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.