Hidden Costs behind an HOA Lawsuit

There was a recent lawsuit filed by a Brittan Heights resident against the HOA, its Board members and various contractors involved in the retaining walls project. So what is the cost of such a lawsuit to Brittan Heights’ residents? Well, there is the obvious legal costs plus any damages the plaintiff may win. It appears from the letter sent out by the HOA that its insurance will not cover this suit, so I guess that it must then come out of the reserves created from the HOA fees paid by residents.

But what about the not so obvious costs to Brittan Heights’ residents? One obvious cost is to sellers. Most banks do not like to lend money for condos whose associations are in the midst of litigation. The condo is the collateral for the loan and a big lawsuit could diminish its value if residents are forced to pay higher HOA fees to cover the costs of a big payout to a plaintiff. This is a real concern, having recently taken a listing there, the lawsuit question has come up. Agents representing buyers have expressed uncertainty regarding whether the mortgage lender for their clients would approve a loan because of the lawsuit.

There is also the fact that some real estate agents will discourage their buyers from purchasing a condo where the HOA is involved in a lawsuit. The agent is of course afraid they could later be sued by their buyer if the lawsuit results in some big assessment or raise in fees on their client.

I must also admit that I also wonder if the person filing the suit could themselves be at risk should a court determine the suit is without merit? One of the items the plaintiffs are suing for is diminution in value to their property. But what about the loss of value to other resident’s property due to the lawsuit? Imagine if condos are selling at a nice steady and reasonably predictable price. Then the lawsuit is filed and the prices go down while the overall real estate market continues unchanged or is even appreciating in value? Could a seller who had to accept a lower price then sue the people who filed a frivolous lawsuit? That’s a question of course for a lawyer and possibly a jury to answer! Let’s see how all this plays out!

UPDATE: well things played out well. My listing closed, but the lender for the buyers did require copies of the lawsuit complaint and really wanted the plaintiff to state the actual damages they sought against the HOA. However, this information was never disclosed, but the lender acquiesced and approved the loan.