Hopefully your HOA doesn’t find itself amid a lawsuit just as you’re getting ready to sell your home or while you have it on the market, but it’s certainly possible.  If does happen, here’s how to proceed:

Disclose what you know
Disclosure laws vary by state when it comes to real estate transactions, but that doesn’t mean you should ever hide what you know – especially if it’s something that could turn off a potential buyer.

The last thing you want to do is have a buyer feel like they’ve been duped in a way.

You certainly don’t have to shout “pending litigation” from the rooftops, and there’s no need for a real estate agent to include it in marketing materials.  But when a buyer is interested, providing the information is important.

By providing information on a lawsuit first, you can frame it with proper context – for example, when a settlement in favor of the HOA board is likely to happen soon.

Talk to your HOA board.  While you should always err on the side of transparency when you risk sending up a red flag for a potential buyer, you should also be in communication with your HOA.  The board may be sharing information with other potential buyers on the situation, and it may be tasked with providing such details instead of you as the seller.

Accept that some buyers will be turned off.  The litigation may be no fault of yours, but you should accept from the start that some buyers will have a blanket “no” policy when it comes to active litigation involving the association. Some people hear lawsuits, and they just walk away.

Your pool of potential buyers shrinks when certain issues exist, due to restrictions with their lender, how quickly other houses are selling in the neighborhood and how competitively your home is priced.  Just like some buyers don’t want to renovate a kitchen, others don’t want to deal with a condo association involved in a lawsuit.

Expect most major lenders to say no.  A key factor contributing to many buyers’ attitudes toward litigation is the mortgage lender they’re planning to use.  If you’re selling a condo, pending litigation means Fannie Mae and Freddie Mac won’t purchase the mortgage in the secondary market, making the condo non-warrantable – so most major banks will not approve the loan.

Large banks such as, Bank of American or Wells Fargo will just say no. A lender may also turn down a loan for a single-family house due to pending litigation if the lawsuit threatens or calls the value of the property into question.

If the lawsuit is based on some form of construction defect, it will be very difficult for a lender to lend on that property in that scenario. Usually, the litigation is not typically that serious where there is something fundamentally wrong with the building.

Smaller banks, credit unions and some nonbank lenders may be more likely to consider the property based on the circumstances of the lawsuit, negotiated price, down payment and other conditions.  Of course, it’s up to the buyer when it comes to deciding which lender to work with.  An all-cash offer does help you avoid the lender hurdle, although the price may require a bit more negotiation in exchange for a smoother transaction.

Be willing to go lower on the price.  Unfortunately, an active lawsuit involving your HOA may mean you have to price your property more competitively.  With a lower asking price, you’re more likely to attract serious buyers who are willing to look past the litigation and consider the other positives.

You may want to consider waiting out the litigation process until it gets resolved.  If you’re not in a time crunch or in need of the profits from a sale right away, you may not be able to wait, but consider your options.  Consider renting out the condo or house for a year or two so you can collect rent to cover the mortgage while litigation plays out.

Keep in mind that any lawsuits involving HOA, condo or co-op boards can be simple.  The most common forms of lawsuits are: pursuing delinquent dues from members; followed by action against the developer for defective construction; or, typically in an association of single-family homes, enforcing construction restrictions among members.

Please note that litigation does not go on forever – but it may take a couple of years to get resolved.