I remember in the last real estate cycle that ended spectacularly in 2008, there were a lot of apartment properties being converted into condominiums. As I look around eight years later, I don’t see any. Why not? Well, it turns out the problem with condo-conversions is the same as the problem with new construction condominiums… a fear of lawsuits! On top of that, apartment rents continue to rise, so the risks are much lower for multifamily developers to go toward rental income projects than take on a new condo project.
Many of the market participants point their finger at the Washington Condominium Act as the prime culprit in this dilemma. The Act allows homeowner associations to sue builders for construction defects and that's a good thing for consumer protection. But many builders are complaining that there is a cottage industry of attorneys driving most of these lawsuits and reaping substantial fees in the process. These legal risks are scaring away builders, lenders, and even sub-contractors and they driving up costs for insurance and legal fees.
To avoid the legal exposure of dealing with condos, developers are focusing on creating townhouse projects which are a form of single-family home ownership. The problem there is that townhouse projects are smaller and thus there are fewer units entering the market. In the same space that four townhouses occupy, there could be 8 to 12 condo units.
Seattle mayor, Ed Murray, is seeking ways to modify the Washington Condominium Act so that more condo units can be built so that housing is more affordable.. He has created a blue-ribbon panel to analyze the situation and offer recommendations. In Olympia, the home builders lobby is doing battle with the trial lawyers lobby over proposed changes to the Act. The home builders lobby wants to provide a provision that gives the builder a “Right to Cure” the construction defect before the lawsuits begin.
I know this is a cliché, but I’ve often heard that “once the lawyers get involved, nobody wins... except the lawyers.” Please know that some of my friends are attorneys and they understand this sentiment. [But I’m not sure they fully agree.]
Here is my solution! You ready? The state should set up a special court to handle condominium construction claims. It would be a hybrid between binding arbitration and the regular court system. The process would be standardized and the technical experts representing the claimants would be vetted and certified. The objective would be to preserve the consumer protection of owners while reducing the legal costs for both sides. Housing is fundamental need and condominiums fulfill a part of that need. Clearly the system is broken, so let's fix it!
I’d love to hear your comments.
Your Seattle Condo Specialist