I have often heard that if a condominium association is currently involved in litigation, it results in an automatic Rejection for an FHA Condo Approval. In fact, I read an article earlier this week that mentioned this.
It is simply not true.
More than half of the condominium associations whom we’ve assisted to obtain their FHA approvals have been involved in litigation in some form. FHA does want to know about the pending litigation so that it can make a determination regarding the potential risk to the association.
FHA is interested in actions that involve the association as a defendant, not as a plaintiff. This means that no information need be provided to FHA regarding suits where the association has taken legal action against a unit owner for non-payment of common charges. The exception to this is if the association is suing the builder for structural defects. FHA would require information pertaining to this lawsuit as it points to a much larger issue and potential risk to FHA.
FHA is also not concerned about foreclosure actions against unit owners where the association is also named as a defendant.
Aside from foreclosure actions, the most common are suits regarding liability insurance, aka “slip and fall” suits. Rarely does this adversely affect a condominium project’s ability to obtain an FHA condo approval. This is because slip-and-fall suits are typically covered by the association’s liability insurance. Only in cases where the claim is greater than the insurance coverage might the association suffer damages.
According to HUD’s Philadelphia Homeownership Center, as of September 2013, only one condominium association was rejected on the basis of a slip-and-fall suit. It involved a professional dancer who suffered a career-ending injury and was suing the association for something like $10 million. This is far in excess of the liability coverage and FHA would not consider and approval of the condominium until the conclusion of the suit and the damages were known.
About 30% of the associations whom we have assisted have been involved in slip-and-fall cases and all have obtained an FHA condo approval.
Some actions against associations involve suits over broken agreements and contracts. An example would be if an association fires a landscaper and the landscaper sues for the remainder of the funds owed to him/her as per the contract. In cases like these, FHA determines if the association has sufficient funds to cover the full amount of monetary damages sought AND still have enough money remaining to meet the reserve requirements.
Sometimes the actions are only to seek injunctions but not specific monetary compensation.
I heard an example of this recently. After unsuccessful attempts of a unit owner to convince the condominium Board of Directors to move a light pole and dumpster and to ban kids from playing in a common area, he presented the association with legal action to get his way. He is not seeking monetary compensation and, if he wins, it may cost the association a small sum of money to move a light pole.
Another example is a defamation lawsuit of a unit owner against the association. I won’t get into the details of the case but the unit owner has gone on record that he is not seeking a monetary reward (which is very difficult to obtain in such cases anyways).
In this case, an attorney opinion letter from the association’s attorney will play a major role in FHA’s determination of the potential risk to the association, and the risk to FHA should it choose to approve the project.
Gavel image courtesy of Salvatore Vuono/freedigitalphotos.net
Light post image courtesy of artur84/freedigitalphotos.net
The Condominium Project Approval Team at ReadySetLoan is dedicated to helping condominium projects across the nation to obtain their approvals with FHA and the VA or become recertified with FHA. We have assisted nearly 200 condominiums and we can help your association.
ReadySetLoan is an active member of the Connecticut and New England chapters of the Community Associations Institute (CAI) and is a frequent contributor to Common Interest Magazine as an expert in FHA/VA condominium project approvals.
Please contact us with any questions regarding FHA or VA condominium project approvals. You can email me at firstname.lastname@example.org or call me at 404-433-4565. I will be happy to answer any of your questions.
FHA/VA Condo Approval Specialist
404-433-4565 Cell Phone
860-644-3772 Fax Phone
Check out our article in Common Interest magazine on page 19!