Publications

Phillip C. Querin, Partner
Partner - Portland, Oregon Office

philquerin@dwt.com
(503) 241-2300

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Realtor® Risks – Condo and Townhome Re-Sales
[May 2006]

Generally. As every active Realtor® knows, the condo and townhome market has been booming for the last several years. This includes new projects as well as conversions. While these developments present great marketing opportunities for Realtors® and attractive housing alternatives for consumers, they can pose challenging disclosure issues upon resale when there are potential claims pending against the developers, builders, and contractors, due to habitability, workmanship or construction defect issues. If the relevant information is not disclosed by the seller – or disclosed but not thoroughly evaluated by the purchaser before closing - there is a chance that the Realtor® could be brought into a dispute.

The Problem. While there can be substantial differences, well beyond the scope of this article, generally townhomes and condominiums both contain certain common elements, such as the roof, exterior siding, common walls, and internal operating systems, such as heating and cooling. Maintenance and repair of these common elements is the responsibility of the homeowner association (“the HOA”). If two or more owners begin reporting a persistent and similar problem to the HOA, and investigation reveals a systemic problem affecting a larger portion of the development, it could ultimately result in a serious issue for all of the homeowners – even those not experiencing the problem.

Water damage, which is one of the most insidious problems because it can result in mold claims, is a good example. If the siding of the units was not properly installed, and invasive testing reveals that it must be entirely torn off, the costs can be astronomical. Frequently these unanticipated expenses are not sufficiently funded by the HOA, which means that future assessments will be made by the HOA to pay for them. Additionally, if the investigation reveals the possibility of negligent construction by the contractors, lawsuits can ensue. These claims can take one to two years or longer to resolve.

In the meantime, life goes on. When homeowners try to market their homes in the middle of pending investigations, repairs or lawsuits, the issue of disclosure arises. How much information must the seller disclose? What is the listing agents’ responsibility to the seller? What is the buyer agents’ duty to their customer?

Learning About a Problem . Most HOAs hold meetings and keep minutes. This is mandated in the bylaws of the HOAs and is the means by which the officers and directors are able to meet their responsibilities to the homeowners in keeping them informed. By attendance at these meetings, by the circulation of minutes and other information, and by word-of-mouth, most homeowners learn about major repair issues being faced by the HOA. If the development is professionally managed, information may be disseminated by the company as well. Although there may be a few exceptions, such as absentee landlords who are renting their units,¹ in most cases, homeowners learn sooner rather than later when major repair and expense issues are looming.

Listing the Property. When listing townhomes and condominiums for re-sale, agents must learn to ask the right questions of their clients. If a major issue is looming, such as an impending siding replacement for the entire building, some sellers may simply not talk about it to their agent since no final decision has been made. If the listing agent does not thoroughly explore the issue with their client, he or she could end up being brought into a nondisclosure claim by the buyer against the seller. The seller’s defense would be that “My agent never asked me about it, so I didn’t think it was important.” In addition to reviewing the seller’s property disclosure form closely, listing agents are encouraged to ask their client some tough questions, such as:

“Do you know of any damage, repair, or construction issues affecting any of the common areas, such as the siding or roof?“

“Is the HOA discussing any possible claims or expenses that could result in an increase in assessments?”

In addition, the agent should have their seller secure copies of all of the HOA minutes for the last couple of years, so that this information can be provided to a buyer upon request.

Buying the Property. On the buyer’s side, agents must also ask the right questions. Since professional inspections of condominium units and large townhome projects do not normally pay close attention to the exterior of the unit, these issues can be overlooked unless the buyer or their agent exercise careful due diligence. While this includes reviewing the HOA minutes, more is suggested. Some HOA’s are better than others in their record keeping. Sometimes the minutes do not go into much detail about a potential problem, especially where things are still at the information-gathering stage. In other words, the minutes may not be sufficient in actually disclosing the full extent of a problem. For this reason, actual contact with one or more officers and directors may be in order. Equally important is speaking with neighbors. The more information a buyer and their agent have, the better the decision making process can be.

However, Realtors® are not water or construction experts. Their role is to assist the buyer in the information gathering process – but not to evaluate the problem. Telling a client that a particular issue, such as a roof leak that has been repaired, was localized and nothing to worry about, could later become the basis of a buyer’s claim against their agent, if the problem later results in major assessments or repairs after closing. Rather, when issues such as these present themselves, the agent is better served by encouraging the buyer to investigate further, to learn more about the problem and the scope of the repair, and possibly employ another expert to verify that the repair is a permanent one.

The Stigmatized Property . While it is difficult to put a dollar value on the issue, there is little argument that a condo or townhome project undergoing major repairs or embroiled in litigation against the developer can have a dampening effect on resales. This is especially so where the repairs or litigation have not been finally completed, and the full amount of the final HOA assessment has not been determined. However, sellers do sell and buyers do buy, even under these circumstances. In these cases, especially, agents must encourage their clients to go to extra lengths in securing independent professionals to investigate all outstanding repair and cost issues before making a final purchasing decision.

Conclusion. Listing and selling agents should not rely solely upon HOA documents. Nor can they rely solely upon a seller’s representations – not because sellers intentionally misrepresent, but because they may make an independent and undisclosed evaluation that the problem does not need to be disclosed since no final conclusion has been made by the HOA. This is especially so in smaller projects where there are only a handful of owners and the association is not being professionally managed by an independent company.

FOOTNOTES

1 This is not to suggest that such landlords are immune from the claim that they should have known about the problem, since their tenant did have actual notice.

© Copyright 2006. Phillip C. Querin, Davis Wright Tremaine. No part may be reproduced without the author’s express written consent.