2010 May 18th

Is Your Condo Adequately Protected?

Why Flood Insurance Is a Big Issueumbrella

One of the most important functions of  the Board of Directors of your condominium assocation is to provide adequate insurance.  This insurance differs from your own individual homeowner’s policy you have on your individual unit.  We’re talking about insurance on the common areas of the building.  Each unit owner has a proportional interest in the common areas.  This insurance  is paid for through the unit owners’ monthly maintenance charge.  What type and how much insurance a condo association should have is determined by the by-laws of the association and also by state regulation.  In addition to liability insurance, it is also necessary for a condo association to have flood insurance.  As we all know, Hoboken has an issue with flooding and, more importantly, almost all of it is located a flood zone (technically called a Special Flood Hazard Area or SFHA).  Here is an interesting flood zone map

Recently, there have been quite a few buyers who have had problems getting a mortgage for the Hoboken condo they wish to purchase because they learn that the condo association does not have adequate flood insurance.  Often times the lender requires that the condo have replacement value coverage.

This straight from the FEMA website:

Federal financial institution regulators state that the amount of flood insurance purchased for a structure in a high-risk area must at least equal the outstanding principal balance of the loan, the insurable value of the building, or the maximum amount of coverage available for the particular type of building under the NFIP, whichever is less.  However, the lender may exceed the minimum requirements, if necessary, and compel the purchase of limits that more fully protect the lender and the property owner.

What’s more, most loans being made today are sold on the secondary market and must therefore comply with Fanny Mae and Freddie Mac guidelines.  These guidelines may be even more stringent.  More specifics are available on the FEMA site or by speaking with a mortgage lender and insurance agent. 

Some buyers have the seller go to the condo board and try to convince them to increase the insurance coverage.  Of course, there is always resistance since more insurance means more premiums.  Yet Hoboken condo boards should not be short-sighted.  The marketability of each unit is at stake here.  While it may not be your unit for sale today, every unit owner is likely to come up against this issue when they try to sell.  In fact, a Board that does not arrange to provide adequate insurance coverage for the condo may find itself hit with a  lawsuit from the unit owners and Directors could even be held personally liable.

Similarly, condo associations are supposed to have separate accounts for their day-to-day operating expenses (paying the PSE&G bills, for example) and for a capital reserve account (replacing the roof).  Many Hoboken condos, especially smaller, self-managed ones do not.  Again, buyers are having real problems obtaining financing as a result. 

So at your next condo Board of Directors meeting (you do have those, I hope) it might be worth reexamining the adequacy of your flood insurance and the state of your condo’s finances.  The flood insurance guidelines are also set out on the FEMA website and are quite detailed and specific.  When you go to sell your unit, you will be glad you did.  If you are in the market to buy a condo in Hoboken, this is a question you should ask early on in the process – either during attorney review or even when making an offer.  A condo that is not adequately insured and has not kept its books correctly is certainly worth less than one that has, no?

  1. Tiger

    Great article, Lori. I totally agree. I recently refinanced and this is the only thing that came up. I have to say though, my building has an EXCELLENT management company and indeed they told me beforehand that this is something that will come up during refinancing, not because we didn’t have adequate insurance, simply because FEMA increased the requirement from 80% to 100% (or something like that), and ours was pending 30 days.

    That said, I don’t see why this would stop anyone from getting a loan. I simply got a SUPLIMENTAL FEMA insurance, closed, and as soon as my building additional flood insurance kicked in, I cancelled my own. Worked like a charm 🙂

  2. Lori

    Thanks for the advice Tiger. Supplemental insurance may be an viable option for buyers. Something for them to look into.

  3. teaorcoffee

    We bought supplemental flood insurance as well – cost a few hundred dollars.

  4. Craig

    Luckily, my building was fully insured at full replacement value, so that wasn’t an issue. My issue was that the building, which is professionally managed mind you, had NO reserve fund whatsoever. Somehow the seller’s agent got the management company to issue an assessment to all owners, thus instantly creating the necessary reserve fund of 10% of annual operating budget as required by my lender.

    Still, if this building even needs a major repair, like a new roof, there is nowhere near enough money in reserves to pay for it. No one cares right now because the building is relatively new. But sooner or later, something big will need repair. I plan to bring it up at the next condo association meeting.

  5. Amie

    I would be careful about purchasing in a building with no reserves. My sister moved into a 2 year old building and got hit with a $4000 assesment because there was not enough reserves, and there was a fault in the roof which was out of warranty. It was cheaper to pay the assessment than to sue the builder.

  6. Lori Turoff

    You would be amazed at how many Hoboken condos have no reserves, don’t have regular board meetings, don’t keep any records or financial statements, don’t have a budget, don’t plan for future repairs or maintenance, etc. Now that the banks are getting picky it’s becoming a wake up call.

  7. Tiger

    Teaorcoffee / check with your condo association, FEMA has raised the requirements, and I think it is A LOT cheaper to insure the entire building than individual units. In my case it was all about timing, FEMA’s old requirements were 80%, but it got raised in February to 100% and I was closing soon.

    You can cancel your FEMA supplimental policy anytime (like what I did), and you will get a refund.

  8. Dunce

    In general is there an amount of reserves that would be considered a good number? I cant imagine 1 month of reserves for my building would cover the cost of a new roof.

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