Buying a condo with a pending lawsuit

This Old CondoI just received a call from an agent from another company regarding a complex with a pending lawsuit.  It is one of many calls I have received regarding the same complex.  The developer of the condo conversion project, now two years old, has been asked/forced to come back and make improvements (to the roof, I believe) and agents are scrambling to find a foothold.

One might think that the builder being made to come back and make improvements is a plus for present and future owners.  Whether the builder is coming back as a result of a lawsuit won, or the settlement of a lawsuit brought, isn’t the fact that the property is going to be improved a positive factor?

Not necessarily, at least not during the suit and during the improvement phase.  Why?  Because lenders do not like to finance condos in the midst of pending litigation.  The listed properties are stacking up.  The pending sales are not closing.  The agents being called by owners to list properties are calling everyone to see if the properties can in fact be sold at all during the lawsuit and improvement phase, before they agree to list them.

Buying condos during a period of pending litigation can be a wise investment for investors seeking to buy at rock bottom prices, holding them as rentals during the improvement phase, and then selling them when the “dust settles”.  But the investor buyer may have to buy them with cash, as lenders may not be wiling to lend. 

Sorry, no, I’m not going to tell you which complex I am speaking about here.  First because it’s irrelevant to the post, as the one I am discussing is just one of many in this situation from time to time.  Second, because I am going to call a few of my investor clients and suggest that they buy the best of these while they are going cheap.  If I tell you where this place is, it would not be in the best interest of my clients. If I blog about this compex by name, other investors who are not my clients may compete with my clients as a result of this post, driving the prices up for my clients.  I blog “transparently”, but never without first determining the positive and negative impact a post may have on my own clients.

I have always said that the best investment is buying into a condo complex that has received moneys from the builder to make improvements.  I have purchased a condo in the past on this basis myself.  BUT you have to be sure that the improvements will be paid for by the builder IN FULL!  The BEST improvements during your HOLD period…are the ones paid for by the builder or developer, and not the home owners, IN FULL, not in part. Even if the seller is going to pay the special assessment, that is not good. If the net result after improvements is a huge special assessment that will be paid out over a 15 year timeframe, increasing the dues substantially, then it is NOT a good investment.

A few recent examples from The Eastside.

One complex had substantial improvements paid for by the builder.  During the lawsuit phase, the units sold at a 16.8% discount.  During the repair phase they sold at a 10.1% discunt.  This is not considering the substantial appreciation during those years, so the discount was more like 25%. There was NO special assessment incurred.  The dues did not increase as a result of the repairs.  The builder was forced to improve the property at no cost to the existing homeowners.

Prior to the suit, the units were selling for $345,000. (Downtown Kirkland).

During the lawsuit phase they sold for $287,000. 

During the repair phase, when they were financeable (suit settled) but cosmetically VERY unappealing, the units sold for $310,00

When the improvements were completed, the units sold for $525,000 partly due to appreciation during the lawsuit and repair phase that took many, many months, and partly due to the increased comsmetic appeal and other resale certificate improved factors.

In 2008, in a weaker market, the units are down from $525,000 to $495,000, but the investors who purchased during the lawsuit phase at $287,000 still have appreciable gains even during a weak market phase.

I wanted to include another example where the property value goes DOWN after improvements instead of up.  That happens when the builder doesn’t pay all of the amount for the improvements, or the lawyer keeps 1/3 of that money, causing a long term special assessment after repairs.  But I have an appointment at 1:00 to present offers on one of my listings.

Just know that the values CAN go down instead of UP after improvements, the key being the shortfall between builder provided repairs or monies, and the cost of the improvements. 

16 thoughts on “Buying a condo with a pending lawsuit

  1. Pingback: Buying a Condo With a Pending Lawsuit? | urbnlivn on Seattle condos

  2. We had a client make on offer on a condo, and then back out (on our advice) based on pending litigation in the very early stages. Another unit has sold in that complex since then, but perhaps it was a cash buyer?

    BTW, the value can continue after the project is finished. I saw a complex two years ago where the agents were apparently listing the project without knowing of the fixes, and the listing were just flying out the door (accepted offers within 7 days or less). You could have probably pocketed 10% on your money, after closing costs, selling within 6 months.

  3. To both Matt and Kary,

    The key is whether or not there is a special assessment after the improvements are done. There are a few complexes that carried a huge special assessment that doubled or tripled the dues for 15 years. When the dues are that high, the prices have to come down to compensate.

    So a bargain is not a bargain if you buy cheap based on pre-special assessment comps without considering the after special assessment affect on pricing.

    Even if the seller of the condo that you purchase pays the special assessment, if every other unit has financed it and included it in the monthly dues, then the value of your unit goes down with the ship, even though the monthly of your unit isn’t elevated.

  4. Well we advised the client to bail based on it being so early in the process. At that point the risk is a lot greater. Once the litigation is resolved, and bids are in, there is still risk, but it’s much less.

  5. Given the changes in the market since May, what advice do you have for condo owners who want to sell but are in a bldg going through renovations as a result of successful litigation? Should we wait to put the unit on the market until the renovations are done next spring? Or will we see no real benefit by waiting and just put it up for sale now?

    The repairs include replacing siding, decks, and columns. It’s a newer building so the updates won’t significantly update the look/feel of the building. There is an assessment, but it isn’t huge (approx $5-6K per unit).


  6. Lindsey,

    That happened over at SoHo here in Kirkland. Those who sold after the repairs were done, did better than those who sold at the phase you are in and during the time of the renovations when the place was covered in plastic and had porta potties lining the street and entrances.

    But the discount in the market due to the downturn bedtween now and next year could be equal to or greater than the discount for having to live through the improvement phase. It can get pretty ugly and noisy during that time, and you could be encapsulated in dark plastic. That’s a lot for a buyer to take on and the price has to be discounted accordingly.

    There’s no easy answer to that one without specifics. If it is local, send me an email. It depends on the specifics and not the generalities. If it is North Seattle or Eastside or the top of the Lake (Kenmore, Bothell, Lake City) I’ll give you my best guess, but I’d have to see the place. A lot depends on the position of the condo in the complex, among other things. So I can’t give best advice without seeing it. Hopefully it’s not Downtown. The only building I touch Downtown is The Newmark.

  7. Obviously you are talking about Cooper Square, one of the many crappy condo-conversions done by Wysong. Anyone who buys a condo that was converted by Wysong is in for a world of trouble. A new roof should be the least of their worries.

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