The Impact on Property Values of Litigation by a Home Owner’s Association

How does litigation impact property values when a condominium HOA files a lawsuit and has “pending litigation”?  Here is a look using Oakland’s The Estuary community as an example of the devastating impacts

As you may know, when a home owner’s association is in litigation, financing from conventional lenders is not possible.  Limiting sales to those people who can pay cash or are willing to pay hard money fees and interest rates is devastating to property values within a community.

In 2006, when Signature Properties began listing their last remaining units on the MLS, there were 5 sales recorded.  These sales had an average sales price of $705,480 or $407/square foot (this is the more important metric given the small sample size).

From 2013-2015, The Estuary had only two sales recorded in the MLS.  These sales had an average sales price of $387,500 or $252/square foot.  The $252/square foot represents a decrease in value of 38%.

Let’s compare this to what’s going on in Jack London Square.

In 2006, condos built after 2000 sold for an average of $550,769 or $474/square foot.

In 2015 (through 11/10/2015), these same condos (excluding The Bond and The Ellington which sell for a premium) sold for an average of $606,681 or $609/square foot.  The $609/square foot represents an increase in value of 29%.

I understand that this isn’t an apples to apples comparison, but this should demonstrate that urban condo prices in Oakland have appreciated over the past decade unless impacted by litigation.

If we assume a modest 14% appreciation at The Estuary from 2006-2015 (less than half of the appreciation of Jack London Square), current sales would average $464/square foot – a premium of 84% over the current average of $252/square foot.  Applying these averages to a 1,500 square foot property, the difference $696,000 versus $378,000, a difference of $318,000!

What is the greatest upside of a settlement/victory on a per unit basis after legal fees? It is unlikely to be anything close to $318,000.  This doesn’t take into account the money depleted from the HOA’s operating and reserve accounts on legal fees which will likely result in assessments.

When litigation by an HOA is finally terminated or resolved, property values don’t soar up to market value.  It takes years for values to gradually climb their way up with each sale and appraisal.

It is best to mediate or move on….

Andy Read

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