The effect of a lawsuit against your HOA.

Someone posted a good question about what would be the effect on a HOA after a lawsuit is filed or won.

There are several effects that could happen in a HOA due to lawsuits. I am going to post just a few off the top of my head to get started. I am sure other posters on here have had the experience on what happened after it happened to their HOA and will post it.

The question came up referencing mortgages... A HOA typically does not have any mortgages. The owners/members do. However, there is an effect on your ability to refinance or new owners to get loans. There is a HUD form that is filled out that works much like a HOA appraisal form. It is used by the mortgage lenders to gauge the health of the HOA. On that form there is a place for asking if the HOA is currently or has been involved in a lawsuit. The details of which must be provided. This information then is used by most likely the big three federally backed loan lenders. FHA, Freddie Mac, and Fannie Mae. Those are the MOST popular loan lenders that most people use in buying houses. However, they may be denied the loan and have to find another lender. A lender that will have higher rates or more stringent approval rules. Which means it will be harder to get approved buyers for the houses/condos in your HOA.

This will also go into refinancing areas. The rates of which will most likely go up due to the higher risks and costs of your HOA. The HOA will most likely have to raise dues or have a special assessment to cover the costs of the lawsuit or lawsuits. The bank has to factor in HOA dues much like utilities bills. So when they do a debt load ratio on you for approval your debt load just went up. Which then in turns pushes your rate up or denial of refinancing.

A claim also effects the HOA's credit rating. Yes, HOA's do have some kind of "credit rating". It's not exactly like your personal one. However, what it can do for a HOA is make it pay more for insurnace and loans. A HOA can apply for loans if needed. It is kind of rare but it does happen. A claim can effect that and make the loan a higher rate or denied. So the HOA can't really borrow money to help pay for their lawsuit pay outs if their credit rating bites it.

The most obvious result is losing your HOA's insurance altogether. They will cancel your insurance and can do so legally. The insurance company can also raise rates to the point the HOA can not afford it. It is extremely difficult to find new HOA insurance companies. There are only a few nationwide that even offer such insurnace. So if you got an insurer it's best to do the best you can to keep them.

The effect out of your pocket as a member? The HOA may have to raise dues or have a special assessment of course. The insurance only covers a certain amount of the award. A 1 Million policy does NOT pay out 1 million dollars. It roughly pays out about 80K if you read your policy. So if the court awards 100K then the owners would have to pick up the 20K difference. Keep in mind the lawsuit is against ALL of the members not just the board.

There is also some trickyness with the special assessment. Your HOA is going to have issues with people refusing to pay the special assessment. They didn't want to be part of the suit or were part of the suit. It doesn't exclude them from paying the special assessment. If they don't then your HOA will have to put a lien on their property to collect. A lien can be filed for not paying a special assessment. Which then means more money the HOA has to spend out to collect the money owed.

As you can see this is the real effect a lawsuit has on a HOA. You may want to sugar coat it with "I am right" but the reality is no matter how "right" you are, these are the results...Suing your HOA is suing yourself and your neighbors...Enjoy the higher dues, less ability to sell/refinance your home, and living with angry neighbors upset with having to pay the bill...Nice laugh eh?

It is a complicated situation. I posted what basically could be the effect of lawsuits on a HOA if you see issues when selling or purchasing in a HOA. These would be red flags. They are also something that happens slowly that many don't see the symptoms until they get effected.

I am of the opinion that many HOA's are over lawyered. That happens because of the lack of education and inability for many volunteer boards to understand what they are doing. It's the natural answer for many who suddenly find themselves on the HOA board: "Let's consult the lawyer". It is good intentioned to have a lawyer for a HOA but too much dependency situation develops. It can handicap a HOA and raise operating costs. Plus the advice isn't always correct or is misunderstood.

The truth is that 95 percent of the issues with a HOA are resolvable, changeable, and resolvable INTERNALLY. The rules are all set up so they can be changed/modified if the majority does not want them. They do allow for legal ways to collect money and enforce rules. The documents of the HOA is pretty much the "Bible" except that some people insist you need a preacher/priest to translate the information inside. (Lawyers=Preachers).

Lawsuits really are the LAST and MOST inefficient way to conduct business for a HOA board. Do they do it? Yes. Why? Because they don't know any better or they don't understand that the liening/foreclosing process is a much stronger/better option. It's just more long term than short term in a lawsuit. I always preach that lawsuits by a HOA is the worst route to go for multiple reasons. The first of course being that they allow people to move and leave the HOA without ever paying a dime of the judgement. Something a lien doesn't allow.

Now some states do require the HOA's recourse on certain areas to be resolved in court. Those areas are usually in the "fines". It's not related to unpaid dues. So it is possible the HOA is doing what it is supposed to do by taking members to court because that is the practice of their state for violation pursuits. Which throws a little bit of a wrench into the avoiding the lawsuit approach I admit. However, if that's the prescribed remedy for your state, then you have to go with it. If your so set on collecting fines on violations.

Overall a HOA should just avoid filing lawsuits altogether and go with the lien/foreclosure process instead. It has less of an effect than lawsuits. Until your BOD is sufficient and proficient in it's own workings and rules, your HOA will probably keep consulting lawyers and mounting suits. Until they learn that lawyers are TOOLS for the HOA to use and an legal extension since they can NOT practice law, then HOA's will continue on this lawsuit circle...One I hope people learn to avoid in the future.

MelissaP1
(Alabama):

From your expose, it appears that the HOA should do the "right thing" to prevent these "problems" don't you think?

I concur with FredO's analysis. Importantly, studies of medical malpractice cases show that when doctors and hospitals simply apologize to the patient, the chances of an actual lawsuit diminish significantly. See citations below. It seems to me this outcome is likely to apply to apologizing for HOA mistakes as well.

From 2014: http://www.physicianspractice.com/blog/apologizing-for-medical-missteps-whether-its-a-mistake-for-physicians

From 2011: http://www.uh.edu/~emliu/jru11/JRU_final.pdf

From 2008: https://www.ncbi.nlm.nih.gov/pmc/articles/PMC2628492/

From 2004: http://www.wsj.com/articles/SB108482777884713711

That may not always be true ... in some states if an individual wins against the HOA they cannot be held accountable for the assessment for HOA legal fees. Potentially it is meant to keep down the number of lawsuits and insure people try to work things out. If a lawsuit is filed the petitioner (whether Owner or HOA) has most likely estimated a very high probability of winning, as they would not want to be responsible for all parties legal fees if they loose.



Very good point ... I would add stubborn to go along with ego's and pride.



Many states are requiring the disclosure as part of everyone's closing. I am hoping all states will require and if anyone's state does not you should start hounding your State Legislators. It is very irritating for a BOD's when people do not know they bought into an HOA and understand the consequences. SC is looking at adding HOA laws and this is an item they have been discussing:

"The panel was specifically tasked with reviewing five categories: whether HOA governing documents should be disclosed to homebuyers, education for homeowners and board members, manager certification, the time period of a developer’s control of an HOA, and the need for a uniform planned community act.

The panel did agree that HOA governing documents should be disclosed to prospective buyers, particularly for new home sales."

Read more here: http://www.thestate.com/news/state/article54217830.html#storylink=cpy

I was not coming from that angle. It was to show what happens when one sues their HOA. The other way around has a similar effect and still reported on the HUD form. It is that ALL the members money is being used to pursue legal action against one. Which may be something not all believe in should be pursued.

I think HOAs should not sue their members for corrective actions or collections. A lien or foreclosure process is a much stronger approach than a lawsuit. Fines are not necessarily legally enforceable or collectible in all situations.

Regardless of which way a lawsuit goes, you are still suing yourself and your neighbors or using the HOA money to sue its member...

From first hand experience, there are times when a large lawsuit is hidden from the members.If someone does find out, they are characterized as a trouble maker. We even had a clause in the CCRs that required membership approval if the cost to litigate were to go over $2500.00. The attorney and management ignored the governing documents.

If the HOA is not transparent, financials generally are not available. How many people really read the year end annual reviews. I have dealt with my share of attorneys and PM's who deal with anyone who remotely questions their god given authority.

Said state of affairs when no one give a ****. I moved out of my HOA. Lucky too, because home sales and refinances have come to a halt as the HOA has a $20M lawsuit against them. They have $300K in delinquencies, can't figure out how to do a budget, gates don't work and when elections come along, no one wants to step up and take charge.

I have been involved in HOA's in many different capacities since 2009. I have never used the services of an attorney. As Tim said, a cup of coffee goes a long way in resolving simple issues.

But, if I were to sue my association, and I was very close, the $2M I would have sought would have cost me maybe $100.00 per year in increased insurance premiums. Small price to pay.

Our state did amend the HOA law last year requiring that buyers be advised that the house is in a HOA community at least 3 days before closing, I think. It's a start, although I would have said at least 7 days in advance. The state realtor association put something on its website about the new law, but I wonder how many really pay attention to it.

To wit - I exchanged a few emails with my former board colleagues over assorted issues, during which I said something about homeowners not being educated on what a HOA is. One (a former president and current realtor) said many of his clients are so excited about buying the house, they don't even think about the HOA part. At first, I thought "and I bet YOU don't bring it up either", but I'm giving him the benefit of the doubt because this board member set up the association website, which does have a message for realtors on our community being in a HOA and a brief statement as to what will be expected of the homeowner. So it's a start.

And let's not forget the SELLER in all this - it seems to me they should be held responsible for not telling the homeowner the house is in a HOA community? People yell at the realtor, the property manager and the HOA board, but it's the seller's house and one would think he/she lived there long enough to know there was a HOA and what's going on. Maybe sellers should be required to at least tell the buyer if the house is current with assessments, what exterior changes were made and if they were approved by the board. Instead the seller usually takes the money and runs, like everyone else, not telling the buyer that fence in the backyard wasn't approved by the association and it's about to send a nastygram ordering him/her to remove it or be fined.

And yes, this would include bank owned houses. The board member I mentioned above said "well, the banks don't always know the house is in a HOA." That may have been true when I brought my townhouse in 2001, but in light of the 2008 housing meltdown, I say BS - the legal department probably learned of an assessment lien filed against the house when they pursued foreclosure, so maybe they need to take the time to dig a little deeper as to what's behind it.

Many say do not answer a question that is not asked, especially in a sale situation.

GenoS
(Florida):

I agree...

It is funny, but, we do NOT have this FL disclosure in AR...
Although we do have a "disclosure" statement and several of the questions, in good conscience, could require this disclosure...

The above bold is also my experience.