Can You Sue For A Shortage in Reserves?

The questions are rolling in about association finances, reserves and loans for condos, including refinance, buy, sell, and reverse mortgages. Here are a few samples:

“I am so mad at my condo association. I applied to refinance so I could avoid a jump in interest (yes, I have a variable loan coming up for the hike later this year), and find that I cannot get a  loan because the association reserves are in dismal shape and the delinquencies are high. How did they let this happen? Can I sue them? I stand to lose everything if I cannot get this loan. ”


“May I take legal action against the board of my HOA?  I applied for a reverse mortgage and the board has not collected enough funds to satisfy the reserve requirement. [A large national bank] turned me down.”


“I serve on the board of a condo association and we have been struggling so hard to stay afloat. We are at 25% delinquencies on dues; we had to write off more than $30,000 last year for losses related to foreclosure and bankruptcies, and we had several unanticipated repairs this year, thus having to borrow from reserves (so our reserves are low).  Now, some of the owners are attempting to refinance  or sell so that they can keep afloat – and we (and they) have found out that we cannot qualify for FHA certification. So our owners that have been paying dues are threatening to sue. Where will this end?


I will say this – there is no end in sight, unfortunately. I just sent out an E-Newsletter on the subject of FHA certification changes – AGAIN (the second this year on the topic). HOA and Condo financing is a hot topic!

And many want to point fingers and sue someone. I will tell you this, I am not a litigator (thank the good L) but you may find someone to take the case. However, consider this:

It is the variable loans threatening folks today that lead in part to the subprime mortgage fiasco so if you got one assuming that you would be able to sell or refinance by the time of the big “hike” – who you gonna blame?

It is the failure of homeowners in the USA to appreciate the value of saving for the event that the finances fall through or big expenses step up to bite that lead to a lot of the problems individual owners are facing today. This “live it up” society is eating itself up now.

It is the failure of homeowner associations in the state over the long term to make any kind of reasonable push to pump up reserves that is now claiming many associations as well.

So who you gonna sue, and for what? It’s a big and expensive undertaking. I am not saying it is not ever justified. However, be advised that the burden on the “sue – er” (plaintiff) to show that the “sue – ee” (defendant) (1) had a duty to take better care of the money situation, (2) failed in that duty, (3) caused your loss, and (4) that you lost money.

Sound simple?  Well, there are SO MANY FACTORS swirling around us today that are causing monetary losses to SO MANY people and SO MANY of the factors result from a complicated domino effect that might have started with the potential “sue – ee’s” personal decision making processes and financial choices.  

I am beginning to sound like an Iowa  hog caller here! (I’m from Iowa so I can make this joke with a smile.)

Let’s face it, it is the struggling owners who have been forced out of their homes through job losses, family illnesses, and desperate circumstances that for the most part deserve the sympathies.

Let’s get real. In 99% of the cases where people say they want to sue someone, it’s a reaction to stress. When they find out the cost and toll it requires, they look for another way. Probably not what you wanted to hear, but be wary of the attorney who jumps at the chance to lead you into the courts without much ado.  He or she may be hungry too to “get some action.” (if you know what I mean).

It is important to understand from the outset the strengths and weaknesses of your “case”, the cost and the hurdles to going forward, and the best and worst possible scenarios if you are considering suing someone for your losses.

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