When evaluating a condominium unit purchase, a real estate investor performs a standard evaluation with regard to cost, rental rates, market value and other important factors. But condos also have their own unique set of twists thcondos and lawsuitsat single family homes or other detached property. One of those twists involves how banks evaluate condos and it’s a bit different due to legal structure that governs a condominium development.

 Individual condo owners claim 100 percent of the interior of their unit but share the common areas equally with other owners. There are specific rules that govern and manage the property and this management is funded by homeowner’s association fees that are paid monthly or annually by each property owner. The homeowner’s association is populated by property owners and it’s their job to enforce the rules that govern the condo but also work with third parties such as contractors, maintenance companies and others.

For instance, the association contracts with a roofer who makes some roof repairs. A few weeks later an owner complains that the leak that was supposed to be fixed actually wasn’t. The roofer is contacted to come and fix what was supposed to be fixed in the first place. The roofer balks, complaining that he did what he was supposed to do and if he is going to do more work, he expects more pay.

So the homeowner’s association files a lawsuit. When that happens, all financing in that condominium project comes to a screeching halt. Why?

A bank will review the rules that govern the condominium project as well as a host of other factors including making sure the project has sufficient liability and property insurance, a proper number of primary residence vs. rentals and other specifics. The problem with lawsuits is the lender has no idea the outcome. Who will prevail? Will the lawsuit be a protracted one? What about a countersuit? The funds that pay the lawyers to file the suit come from the homeowner’s association dues and if that’s not enough money they hit up the property owners for more money, called a special assessment.

What if the special assessment is another $100 per month for each owner? What if it’s a one-time $1,000 charge? When a bank evaluates a loan application debt to income ratios and assets are carefully reviewed and without knowing the outcome of a lawsuit, there’s no way a bank can determine whether or not a borrower will be able to afford the special assessment until the lawsuit is settled. Associations with a history of litigation may be acting in the best interest of the property owners, but an overly anxious association can hamper the sale of any unit in the project.