Many Charleston-area condominium complexes have faced lawsuits over construction defects, and for some owners and potential buyers, that meant missing out on rock-bottom mortgage rates.
Linzie Davis is one such co-owner. In 2021, she expected to finally get a low-interest mortgage on her condo at The Peninsula on James Island.
Mortgage interest rates were near record highs and Davis wanted to replace an adjustable rate mortgage that had been her only option when she bought her home in 2017 due to ongoing litigation.
As of 2021, the 300-condo complex on Daniel Ellis Drive had been the subject of two construction defect lawsuits. Davis thought that was all a thing of the past and was assured by the resort’s management company that there was no ongoing litigation. She applied for a 30-year mortgage when average interest rates were around 3%, and she locked in her rate in November.
Unbeknownst to Davis, her condo association had filed another lawsuit, and when her lender, SouthState Bank, learned of this in January, they refused to process her loan.
“We totally missed the boat,” Davis said. “I got all these emails from the (condominium) association saying there was no dispute.”
The problem is that most banks take out mortgages and then resell them to Fannie Mae and Freddie Mac, federally created entities that buy mortgages so banks have more money to lend. And Fannie and Freddie will not buy loans for disputed properties.
In the six months since Davis’s loan rejection, mortgage interest rates nearly doubled. The variable rate mortgage that Davis currently has is set to change in 2024, with a potential interest rate of up to 9.125%, and his monthly payments could skyrocket.
While Davis’ experience – being mistakenly told there was no litigation involving his condo complex – may be unusual, the inability to secure a fixed-rate mortgage is an issue that is confronted anyone who owns or hopes to buy a condo embroiled in a lawsuit.
For co-owners, it makes sense to sue when buildings are found to have construction defects, because someone will have to pay to fix them. However, lawsuits can take years, and while they unfold, homeowners and potential buyers find it difficult, if not impossible, to obtain a conventional mortgage.
“The problem is the existence of the lawsuit,” said Brian Beatty, a Charleston-area realtor with a weekend radio show on WTMA-AM. “On the one hand, they do it for the benefit of the owners, but the inability to finance reduces potential buyers.”
Beatty has had his own experience with condominium litigation, and it illustrates how prices can dive and rebound.
He bought a condo in Point James on James Island as an investment before the Great Recession. Building defects sparked a lawsuit, housing prices plummeted during the recession, and Beatty said he saw his $140,000 condo go for around $40,000.
Later, he said, the litigation was resolved and the housing market recovered, and he was able to sell it that year for $188,000.
Dozens of condo and townhouse developments in the Charleston area have been the subject of litigation, some of them more than once. Most cases have involved water intrusion due to poor construction of windows and porches, sometimes leading to mold and termite problems, and even life-threatening structural problems.
Repeated lawsuits have typically involved disputes over the quality of repairs carried out to fix construction defects that spurred the original litigation, as is the case with The Peninsula.
Pelican Pointe, another condo resort on James Island, is among those that have returned to court and are still in litigation.
Owen Tyler, Cassina Group’s managing broker, said there’s no easy way to tell which condo and townhouse complexes might be in active litigation without looking at court records. Sellers are required to disclose such disputes, but such disclosures only occur after an offer has been made.
Beatty said condo buyers should look for realtors who have been in the area long enough to be familiar with the history of condominium complexes.
For potential buyers, condos and townhouses are among the most affordable options to own, but only if mortgages are available.
For condo owners, including Davis, litigation has meant having to watch in frustration as rock-bottom mortgage interest rates come and go.
For someone who borrows $200,000 over 30 years, the difference in monthly payments between a 3% interest rate and a 6% interest rate is $356, or more than $4,270 more each year.
At least for condo owners, litigation has one potential upside: the prospect of winning big settlements to pay for repairs that owners would otherwise have to fund.
In Pelican Pointe, for example, the owners of the 84 condos were asked in 2019 to pay nearly $60,000 each to fund repairs, including termite damage that prompted a city-ordered temporary evacuation. A lawsuit related to termite damage and an expired termite insurance policy is pending.
Charleston County court records show The Peninsula condos were in litigation over construction defects from April 2006 to March 2011, resulting in a settlement of over $10 million.
From November 2014 to April 2018, the condo association and two companies involved in the repairs were defendants in a lawsuit brought by multiple condo owners, which was dismissed under undisclosed terms. And in September, the condo association sued the companies and insurers involved in the repairs that followed the 2006-2011 litigation.
“It’s kind of a unique situation,” said Charles Hipp, chairman of The Peninsula’s HOA board.
Hipp said he was unwilling to discuss the lawsuit which took Davis by surprise because he was upset by unspecified aspects of previous reporting on The Peninsula’s issues.
In 2018, The Post and Courier reported that residents of 19 condos were ordered to temporarily evacuate days before Christmas after structural engineers discovered damage that Charleston city officials said constituted “an immediate threat to public safety”.
Hipp, whose company sell and rent real estate, including condos at The Peninsula, said despite the latest litigation complicating mortgage availability, condos are selling quickly.