Pay Closer Attention to Your Condo Homeowners Insurance (HO-6)

Question: What is the difference between my individual condo insurance and the Association’s master insurance policy and do I need my own insurance?

Answer: Every condo association has its own (expensive) Master Insurance policy to cover the common elements and limited common elements, but there are substantial gaps between the association’s policy and what you’re personally liable for without an individual HO-6 policy. Most people shop for the cheapest, fastest individual insurance policy and apply just enough coverage to meet the lender’s requirements, but that may put you at financial risk.

To explain common gaps between master policies and HO-6 (individual condo) policies, I’d like to re-introduce Andrew Schlaffer, Owner and President of ACO Insurance Group. Andrew is an expert in Master Insurance policies and has helped multiple local condo association’s reduce their cost and improve their coverage since writing a column on the topic last year. If you’d like to contact Andrew directly to review your association’s master policy, you can reach him at (703) 595-9760 or andrew@acoinsgrp.com.

Take it away Andrew…

Master Insurance vs Individual Insurance Policy

Nearly all master insurance policies in this area are written on a Single Entity basis which means coverage extends to general and limited common elements but also extends within individual units to fixtures, appliances, walls, floor coverings, and cabinetry, but only for like kind and quality to that conveyed by the developer to the original owner.

Items not covered by the master insurance policy and are generally not the association’s responsibility include:

  • Personal Property (clothes, electronics, furniture, money, artwork, jewelry)
  • Betterments and Improvements (demonstrable upgrades completed after the initial conveyance)
  • Additional Living Expenses (the cost to live at a temporary location, storage fees, loss of rents)
  • Personal Liability (provides protection for bodily injury or property damage claims arising from your unit)
  • Loss Assessment (triggered only if there is a covered cause of loss and the master insurance policy limits are exhausted; this assessment would apply collectively to all unit owners)
  • Medical Payments (no fault coverage available for injured guests within your unit)

Condo owners should purchase an individual condo insurance policy (HO-6), which is also required by lenders. This policy can provide coverage for the items listed above.

Review Your Dwelling Coverage

Dwelling Coverage should be included in every HO-6 policy to avoid significant out-of-pocket expenses. Many condo associations can hold you responsible for expenses that fall under the master policy deductible that are caused by the owner’s act, neglect, misuse, or carelessness. Due to the rise in water damage losses, many insurance carriers are increasing their deductibles, which in turn spurs the need for homeowners to adjust their dwelling insurance limit.

In a recent instance, a condo suffering from significant water damage losses was required by its insurance carrier to increase the master insurance policy deductible from $10,000 to $25,000. In this community, each homeowner should have at least $25,000 of dwelling coverage to indemnify them for the deductible expense in the event a claim arises from their unit. If coverage is not available, the homeowner would either pay this expense personally or the association can put a lien on their unit.

Dwelling coverage should also include a homeowner’s betterments and improvements (improvements made above what the builder originally delivered), including those completed by prior owners. Most lenders will require at least 20% of the unit’s market value insured under this coverage as well. 

What Information to Share with Your Insurance Provider

You should always review the condo association’s governing documents and understand the applicable statutory requirements (i.e. Virginia Condominium Act) and lender requirements to verify their individual responsibilities, including maintenance/repair and insurance. Along with sharing the association documents, homeowners should also provide their personal insurance agent with the following:

  • What is the master policy deductible? ($5,000, $10,000, $25,000)
  • What approach is used for the condominium insurance coverage? (Single Entity)

My Recommendation for HO-6/Other Individual Policies

Thank you, Andrew, hopefully this helps at least a handful of readers better protect themselves.

I find that most buyers go straight for the path of least resistance and cheapest premiums for their insurance coverage. Adding coverage to your existing auto policy in 5-10 minutes probably means that nobody reviewed your association’s Master Insurance policy and thus you’re at risk of coverage gaps. Personally, I’d rather pay a bit more to know that my policies have been designed with some personal attention and reviewed annually for gaps. Andrew and his team can handle this for you as well.

If you’d like to discuss buying, selling, investing, or renting, don’t hesitate to reach out to me at Eli@EliResidential.com.

If you’d like a question answered in my weekly column or to discuss buying, selling, renting, or investing, please send an email to Eli@EliResidential.com. To read any of my older posts, visit the blog section of my website at EliResidential.com. Call me directly at (703) 539-2529.

Video summaries of some articles can be found on YouTube on the Ask Eli, Live With Jean playlist.
Eli Tucker is a licensed Realtor in Virginia, Washington DC, and Maryland with RLAH | @properties, 4040 N Fairfax Dr #10C Arlington VA 22203. (703) 390-9460.

How Much Are Condo Fees in Arlington?

Question: We are finalizing our condo budget for 2022 and wondering if you can share information on what condo fees are elsewhere in Arlington.

Answer: For those unfamiliar with how condo fees are set, they’re a calculation of the next years projected budget (operating costs, savings contributions, etc) divided by each unit based on a pre-determined ownership percentage (usually based on square footage or bedroom count). The budget is set by the Board, which is made up of condo owners, not by the property management company.

Many condo owners/potential owners have a hard time wrapping their head around paying condo fees and see it as a loss compared to other property types, but it’s important to understand some of the benefits of condo fees, which I wrote about here in 2018. With that said, condo fees that climb too high have a negative impact on property values, which I detailed here in 2017.

So let’s take a look at what average condo fees look like around Arlington! Please note the following about the data:

  • I don’t include amenities in these numbers because there isn’t a reliable source for amenities in each building and the data that’s in the MLS suffers from a lot of human error (missing or incorrect info)
  • The source for the condo fees is property sales data in the MLS so it is limited to what has been sold/offered for sale, not published condo fee data from each building (that doesn’t exist). While this isn’t a 100% accurate picture, it’s a big enough sample size that we can consider these numbers pretty close.
  • I limited the data set to one and two bedroom condos and also did not include cooperatives
  • My reference to “buildings” in the 2nd and 3rd cross-sections refers to condo buildings with 5+ floors and “low rise” refers to buildings with four or fewer floors
  • In some cases you will see a year-to-year decrease in condo fees. It’s unlikely that condo fees dropped in Arlington in those years, rather it’s a result of shifts within the data (more sales of condos with lower fees or fewer sales of condos with high fees)
  • Fee/SqFt refers to the average monthly condo fee divided by the finished square footage of the unit. It’s a good way to compare the relative value of a building’s fees.

Hopefully these numbers help Boards and condo owners understand where they fall relative to the rest of the market. Keep in mind that there are several factors that cause buildings to be above or below average including amenities, staffing, historical management of reserves, unit mix (buildings with larger units have fewer owners to spread costs across), and many more.

It’s important for each Board to understand how their fees compare to comparable buildings and take a good look at each budget line-item to ensure smart spending with proper savings (primarily driven by the Reserve Study). The budget drives fees, fees should not drive the budget.

If you’d like to discuss buying, selling, investing, or renting, don’t hesitate to reach out to me at Eli@EliResidential.com.

If you’d like a question answered in my weekly column or to discuss buying, selling, renting, or investing, please send an email to Eli@EliResidential.com. To read any of my older posts, visit the blog section of my website at EliResidential.com. Call me directly at (703) 539-2529.Video summaries of some articles can be found on YouTube on the Ask Eli, Live With Jean playlist.

Reserve Studies Required Every Five Years for Condos/HOAs

Question: How often do Condo Associations and HOA/POAs need to conduct a Reserve Study?

Answer:

Virginia Requires New Studies Every Five Years

In light of the recent condo tragedy in Miami, I thought it would be a good time to remind everybody that Virginia requires Condominium Associations and Home Owner/Property Owner Associations to conduct a new Reserve Study at least once every five years.

In addition to providing valuable financial/budget guidance, Reserve Studies are also an important way to ensure your building/community remains in safe working order and structurally sound.

What is the Purpose of a Reserve Study?

During the Study, an engineer, or team of engineers, will inspect all common elements of the building/community to provide an assessment of current condition, useful life expectancy, and projected cost of repair/replacement. A building inspection includes everything from the elevators, to foundation, to hallway carpet.

After the inspection, the Study team will provide a detailed report of their findings and an assessment of the future financial needs of the Association over the next 30 years to maintain and replace the common elements of the building/community.

In most cases, these annual financial needs are analyzed against the current Reserve Balance (Association’s savings to pay for common maintenance and replacement costs) and the current Reserve Contribution amounts to determine if adjustments need to be made to the contribution levels in future budgets. Accelerating savings for an under-funded Reserve are one of the most common reasons Associations increase dues. If the funding requirement is high enough and the repair/replacement needs are urgent, that is when Associations will consider charging a Special Assessment to fund the Reserves immediately.

Don’t Forget About Presentation

I have reviewed tons of Reserve Study reports over the years and there is a wide range in quality. In my opinion, a quality report should not only be incredibly detailed in the inspection findings, but also as detailed in the presentation of the financial projections/recommendations. It’s also critical that this information be presented in an organized and easily understood format, which is not an easy feat when dealing so much information. If you are helping your Association choose a company to lead the Reserve Study, don’t forget to review reports they’ve produced for other communities so you can see how well they present their findings.

Important for New Buyers Too

In addition to Reserve Studies being important for building maintenance and budgeting, every new Buyer into your community will receive a copy of the Reserve Study (along with a other Association documents) once they’re under contract and has a three-day review period in which time they can void the contract for a refund of their deposit. So having a current and easily understood Reserve Study report is also a critical part of keeping Buyers under contract and the resale market in your community from under-performing.

If you’d like to discuss buying, selling, investing, or renting, don’t hesitate to reach out to me at Eli@EliResidential.com.

Video summaries of some articles can be found on YouTube on the Ask Eli, Live With Jean playlist.Reserve Studies Required Every Five Years for Condos/HOAs