Another question the builder should ask when choosing an HOA management company is its philosophy in handling construction defects and litigation.

Two problems need to be avoided.

First, the HOA management company must advise and represent the homeowners in resolving construction problems with the builder.  This position is difficult at best because the HOA management company was originally hired by the builder.  The HOA management company must advise the homeowners about beneficial courses of action in how to resolve construction problems and defects without appearing to take the side of the builder.

The second problem is a direct extension of the first.  The HOA management company should advise the homeowners to use legal remedies only as a last resort in getting construction defects resolved.  The HOA management company must properly advise the homeowners to avoid an “ambulance chaser” construction defects lawyer who might find all sorts of defects that really do not exist…or magnify defects that do exist out of all proportion…and entice homeowners with the prospect of a large monetary judgment.

I once heard the true story of a large condominium project that had legitimate construction defects of settlement cracks and retaining wall waterproofing problems.  The HOA…on advice from their defects attorney…successfully sued the builder for $20 million.  The builder then went bankrupt, and the builder’s insurance policy was good for only $2 million.

Because the HOA sued the builder, the $20 million worth of construction defects became public record…but the $2 million recovered through the insurance company was not enough to make the required repairs.  Each homeowner then had to legally disclose that the $20 million of construction defects still remained within the project to be repaired…when attempting to sell their units.  This legal obligation and duty to disclose these unrepaired defects made it difficult to sell the units.

The person trying to resolve this dispute between the builder and the HOA said the list of alleged defects could be organized into three different columns.

The first column consisted of real construction defects that needed fixing by the builder.  The second column consisted of defects magnified out of proportion…making minor problems appear larger than they were.  The third column consisted of alleged defects that either did not exist or would not even have been complained about by the homeowners if it were not for the previous two groups of complaints.

This person estimated that the legitimate defects could have been repaired within the $2 million of insurance coverage…if the situation at the outset had not been inflated by the defects lawyer, if a lawsuit had not been started, and if the builder had been allowed to make the legitimate repairs.

The best approach for the HOA management company should be to advise the HOA that if a lawyer is needed to resolve construction defects issues, the lawyer should be retained to only render an opinion at first.

Once the HOA decides to start a lawsuit, the homeowners need to know they might have to disclose the existence of suspected construction defects when attempting to sell their units.

The HOA also runs the risk of obtaining a judgment in excess of the insurance coverage amount…thus resulting in a special assessment to each homebuyer to make up the monetary difference between the insurance coverage and the amount required to repair the construction defects.