One of the biggest annoyances when shopping for a townhouse or a condo is to know that your ideal community is under HOA litigation. When does HOA litigation happen? HOA can be embroiled in litigation because: Either A) HOA is being sued, for example, someone is injured in common ground and seeks damages , or B) HOA is suing, for example, builders for defects or homeowners for past due HOA fees. In either case, the collateral damage is that house values will go down. Not only that HOA is stigmatized with legal troubles, there is the very real problem that no potential buyer can get financing. Regardless of the cause of the litigation, with today’s stringent lending guideline, the conventional lenders shy away from HOAs with litigation. Litigation means potential liability and liability means risks to lenders. Lack of financing reduces the buyer pool to a very small group of well-heeled, risk taking all cash buyers who will demand a huge discount on price. Even for current homeowners who have no plan to sell in short term, there is the very inconvenience not being able to re-finance.
The sad thing is that HOA litigation is happening more often now than before. As of this month, I counted
at least 18 HOAs in the city of San Jose under litigation. New ones are propping up and the existing ones have gone on for a couple of years. The homes are sitting on the market forever and the sale price drops by at least 20% if not more. For investors who are willing to take risks and make a long term investment, it can be opportunity to find quality properties with basement pricing. Whether HOAs wins or loses eventually, the homeowners suffer the consequence now.