Question about Condos and Earthquakes

[sunnyca]

Hi all,

I have a hypothetical question about condos and earthquakes.  I have a condo in California with a remaining mortgage of $230k at 3.375%.  Initially, I was thinking of prepaying my mortgage as fast as possible.

Then I starting thinking... what if a big earthquake occurs?  My understanding is that although my complex has earthquake insurance, we would all be levied a special assessment to rebuild.  I'm wondering how many people in the complex would choose to walk away.

So now I'm thinking it might be better to invest my savings instead. 

What does everyone think?

[CommonCents]

You still owe the money on the mortgage even if the asset is gone.  For example, if you get into a car crash and total your car the day after buying it and taking out a loan, the car loan folks still want their money back.  Losing the asset such as through an earthquake just means the mortgage is no longer secured by the asset.  If you walk away, the bank will try to recoup their money from your investments instead.

Your earthquake insurance should be sufficient to cover debris removal, any necessary permitting/planning, and rebuilding.  (If a special assessment is required, it's probably insufficient.)  Check whether it covers your unit (studs in) or just the outside building.  If the master insurance just covers the building itself, you'll want to consider insurance for your unit replacement.

In deciding whether you need additional insurance, consider whether you want to deal with the following scenario:
No home (lost in earthquake)
Bank demanding you continue mortgage payments
Special assessments by the condo association

[sunnyca]

Thanks CommonCents!

I think I might not be phrasing my question properly.  I'm not thinking of getting earthquake insurance- it was more a question of paying down my mortgage as fast as possible versus investing. 

I like the secure feeling of owning my place free and clear; however, I'm a little leery of pursuing this path because I live in a condo complex.  In an informal poll of some of my neighbors and co-workers, most would choose to "walk away" in the event of a major earthquake damaging their condo.  Although I wouldn't choose this path, I'm wondering what would happen if most of my neighbors choose to do this.

[dragoncar]

You still owe the money on the mortgage even if the asset is gone.  For example, if you get into a car crash and total your car the day after buying it and taking out a loan, the car loan folks still want their money back.  Losing the asset such as through an earthquake just means the mortgage is no longer secured by the asset.  If you walk away, the bank will try to recoup their money from your investments instead.

Your earthquake insurance should be sufficient to cover debris removal, any necessary permitting/planning, and rebuilding.  (If a special assessment is required, it's probably insufficient.)  Check whether it covers your unit (studs in) or just the outside building.  If the master insurance just covers the building itself, you'll want to consider insurance for your unit replacement.

In deciding whether you need additional insurance, consider whether you want to deal with the following scenario:
No home (lost in earthquake)
Bank demanding you continue mortgage payments
Special assessments by the condo association

California is a non-recourse state, so (depending on the specific mortgage details), you may have the option of walking away.  This is one advantage to keeping your mortgage in CA.

If everyone but you chose to walk away, there's probably a clause in your HOA agreement for liquidation of the entire complex.  I'm not sure what would happen, but I'm guessing the banks that now control the majority of properties would either take control of the entire property and rebuild or sell.  Either way, it probably wouldn't be up to you -- read the HOA.

[Daleth]

Slight clarification: CA is non-recourse for purchase money mortgages (so banks get only the collateral and can't come after you personally), but banks can go after you if the mortgage you walk away from is a refi.

But apart from that, Dragoncar took the words out of my mouth.

[Eric]

it was more a question of paying down my mortgage as fast as possible versus investing. 

This thread has a pretty thorough discussion of mortgage pre-payments vs. investing.  Have a look.

http://forum.mrmoneymustache.com/investor-alley/paying-off-mortgage-early-how-bad-is-it-for-your-fi-date/

[sunnyca]

You still owe the money on the mortgage even if the asset is gone.  For example, if you get into a car crash and total your car the day after buying it and taking out a loan, the car loan folks still want their money back.  Losing the asset such as through an earthquake just means the mortgage is no longer secured by the asset.  If you walk away, the bank will try to recoup their money from your investments instead.

Your earthquake insurance should be sufficient to cover debris removal, any necessary permitting/planning, and rebuilding.  (If a special assessment is required, it's probably insufficient.)  Check whether it covers your unit (studs in) or just the outside building.  If the master insurance just covers the building itself, you'll want to consider insurance for your unit replacement.

In deciding whether you need additional insurance, consider whether you want to deal with the following scenario:
No home (lost in earthquake)
Bank demanding you continue mortgage payments
Special assessments by the condo association

California is a non-recourse state, so (depending on the specific mortgage details), you may have the option of walking away.  This is one advantage to keeping your mortgage in CA.

If everyone but you chose to walk away, there's probably a clause in your HOA agreement for liquidation of the entire complex.  I'm not sure what would happen, but I'm guessing the banks that now control the majority of properties would either take control of the entire property and rebuild or sell.  Either way, it probably wouldn't be up to you -- read the HOA.

Yikes!  I'll read the HOA agreement tonight and find out.  Thanks for the info!

[dragoncar]

Yikes!  I'll read the HOA agreement tonight and find out.  Thanks for the info!

This kind of problem makes me really leery of condos in general and high-rises especially.  I never really got good answers to my questions (such as what would happen to a high-rise SF condo tower if destroyed by earthquake -- would it be rebuilt under the previous permits?  Would neighbors have the opportunity to veto the rebuild, as they have been doing with new towers, leaving former owners holding the bag?).

See:

http://www.cyburbia.org/forums/showthread.php?t=41818
http://www.santacruzsentinel.com/ci_18690108?source=most_viewed

I never determined what the effective lifespan of an apartment building is, and how it gets replaced.  I guess it just doesn't happen very often, but a lot of old condos are starting to show their age.  Presumably the land is still valuable.

[sunnyca]

This kind of problem makes me really leery of condos in general and high-rises especially.
[/quote]

I feel the same way- but in Orange County, it's difficult buying a house for a reasonable price.  I got a good deal on my condo when I purchased it 4 years ago (price has gone up $100k since then), but a lot of my neighbors have a fancypants lifestyle that isn't conducive to saving. 

For example, I have neighbors that make $80k or more and live paycheck to paycheck.  These are people that are single, no kids, never married. :-/

[dragoncar]

This kind of problem makes me really leery of condos in general and high-rises especially.

I feel the same way- but in Orange County, it's difficult buying a house for a reasonable price.  I got a good deal on my condo when I purchased it 4 years ago (price has gone up $100k since then), but a lot of my neighbors have a fancypants lifestyle that isn't conducive to saving. 

For example, I have neighbors that make $80k or more and live paycheck to paycheck.  These are people that are single, no kids, never married. :-/

I hear ya -- I would lean towards a newer place and expect to sell within a couple decades, probably for lower appreciation than you'd like.  There are some 50-year old complexes around here that sell for very cheap but have very high HOAs (presumably to cover excessive maintenance)

[Weedy Acres]

How old is the condo development?  California has had strict building code for decades, making it highly unlikely that an entire condo complex would come crashing down in an earthquake.  I would not make the decision about whether or not to pay down the mortgage faster based on an extremely low-probability event potentially happening.

[dragoncar]

How old is the condo development?  California has had strict building code for decades, making it highly unlikely that an entire condo complex would come crashing down in an earthquake.  I would not make the decision about whether or not to pay down the mortgage faster based on an extremely low-probability event potentially happening.

Post-89 the codes are stricter than pre-89.  Personally, my sweet spot is before those stupid sprinkler codes but after the earthquake codes.

[sunnyca]

Weedy Acres- my condo complex was built in 1992.  You're right that the chances of a major earthquake destroying the complex are very low.  I think part of the reason why I'm concerned is that the city I work for is really concentrating on emergency preparedness and everyone keeps on bringing up worse-case scenarios.

Paranoid, I know...

[dragoncar]

Weedy Acres- my condo complex was built in 1992.  You're right that the chances of a major earthquake destroying the complex are very low.  I think part of the reason why I'm concerned is that the city I work for is really concentrating on emergency preparedness and everyone keeps on bringing up worse-case scenarios.

Paranoid, I know...

Yeah, I don't think I'd worry too much about a '92 condo.  Still, does it really make sense to prepay the mortgage slowly?  I've always been a fan of saving/investing the difference until you have enough to pay it outright.

[gooki]

How old is the condo development?  California has had strict building code for decades, making it highly unlikely that an entire condo complex would come crashing down in an earthquake.  I would not make the decision about whether or not to pay down the mortgage faster based on an extremely low-probability event potentially happening.

FWIW, a building doesn't have to come crashing down for it to become uneconomical to repair. The earthquake in Christchurch, NZ three years ago saw only two 4+ story buildings collapse, yet 90% of them are being demolished.

Earthquake standards are there to protect the inhabitants, not the buildings long term future.

[TrMama]

I think ultimately, you should not invest a significant piece of your stash in an asset whose value could evaporate. Long term, you should probably not keep this condo.

In the meantime, follow the previous discussions on mortgage pre-payments vs. investing.

Also, I "get" the fear of earthquakes. We live in the PNW in an area that gets infrequent but very strong quakes. We're also at risk of tsunamis. When buying a home, DH and I looked at location (aka - elevation and distance from the ocean) and age of the home (aka - unlikely to kill us in a quake).

[sunnyca]

Thanks TrMama!

I don't plan on staying in this condo forever, but the math works as long as I stay in Orange County and work at my current job.  After I retire, I plan on moving out of state, where my pension and savings will go much further. 

Based on the discussions here, I think I'll probably just invest my stash.  Seems to make more sense.

[jba302]

(If a special assessment is required, it's probably insufficient.)  Check whether it covers your unit (studs in) or just the outside building. 

Just as an FYI tack-on to this, you can get a special assessment rider to an HO-6 policy.