Developers don’t build condos with the intention of sloppy work that they hope no one will notice. But never the less, they almost always get sued in about year 8-9.
In California, new construction comes with a 10 year warranty on latent defects on the structure. In plain terms home owners and homeowner associations have 10 years to sue a developer if they find problems with the structural components of a building such as the roof, walls, plumbing or electrical systems, garages, decks, etc.
So, around year 8, if no problems have emerged, many HOA communities will hire a company to look at the building and see if there are potential problems that can happen due to faulty construction. If there are known problems they hire someone to try to figure out the fixes to the issues.
The communities will approach the builder to fix the discovered issues, and if the builder does not feel there is a problem, or the problem is not their responsibility then a law suit may be filed.
Once the suit is filed most lenders will not make loans on the property. The few who do will charge interest rates 1 to 2 pts higher than a traditional lender.
This can put the brakes on sales in the development, and will temporarily depress the price.
If you are a cash buyer, buying a San Jose Condo in litigation for a rental property can be a good idea if you follow these steps:
- Look at the report that explains what the problems are that need to be addressed. If the issues are ones that do not need immediate attention that is better. If the plumbing system has failed, or there is major water intrusion into the building the homeowners may be hit with a special assessment during the multi year lawsuit. Even if the HOA of the San Jose condo in litigation wins the individual homeowners may not be reimbursed.
- Find out what the estimated cost to repair the issues are for the San Jose condo in litigation. Take that number and divide by the number of units, or if available the percentage of ownership the condo in question has. So if the estimate is 10 million dollars, and there are 500 units with equal shares then each unit would be responsible for about 20 thousand in repairs if all units pay condo fees equally.
- Find the market value of the condo you are interested in by looking at the most recent sale of that model before the San Jose condo litigation.
- Subtract the amount of potential assessment.
- If the market is slowing down overall subtract more.
- Explain that you are taking the risk that the HOA of the San Jose Condo in litigation will not prevail in court, and even if they do the homeowners may be assessed before then. You are taking that risk, and buying when most others are not able. You are betting that you will not be assessed.
- Even in a very hot market, this is a good way to get a better price on a San Jose condo in litigation than you would otherwise be able to.
- It is safest to do it when the builder is a very large and stable company, rather than a less well capitalized entity that is more likely to go bankrupt.
There is obviously risk involved, but since such a large percentage of builders get sued, it can be a good long term investment. For example, The Brickyard in San Jose was in litigation in 2011-2012. During 2011 one bedroom condos sold for $140,000-$180,000. The litigation was setteled and in 2016 one bedrooms condos sold for $365,000-$395,000. If you bought a condo for at The Brickyard with cash in 2011 for you would have at least doubled your money in 5 years plus get an additional $800 to $1500 a month profit in rent over the last 5 years. And this was a building with serious problems that have now been fixed with proceeds from the successful law suit.
Most suits are settled, the deficiencies are fixed, and the San Jose condos in litigation go on to appreciate.
If you have any questions about buying a San Jose condo in litigation as a rental property please feel free to contact me.
Keller Williams Realty