Selling and Financing Property During Litigation

Upon hearing the words "construction defect litigation," one of the first thoughts to enter a homeowner's mind is a perceived impossibility to sell and a decline in property values. While this may be true in some cases, in most instances it should be neither difficult nor impossible to sell or finance a property during the litigation, provided certain steps are followed.

Once an association enters into litigation (and testing to determine the scope of defects is completed) the association's law firm should provide homeowners with a quarterly updated "Construction Defect Litigation Disclosure Statement." This disclosure statement should be distributed to homeowners periodically. It outlines the status of the litigation, nature of the claim, parties to the action, nature of alleged defects, legal representation and use of the Disclosure Statement. This written disclosure should be utilized by the homeowner and/or real estate agent during the marketing and escrow period.

Being proactive in addressing potential complications will help to ensure a smooth transaction. Since many banks will not finance a loan while litigation is pending, the homeowner and/or real estate agent should conduct research to determine which banks will provide financing. Provide the prospective lender list to the buyer or real estate agent when an offer is being negotiated and/or accepted.

It is important to inform the buyer of the litigation and the alleged defects at the beginning of the transaction. The litigation can be disclosed in the purchase agreement and the Transfer Disclosure Statement. The most current Litigation Disclosure Statement from the law firm should definitely be referenced on the Transfer Disclosure Statement and attached to the document given to the buyer.

It is also important that the buyer understands that in most cases, the motivation behind the litigation is to take a positive step toward obtaining funds to correct problems.

Realistically, there will be buyers who will select another property as a result of the litigation. However, in today's real estate market, there is an abundance of buyers and not enough inventory. Another buyer who can logically analyze the situation may be waiting down the block.

In 1991, 1992, 1993, 1994 and 1995, there were so few buyers that losing one buyer could mean the property would continue to sit on the market. In today's market, "sitting" on the market is highly unlikely.

During the litigation, an association should have a specific policy on repairs to the exterior of the unit. Disclosing this policy up front ensures that neither the buyer nor seller has an expectation that repairs will take place prior to the close of escrow.

Selling a property involved in construction defect litigation does require more effort. It does require a little more research. However, it is a very straight forward process and can be accomplished.