a lot of properties and I'm not sure why you would want to buy a condo in the first place, even without all the problems this one has. You are always going to be susceptible to special assessments for problems that develop. There are a lot of those. It is difficult to get financing in many places on a condo at an LTV that you would like, if you are going to use it as a rental. This one is looking at even more problems since financing is almost non-available.

I would also suggest you find a property for your first acquisition that does not come with additional problems. I don't want you to dig a big hole to start with.

[Linda Weygant]

Hey Jason,

Yes, the HOA should have insurance, but if they have had other financial difficulties, they may have let their policy lapse.

If you think you might want to move forward with this purchase, make HOA documentation a contingency so that you can bail on the contract and receive your EMD back if the HOA does not check out.

When you get the documents from the HOA, check to make sure they've been paying for insurance. Next, read all of the meeting minutes to see how and when this lawsuit has been discussed and what the HOA is doing about it.

Then, go pull the documents on this lawsuit from the court house and see what's going on. If the plaintiff is suing for repair damages and costs, then depending on the cause of the mold problems, the insurance company may pay, although you'll need to know if the HOA has enough money to meet their deductible as well (check the financial statements for this). If the HOA was somehow deliberately negligent, the insurance company may not pay and, as you suspect, this could bankrupt the entire community.

If the plaintiff is claiming there is a health problem, I'd personally bail on this.  The insurance company may only have a $250,000 to $1 million health coverage and a mold case (or multiple mold cases) could easily go well over that, assuming the plaintiff is actually experiencing a health crisis and not just freaking out over mold.

If worse comes to worse and the HOA becomes insolvent this is a situation that can be turned around, but it requires a highly dedicated and talented group of homeowners to deal with.

The price you pay for this condo should be commensurate with the amount of risk you're taking on.