Condo Reserve Fund …how much is enough?

Let’s start by reviewing exactly what a condo reserve fund is. The condo reserve fund covers capital expenditures that will occur due to repair or replacement of critical items as they wear out. Your management company or condominium association should have a condo reserve fund study on hand and that study needs to be updated yearly to define what those systems are and the anticipated date of failure with replacement cost. Remember, the elements, heat and humidity, in the Houston area take their toll on these critical systems.

Are there condo reserve fund standards for financing?

Rule of thumb says there should be at least 10% of your annual operating budget in your condo reserve fund at any time. In fact, for FHA insured loans, Fannie Mae or Freddie Mac loans, it is actually a requirement that an amount equal to 10% of your annual operating budget be set aside in your condo reserve fund. Additionally, Freddie Mac and Fannie Mae require that no more than 15% of the homeowners be delinquent on their assessments. Click here for more info.

What is the benefit to you?

A condo reserve fund that is equal to 10% of the annual operating budget on deposit helps to ensure that you as a condo owner will not be hit with last minute assessments to address critical failures. So, it should be limited surprises when it comes to maintenance assessments and repairs. This also helps you when it comes to personal budgeting. When you decide to sell your unit, it will also act as a selling point allowing for more financing options and better comfort for the buyer that this is a fiscally responsible property.

Things that can have an effect on your condo reserve fund

There are many things that can affect your condo reserve fund. Inflation is one of them. You may think that the interest you are earning on the deposited reserve fund money will offset this, but consider this: it takes a 13% increase in reserve contribution to offset a 1% increase in inflation.

The age of your complex also has a direct effect on the amount you need in your condo reserve fund. The newer the units, the less needed in reserves, as things are at their beginning of life. However, as a complex ages, you could need as much as 30% more to accommodate the aging items that are covered by your reserve fund.

Your objective in funding also is a factor; if you plan to be 100% funded obviously your monthly amount will be more. If you are using baseline funding, be ready for additional assessments.

What’s the golden number?

For most condominium projects across the country and in the Houston area, the golden number for condo reserve fund assessment is anywhere between $50 and $100 per month. While this might sound like a substantial number, consider this, an assessment of $1500 hitting at the wrong time can be devastating.

Get with your management company and/or condo board today and find out first if they have done a condo reserve fund study and second, if they are meeting the minimum requirements of 10% of the yearly operating budget being assessed for the condo reserve fund. Don’t get caught off guard!

Condominium Leasing – To lease or not to lease

condominium leasing agreement
What you need to know about condominium leasing.

To lease or not to lease may not be the only question if you are considering leasing out your condo. Condo leasing is not as easy as leasing out a home. In fact, you may not even be able to lease out your condominium at all. Let’s take a look at this complicated subject and see where to start.

Condominium leasing – Start at the Beginning

It’s always good to start at the beginning, have your real estate attorney look at your condominium governing documents when considering condo leasing. A declaration is filed when a builder begins a complex that regulates what may/may not be done in respect to the property. Some condominiums actually restrict condo leasing; others have strict rules on condo leasing. Many require permission for condo leasing. Also have that attorney review the leasing laws for your city/state as they pertain to condo leasing. Houston for instance has specific guidelines on balcony railing; height and distance between railings.

Condominium leasing – discovery

You may find only a certain number of units can be leased out at a time due to mortgage considerations; (FHA approved loan only 50% of the property can be rental).Some condominiums require owner occupation for a specific amount of time before condo leasing is an option, this can range from 1 to 5 years. The effect that condo leasing vs owner occupied can have on the insurance premiums for the condominiums master policy may restrict your ability to engage in condo leasing. The declaration or bylaws may restrict condo leasing, as it is an assumption that owners take better care of a property then a renter will. These are just some of the more common items, so do your research!

Items Your Lease Should Cover

If you have determined that you are ready and able to lease do some market research.What are other units in your complex leasing for? What are condos in your general area leasing for? Housing in the Houston area for instance is running anywhere from $1100 per month plus for a 1 bedroom all the way to $1800 plus per month for a 4 bedroom unit (View an example). Are you leasing long term or short term? What is the standard deposit for your area?

Spell out who will be responsible for paying the utilities and monthly condo maintenance fees or any special assessments that may occur during the lease period. Remember no matter what your lease says, ultimately you as owner will be legally responsible if they are in default. Your real estate attorney can make a good recommendation on these items and more pertaining to condo leasing.

Finally, do not forget to spell out in the lease that everything is in accordance with the declaration for the condominium, in accordance with the bylaws and homeowner’s association restrictions and thus are subject to change as dictated by these governing documents and bodies. This should cover items such as parking, common areas, etc.

What about commercial condominium leasing?

Condo leasing can include condos leased out for business purposes such as law offices, real estate office, etc. Be sure that your condominium project allows these types of leases prior to advertising your unit.

So, to lease or not to lease is not the only question, but for the best advice contact a real estate attorney prior to making your decision. If you have a management company running your condominium complex they may be able to offer advice and a reference for a real estate attorney that can keep you protected.

How much condominium association insurance do you need?

Let’s start with what HOA insurance may cover and remember this will differ with each HOA and their members. There are two basic types of condominium association insurance for HOAs which cover the physical structures; one covers the property from the studs out or what is referred to as common areas and the other is an All-In type of coverage which covers common areas and your personal unit. Then there are liability policies which cover the association and its members from losses that can relate to physical injuries on property to acts and omissions of the board members. The Texas Uniform Condominium Act “TUCA” can be read here as well as your condominium association insurance declaration will govern what kinds of coverage are required– however, that doesn’t mean that is all you need.

Property Coverage

This coverage is for property which you own or are responsible for. For most condo or townhome owners associations this includes, but is not limited to, building structures, roofs, exterior walls, slabs, parking lots, elevators, pool areas, entrance gates or other common elements or limited common elements. Studs out is a type of coverage for that covers the building structure but not the contents or anything considered to be a part of the “unit”. Unit boundaries are usually defined in the declaration but if they are you should refer to TUCA above for definitions. Personal property within a unit is almost always the responsibility of a the individual unit owner.

All-In coverage however covers pretty much everything in terms of physical structure, common areas and your physical unit, but, again, normally does not include coverage for your personal property within the unit. This kind of coverage may be required depending on your declaration or whether or not you have stacked units in your association. Associations with horizontal unit boundaries (meaning it is possible for water from one unit to enter another unit from above) are required to carry all in coverage when it is reasonably available.

Often boards will debate whether to obtain “all in” or “studs out” coverage. The truth is, this is generally going to be determined by what your declaration requires. Most condominium association insurance forms will defer to the declaration’s insurance requirements when determining what should be covered. For more questions on property coverage for your condo or townhome please call us to discuss your coverage needs and getting competitive insurance quotes for your association.

Liability Coverage

Another important line of insurance coverage that an HOA must have is general liability insurance. This insurance is generally intended to protect the owners and the association from losses related to bodily injury or other person’s property damage, including lawsuits filed by persons injured in the common area of the property but may not cover an injury someone sustains while in your personal unit. You can refer to the actual policy for details of your coverage. Other types of liability coverage that most associations should carry include: directors and officers insurance, crime coverage, hire and non-owned auto coverage.

The upside to condominium association insurance is that the cost is spread across a group of owners versus just a single individual so many times it can be much more cost effective. Your insurance payment is normally included in your homeowners’ fee, but not the deductible should something happen. You may want to encourage your HOA to keep the minimum deductible in the reserve funds to avoid an assessment at the time of an event. According to bankrate.com deductibles in the past ran about $5000, but in todays’ market those deductibles can run as high as $25000 to $50000. That can be a huge hit at a time when you may be experiencing personal unit damage at the same time.

So what do you personally need to purchase and how do you determine that? When purchasing a condo you should always ask about the types of coverage that are included in the HOA master policy and which are your personal responsibility. Prior to purchase, ask for a copy of the HOA master policy to review with your personal insurance agent prior to closing. Doing this can eliminate surprise cost after purchase that can affect your monthly budget.

For your internal coverage if you are not part of an All-In policy, a simple rule of thumb would be to take half of the value of the unit to determine how much coverage you need. This should adequately cover you if you have to replace fixtures, flooring, etc. If you are uncomfortable with that, have your insurance agent take a look and give you a suggestion. Either way, be certain your agent has a copy of the HOA master policy in hand so they can determine the needed coverage.

One final tip is to know if the property you are purchasing is in a flood plain and if so, does the HOA have flood insurance which will cover not only the common areas, but also your unit. This insurance is normally purchased through the state, and certificates for flood insurance are normally required at time of closing for properties which this applies.

So how much coverage do you need? There is no cookie cutter answer for that but we have licensed professional insurance agent who specialize in condominium association insurance on staff to review your coverage and obtain additional competitive quotes to help you make the best coverage decisions possible.

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