It’s confusing, so here’s an example to illustrate the point: Let’s say a homeowners’ association has a $10,000 deductible on an insurance policy. A hailstorm hits the building and damages the roof. The association then files a claim with its insurance company. After an inspection, the cost to repair the roof is $50,000. The insurance company pays the association $40,000 and the association absorbs the $10,000 deductible cost.
Now, the association turns to its owners to make up that $10,000. They bill the homeowners for their proportionate share of the $10,000 special assessment. If you are one of 10 homeowners and each of you are 10 percent owners of the total property, then each of you would owe the association $1,000 to cover your share of the special assessment.
We can easily imagine that this insurance coverage can help you in some situations, particularly if the special assessment is far higher or your deductible is lower. But many special assessments have nothing to do with insurance losses and claims.
Associations may decide to replace the roof, hallway carpet or windows because they’re old. They may want to improve common areas, install or upgrade a workout room, redecorate lobbies, or do many other improvements and repairs simply because things break or wear out, and no one wants to buy a home if the property looks worn down and out of date.
Either way, the owners will have to come up with the money to fund those improvements or repairs.
If the association elects to finance the work, it may simply increase the regular monthly assessments by enough to cover the work and then use the increase to build up reserves. But it may also elect to institute a special assessment, which will either be in one lump sum or paid out over a specific period of time. Either way, we don’t believe your insurance policy would cover this sort of special assessment.
As we mentioned in our column that discussed association reserves, this is one reason to keep a keen eye on the workings of your association. If you’re thinking about buying into a condo building, make sure you look at the property’s finances and ask specific questions about what work is being planned and how that work is going to be paid for.
But it’s better than nothing. Take the time to read the minutes, building reports and budget for the upcoming years, then walk around the property (not just your unit) with your home inspector. Always look at the condition of the building and its finances before you sign on the dotted line and close on the purchase. If you see something, be sure to ask the seller, the agent or the building’s management company before closing. Don’t wait until you move in.
Article By: Ilyce Glink & Samuel J. Tamkin
Source: Washington Post