Can Filing a Lawsuit Diminish Market Value?

The answer is "NO", at least not the mere process of litigation.  If a house has a problem that was not disclosed by the seller, the filing of a lawsuit to address those non-disclosures will not negatively affect market value.  Why not?   Because once you learn of the non-disclosed facts, you are obligated to disclose them to the subsequent buyer whether you file a lawsuit or not. 

However, if you hire experts to make claims about the property value or the need for repairs that are inflated for litigation, then the answer may be "YES". 

Take for example a water intrusion problem in a house.  Let's assume Buyer finds water entering the house some way - a roof leak, poor drainage, a cracked basement wall - and this was not disclosed by the Seller.  The Buyer has to disclose this (has to may be too strong, ethically and legally should disclose this water intrusion whether he files a lawsuit or not.  The filing of a lawsuit will not affect the market value related to this water intrusion. 

If, on the other hand, the water intrusion issue in the lawsuit is inflated by expert reports and expert testimony that overstate the effect of the water intrusion and call for extreme measures to address the problem, then this process of inflation and overstatement can very well damage the market value of the house. 

If the water intrusion issue can be resolved with a rubber sealant on the basement wall  and will cost under $10,000 to accomplish, then  a subsequent disclosure by the Buyer when they sell the house will not affect market value especially on a house valued in excess of $200,000.

If through litigation, however, the Buyer hires experts who create reports calling for grandiose and unnecessary repairs, then those reports and repair bids can and will come back to haunt the Buyer when he goes to sell the house later.  In the example above, based on an actual case, the Buyer had a water intrusion that occurred during a tropical storm.  The Buyer hired an attorney and in the litigation, the attorney hired an expert.  The expert ignored the common sense solution of sealing the basement wall from the outside and instead,  to prevent water intrusion, conceived a completely unnecessary plan to remove all of the interior wall, ceiling and floor coverings to determine the exact location of the intrusion.  This remedy was solely to inflate damages.  Removing all of the wall coverings and ceilings and floor coverings was estimated to cost $150,000 PLUS!  AND IT STILL OFFERED NO SOLUTION because it could not create a repair until this singular and unique water penetration was located. 

In that instance, the expert report will have to be disclosed and that Buyer will have a hard time convincing prospective purchasers that the remedy proposed was only offered for litigation purposes and was not really a viable solution.  If I was privy to that report and looking at the house, I would argue the value was reduced by $150,000 plus.

The solution is to stay real to what is there.  A real, viable solution is one that a contractor would make for the conditions regardless of litigation.  No contractor on earth would ever create a solution for a homeowner to remove all of the interior walls of a basement area to solve the water intrusion.  They would excavate the exterior wall and seal it.  There, simple and done.  If they did offer to remove the wall coverings, ceilings and floor covers, they wouldn't work for long. 

So, where a litigant resorts to repairs and expert opinions that are extreme and beyond what the average, normal contractor would do, that litigant is destroying his own market value in the future.    It is not the litigation that caused the decreased market value, it is the extreme positions taken by the litigant.  Be careful what you ask for.