The reality is that these are very different property types, especially when it comes to insurance.
A condominium is really just a form of ownership. In a condo, you own the space inside your walls along with an equal share of any common areas and amenities in the development. This would be things like a pool, community center, parking garage, hallways, and elevators, etc. Some describe a condo as an apartment that you own.
A townhouse is a property style, think of an east coast brownstone or row house. In a townhome, the owner actually owns the structure as well as the land it is built on. The townhome will usually have common walls with other owners but offers a little more privacy than a condo.
What these two do have in common is that they are both governed by an association or HOA (homeowners association). The association is responsible for maintaining the development and enforcing the rules or covenants of the community.
Here’s a more in-depth look at the differences between condos and townhomes. One of the best tips when buying a condo, among others, is understanding all of these things discussed here.
Both condos and townhomes have homeowners associations, and these associations are run by a board of directors. The board members are elected by the HOA members (homeowners). The bylaws outline how the association is run and what their responsibilities are.
Providing insurance coverage for the buildings as well as the common areas and interests of the association and owners is usually a directive of the by-laws. The details of these insurance policies are spelled out in the covenants.
Covenants and Regulations
The covenants are the rules of the community; they spell out everything from exterior paint colors and allowable pet types to what insurance coverage is required and who is responsible for purchasing the policies. One of the significant differences in owning a condo vs. a home is not being the king of your castle. You will need to follow the rules. One of the reasons not to buy a condo is if you don't like being told what to do.
Areas that require coverage for condominium and townhome community break down into two major areas. First is the overall community and it's common areas and amenities. This responsibility generally falls to the homeowners association. The association purchases something called a Master Policy to cover these buildings and common areas.
The areas not covered by the master policy are the individual units. Since these are owned by the individual homeowners, the owners are usually responsible for insurance on these units.
Insurance For Condos
In most cases, as a condo owner, you will be required by both the lender if there is a loan on the property and the condo associations covenants to have an insurance policy in place for the inside of the unit.
This type of policy is often referred to as an “HO-6”. This policy provides coverage for your personal property as well as liability coverage in case someone is hurt inside of your residence.
The HO-6 policy covers any fixtures or improvements inside the unit as well. In a condo unit, what is actually owned is everything inside the walls; this includes fixtures like cabinets, countertops, floor coverings, lighting, appliances, etc. The association's master policy will not cover these items.
Insurance For Townhouses
The townhouse is owned differently than a condo and requires a different insurance policy. Since the homeowner of a townhouse usually owns the actual structure as well as the land the structure is built on, they are responsible for insuring everything they own. Townhouses are protected with an “HO-3” policy.
This policy insures the structure or dwelling along with any private structures in connection with the residence. It also covers unscheduled personal property on and away from the premises, as well as a loss of use. Personal liability and medical payment coverage are provided by this policy, as well.
In many cases, the Homeowners Association is responsible for exterior maintenance in a townhouse development. In these cases, the association’s master policy is responsible for the coverage of the exterior of the structure. In these scenarios, the policy requirement is like a condo or HO-6 policy, covering from the walls in.
The regular dues you pay your HOA will go into an operating account and should cover the day-to-day operating expenses for the community. At the same time, a small portion, ideally 25%-40% of these dues, should go into a reserve fund set up to cover unexpected expenditures.
Unfortunately, Reserve funds are often underfunded; many states do not have laws regarding reserve funds, so mismanagement is common. Ideally, the HOA board should conduct a professional “Reserve Study” every couple of years. This study looks at the condition of the property and estimates replacement times and costs.
If the HOA board fails to manage the reserve fund properly, unexpected maintenance due to a natural disaster or some other type of catastrophe can create a problem. If there isn’t enough money in the reserve fund to cover repairs or insurance deductibles, the HOA will implement something called a Special Assessment on the property owners to cover any shortfalls.
A Special Assessment is a charge to a homeowner in an HOA community. This charge is to cover the cost of any required repairs or replacement that exceed the HOA’s current funds.
These assessments usually occur as the result of a significant repair or replacement. In many cases, the HOA doesn’t have enough insurance coverage, or the deductible is too high; in either case, the HOA can’t cover the cost of the repairs, so they turn to the residents in order to cover the deficit.
These assessments can be very high and are almost always a surprise. It’s not uncommon for residents to see assessments in the $5,000 to $10,000 range. In many cases, condo and townhome buyers are the least likely to be able to afford this type of financial hit.
Fortunately, there is a coverage option available to condo and townhouse owners that can help during these assessment events.
Loss assessment is a type of insurance coverage for condo and townhouse owners that provide additional protections for homeowners in the event of assessments. Homeowners with loss assessment coverage are protected from a potentially devastating financial problem, and the best news is this additional coverage is relatively low cost.
Final Thoughts on Condo and Town Home Insurance
If you are considering a condominium or townhouse purchase, you are going to need insurance. Your lender and the covenants of the development are going to require it. Make sure you ask the right questions about policy type requirements and investigate the reserve fund for your association.
Additionally, you want to make sure you read and understand the Bylaws and covenants before you close on the property. It’s also a good idea to see is the association has done a professional reserve study in recent history.
If you perform these due diligence items and make sure you have the appropriate coverage tyes in place, living ion a condo or townhouse can be a great experience. If you fail to do your homework before you close on the property, you just might be in for some challenging surprises.
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About the author: The above article on condo and townhouse insurance was written by Joe Boylan. Joe is a Broker-Associate at Springs Homes Real Estate in Colorado Springs, Colorado. He enjoys writing about residential Real Estate issues faced by homeowners, buyers, and investors.