Relief for condo buyers? A warranty could ease the pain of special assessments

Tens of thousands, if not hundreds of thousands, of condo units are languishing on the market these days, and not just because high interest rates and high prices are combining to keep away would-be buyers.

Some buyers are being scared off by the possibility they’ll be hit with a special assessment: an obligation to pay for repairing or replacing things in need of attention long before they moved in.

That’s the situation that confronted Laura Renaldo of TRD Property Group in Chicago when she listed a condo in an older building. It had been poorly managed and was “light on reserves” to cover the cost of much-needed repairs, she said. “A special assessment was probably coming soon.”

So in the listing, Renaldo included a new warranty program that protects buyers against assessments for up to three years.

“That sealed the deal,” she said. “It gave my seller the opportunity to make the buyer a lot more comfortable” knowing they wouldn’t be on the hook for any forthcoming repair costs.

Don Wilson of the Wilson Realty Group in Chicago was confronted with a similar situation when he listed a condo in an older downtown high-rise. In his case, the building had been well-kept but l needed roof and facade work.

“The possibility of a special assessment could have been substantial enough to stall a deal,” he said. So he discussed the situation with his seller, and they agreed to add an assessment warranty to the listing as a way to “set the buyer’s mind at ease.”

“It’s all about being flexible enough to find creative solutions” to real or perceived problems, said Wilson.

Offered by HOA Warranty, the product is the brainchild of Rhett Graves, a former Chicago agent. Now available in six states — Illinois, Indiana, Michigan, North Carolina, Ohio and Pennsylvania — he hopes to add more states in the next month or so.

Eventually, Graves anticipates the assessment warranty will be as regular a part of condominium sales transactions as home inspections and home warranties are in the sale of single-family houses.

He certainly has a big enough market. There are 369,000 homeowner associations nationwide, of which perhaps as many as 147,000 are condo groups, according to the Foundation for Community Association Research. And an estimated 70% of them are underfunded, with little or nothing in the tank to cover the cost of replacing an aging roof or fixing a leak in the community pool.

Enter HOA Warranty, which launched in March. For $380, it will protect condo buyers for one year against a one-time special assessment of up to $10,000. For $600, protection is extended for two years. And for $800, you’re covered for three years.

It should be noted that the policies don’t protect buyers against increases in their regular association dues — only special assessments.

Graves won’t say how many warranties he’s sold. But he’s set to make his very first payout — $6,000 to cover the policyholder’s share of an assessment to replace the roof on his building. The money is coming from Graves’ savings. But he hopes to build his company to the point where investors are beating down his door.

The ex-agent says he came up with the idea after he saw several deals fall apart because buyers were worried about surprise assessments approved by condo boards.

“When buyers discover something during a transaction — whether it’s a real issue or just a perception — it often creates major friction,” Graves told Real Estate News. “Buyers usually expect the worst, while sellers naturally assume the best. The gap between these viewpoints can be so large that deals fall apart.”

Graves maintains that there’s plenty of demand for the warranty, which can be offered as an inducement by sellers, purchased by buyers at closing as an added protection, or offered by agents to make a deal go more smoothly.

“When I was doing real estate,” Graves said, “I would have paid for a warranty on maybe half my transactions.”

“There are lots of variables when buying and selling” condos, he explained. “Sometimes the home inspector doesn’t have access to the roof, for example. Or no one knows how old things are because management changes every few years and there are no records.”

The warranty is not insurance, Graves stresses. It doesn’t cover a random event like a fire. Rather, it covers common-area physical items that can be repaired or replaced: roofs, HVAC systems, balconies, pools and sidewalks.

Buyers in self-managed properties with five or more units are eligible for one-year policies; those in professionally managed buildings can extend coverage for one or two more years. Townhouse properties also are eligible.

Graves says he wants to allow consumers to get out from under the vagaries of the often-confusing real estate market and “keep more money on their plates.”

Lew Sichelman has been covering real estate for more than 50 years. He is a regular contributor to numerous shelter magazines and housing and housing-finance industry publications. Readers can contact him at lsichelman@aol.com.