Should a first time home buyer avoid purchasing a condo in litigation within Downtown San Diego?

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August 13 - Little Italy
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You want to certainly know the full scope of the situation.  Building defect litigation is common in that 7-9 mark.  With that said, lenders will be very cautious to loan to you for this property even if you are confident this is the right home.  They dont know if this pending litigation will cause HOA's to increase etc or cause added assessments to current residents.  I personally would not consider it.  I lived in little italy for years in camden tuscany building.  Let me know if you assistance from a need a local realtor.

Thank you,

John Reardon
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12 hours ago
Great question Louis, I'm glad that you asked. 

It really comes down to what the litigation is concerning and how intrusive the repairs are going to be.

Generally, in Downtown, we are seeing a lot of "construction defect" litigation. While it may sound daunting, by no means are these buildings "falling apart", in fact, they're some of the most well built condo complexes in San Diego. Like Richard said above, these buildings usually "go into litigation" around the 7-9 year mark, so they're still relatively shiny and new. The reason is that there is a 10 year relationship between the developer of the building, and the condo HOA. During those first 10 years, repairs are bound to come up and when they do, the HOA and developer "go into litigation" to decide who is responsible for paying for those repairs. <-- I simplified the process a bit, but you get the gist. 

Buying a condo that is "in litigation" presents both pros and cons, so buyers will have to weigh their options.

The cons would be: 1) Lack of financing - This is a big one. If a condo complex is "in litigation", Fannie Mae and Freddie Mac will not buy the loan from the original lender, even if the repairs are insignificant, they dont like the uncertainty. Because the original lenders cannot "sell off" these loans, they simply wont do them. So your "big lenders" like Chase, Wells Fargo, etc wont even look at loans on condos in litigation. Also, programs like FHA and VA (big one in San Diego) are suspended until the building settles their litigation and makes any needed repairs. That all being said, there are still lenders out there that may lend on a building with litigation, but generally they will require a minimum of 20% down and will not have as favorable rates. Definitely something to consider. 

2) The Repairs - As mentioned, the repairs that are needed could be insignificant (cracked driveway, faded paint, etc), or they can be major (water tower issues, plumbing issues, etc). If the building has major issues, it means that at some point, there is going to be major repair work that you're going to have to live through, which can be a real inconvenience for certain buyers. Make sure that, as a buyer, you review the litigation documentation so that you fully understand what you may be living through. 

But conversely, there is a pro to purchasing a condo in litigation, namely... saving $$$. our statistics show that *usually* when a building enters litigation, there will be a small drop in value in the building, anywhere from 3-7%. This is a direct result of the lack of financing options eliminating the ability of a lot of the buyers in the market, basic supply and demand at work. Less buyers able to purchase means that a property may sit on the market for longer, resulting in a price drop in order to attract a qualified or all-cash buyer. Once one unit sells at the lower price, the other sellers in the building begin to follow suit, leading to a decrease in value throughout the building. So if you are able to obtain financing, or are a cash buyer, condo buildings in litigation may present an opportunity to get a great condo at a slightly discounted purchase price. Again, make sure that you really understand what the litigation is in regards to and how it will affect you. 

The TL;DR (Too Long; Didnt Read) version of this is that NO, first-time home buyers should not avoid purchasing a condo in litigation. It just requires a little bit of extra research. You may even find yourself a killer deal.
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3 days ago
You might want to check on the kind of litigation. Whether it is for HOA dues collections or building defects or liability etc. In some cases HOA doesn't have enough reserves to cover these expenses. That's when the new buyer might see supplemental bills. Apart from that a long litigation affects in resale.
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August 24
Hi.

Since this questions seems to be related to little italy, I am guessing you might be speaking about Aqua Vista?

I don't think being a first time home buyer would effect whether or not to avoid a condo with litigation; as long as you are a well informed first time home buyer :)

The only thing to be worried about with a property in litigation is the potential increase of HOA dues. During the escrow process you will be provided with HOA documents that include the complexes financials. Make sure that there are sufficient reserve funds.

The other issue that may initially arise will be financing the unit. If you're paying cash, then no problem. If you're using financing, it is recommended that you work with a local direct lender who can waive some of the items large lending institutions cannot....eg. litigation.
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August 24
Hi Louis,

It is a good idea to find out what the litigation is about.

All the best,

Arpad
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August 13
I don't know that the area makes much difference. I would focus a great deal more on the actual substance of the lawsuit. Much like any litigation, HOA lawsuits can run the gamut from serious construction defects to BS slip and fall claims by the guest of a tenant. I would get a copy of the claim, review it with your Realtor and lender and decide whether or not to go forward in an informed and conscious manner. Lawsuits can scare away other buyers and possibly make for a sweeter deal.
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August 13

All condo towers enter into litigation eventually and statistically it is most likely at the 7-9 year mark after completion as this is when many of the builder warranties expire.  When I tour first time homebuyers I always explain that Litigation is not something to be afraid and can be a opportunity for many buyers.  It is most important to find out all the specifics on the litigation and to make sure you fully understand the risks.  Also make sure your Lender can do a loan in a litigation property, there are two lenders I use in Downtown San Diego that specialize in doing these types of loans as the majority of lenders will not consider doing a loan in a Litigation property and they usually require 20% down.

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August 13
 
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Should a first time home buyer avoid purchasing a condo in litigation within Downtown San Diego?
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