Evaluating townhomes and condos with HOAs when running numbers
Hello everyone!
I just moved to Miami just under a month ago, and I'm currently living in Miami Beach (renting). I'm looking to buy my first property using conventional financing (have VA loan as an option or would be willing to do 20% for the right deal). When looking at townhomes and condos, most have HOAs. My questions on that are:
1.) What does the homeowner's insurance typically look like? Does it take into account having HOAs? I'm seeing a fair number of townhomes between 200K-300K, so I'm curious what insurance rates are looking like right now.
2.) How do you factor maintenance/capex into your analysis when a HOA covers certain parts of the property?
Thank you all!
-Eddie
Hey Eddie, my first property was a condo. Here are some things that may help you!
1.) talk to a few insurance agents/brokers to get a real local answer to this. It's the only way :) Try to work from referrals from investor agents and/or lenders.
2.) I do this the same way I do on any non-hoa property with one additional step. see below:
When I walk through the property, I use a list of capex items (roof, flooring, paint, plumbing, electrical, doors/windows, garage door, siding HVAC, etc.) I have the cost to replace said item there and during the walkthrough, I just try to estimate the remaining life on each item. Now, you might be thinking...well what about the roof? It's huge and covers 8 units. Just focus on the remaining life and less on the replacement cost. I then take the total cost over the remaining life and get a monthly amount needed to save for each item. In my condo, it was turnkey except for the air conditioner and I was responsible for everything studs-in. The association replaced some lights and siding and did a back deck repair on them while I owned it, but I ended-up replacing a bad garage door and air conditioning condenser because those items were not covered.
With an HOA, your fee is supposed to go to ongoing maintenance and some larger replacement items, BUT.... if the HOA is bad at managing their money and/or they have a bad balance sheet you could and likely will get stuck with the bill as a special assessment for your portion of that capex item. These can run in the thousands of dollars, so you don't want to pretend like you never have to pay for the roof - you could end up doing that. Also, each association will have its documents that lay out the latest financials and the rules and regulations, and bylaws for that community. That set of documents will answer your questions on what is your responsibility and it's important to check it for each community you explore.
Having an idea of the remaining life on the big ticket items is useful for you, and between that and the current financial standing of the HOA, you should be able to get somewhat of an idea what the risk/likelihood of getting stuck with one-time flat assessments on top of the monthly HOA fee looks like.
good luck
#1 All Forums Contributor
- Investor
- Virginia
Quote from @Eddie Wright:
Hello everyone!
I just moved to Miami just under a month ago, and I'm currently living in Miami Beach (renting). I'm looking to buy my first property using conventional financing (have VA loan as an option or would be willing to do 20% for the right deal). When looking at townhomes and condos, most have HOAs. My questions on that are:
1.) What does the homeowner's insurance typically look like? Does it take into account having HOAs? I'm seeing a fair number of townhomes between 200K-300K, so I'm curious what insurance rates are looking like right now.
2.) How do you factor maintenance/capex into your analysis when a HOA covers certain parts of the property?
Thank you all!
-Eddie
As mentioned, get some quotes for insurance on the property. Depending on the HOA, if its a townhouse they typically do not cover much except common area items, a condo typically covers everything starting outside the drywall.
For capex and maintenance, you need to put in the HOA/Condo Fees, ask if there are any special assessments coming, and determine what repairs you may have and capex (how long life does each item have) to determine what you should carry.
Eddie,
Most condo associations have coverage typically referred to as "bare-walls", "walls-in / original design", or "all-inclusive" style coverage per the governing docs of the association. Depending on what the community has in place will determine how much insurance you buy, and how expensive that coverage might be. If the condo community has a bare-walls style policy you'll be insuring more items within your unit, where if the condo association has an all-in style coverage, you'll be insuring significantly less items within your unit.
When it comes to townhomes, that's a completely different ballgame. Some townhomes can be insured like a single-family home where you as the owner insure the entire dwelling inside and out, while some townhomes are insured more like condos. I would certainly keep this in mind when looking to buy a townhome or in a townhome community, especially when those townhomes have condo style insurance.
Below are insurance terms that may (or may not) be found in the governing docs of a condo or townhome association. It usually depends on how old the documents are. These insurance types spell out what each unit owner is responsible for insuring, versus what the condo / townhome community is responsible for insuring. Always remember that neither a condo or townhome association will ever be responsible for your personal property / contents as an owner, nor that of any tenant.
For simplicity, "walls-in" is the least amount of protection from the condo association. This insurance type simply means that the condo association doesn't insure anything on the "inside" of your unit. Thus you must insure the entire finish-out of your unit (flooring, cabinets, appliances, wall coverings, fixtures, etc.).
The second type of condo insurance is called "walls-in / original design". This is the most common form of condo insurance today. This usually means that the condo insures the outside and inside of your unit back to it's "original" finish out by the developer (or at first conveyance). In this insurance type, the condo association would be required to insure your flooring, cabinets, fixtures, wall coverings, and certain appliances back to the way they were at first conveyance to the very first owner. This would be with similar kind and quality of products in todays marketplace.
The last type of condo insurance is known as "all-inclusive" insurance. The only difference between "walls-in / original design" and "all-inclusive" type insurance is that the condo association's policy would actually pick up coverage for any upgrades made within your unit. This would be for "any upgrade" made by you or any prior owners. This type of condo insurance obviously provides the "most" coverage to a unit owner, but is also the least likely insurance in most areas of the country. You usually see this style of condo insurance more up in the northeastern and mid-western states.
Hope this helps! Good luck!
See @Bo Bond write up on the insurance. The easiest way to determine what you may need for your own insurance is to either look at the master policy certificate of insurance (more often than not it’ll describe it) or call the master policy broker ( their contact info will be on that certificate). The certificate will come with a resale certificate which will include a few hundred pages. Read them! Vet your association!
Your maintenance/capex budget will be driven by what you see in the resale cert (review financials, budgets, reserve study, read meeting minutes) to see how well the association is functioning. If all is well your maintenance and capex are limited to interiors only. Confirm this by reading governing docs, CC&Rs, etc. In a townhome setting, you may be responsible for the exterior, driveway, landscaping, etc. Or not. Depends on how it is setup in the governing docs.
And lastly, read rental rules and restrictions. There may be a cap on rentals, a requirement to owner occupy for a period of time before being able to rent, etc etc etc.
Vet your association! I cannot stress this enough!