Property Investment
Guide to residents' associations and body corporates
Learn what the main difference is between the two, and what each will cover in terms of your investment property.
Property Investment
5 min read
Getting insurance for a townhouse can be complex.
In the past, we here at Opes have always said: “If you have a block of townhouses that has 5+ units connected, you need a group insurance. So you must, must, must have a Residents’ Association (RA).”
But over time we’ve dealt with more situations, so we’ve come to a more nuanced view.
We still like Residents’ Associations, but sometimes there are still good deals that don’t have one.
So a lot of investors ask me: “How do I get insurance for my townhouse if there is no RA?”
In this article, you’ll learn what happens if your townhouse development doesn’t have a Residents’ Association. You’ll also learn how to get insurance and what you should do to make sure you’re protected.
Insurance can be complex, and I’m not an insurance adviser, so for this article, I asked Simon Yarrel of Axico Insurance, to help gather the facts.
How come insurance is different for townhouses?
Townhouses share parts of themselves with other townhouses. Your property might be joined by at least one wall, and you might share a driveway and common areas like gardens.
House insurance protects your investment and all the shared aspects. In other words, your insurance helps your neighbours, and theirs helps you. You’re all in it together.
That’s why townhouses usually have a group insurance policy. Everyone uses the same insurer, and typically you get a bulk discount.
These group schemes are usually organised by:
- The Residents’ Association, or
- a clause written into the title when you first sign the contract, known as a land covenant (more on this below). This forces everyone to get insurance.
However, if you don’t have either of these, there is a slim possibility your neighbour doesn’t get insurance.
The reason it’s slim is that you have to get insurance when you take out a mortgage, so the only way to not get insurance is to buy a property with cash. In practice, that doesn’t often happen.
More from Opes:
Can a developer force you to get insurance without an RA?
Even if a developer doesn’t set up an Residents' Association, they can still put rules in place for the project. These are rules that everyone agrees to when buying their property, which are known as land covenants.
They tell the owner what they can or cannot do and they are legally registered on the title (legal description of your property).
So even if a property is sold, the new owner has to follow the same rules; they can’t opt out.
For example, a land covenant might say:
- You can’t paint your house pink (or an odd colour)
- You can’t hang washing on your deck
- You have to get a group insurance policy
Usually, these covenants are adopted into the RA. Basically, the Residents’ Association copies those rules and enforces them.
Simon Yarrel says he’s seeing more townhouse developments use these land covenants to organise insurance.
A recent development on Archers Road, Auckland, had a land covenant that specified all the owners had 18 months to agree to one group insurer. So if you don’t have a Residents’ Association, there may be a land covenant that sorts your insurance.
There is one small challenge with this approach: Someone has to step up to organise it. Effectively, one owner will act as an informal RA secretary.
If you’re buying a property through Opes, we’ll often organise this to save you the hassle.
What happens if my neighbour doesn’t get insurance?
If there is no land covenant or Residents’ Association, you can’t force your neighbour to get insurance.
If your neighbour chooses not to insure themselves there are some risks.
Let’s say you share a fence with your neighbour. The fence breaks. You pay for your half ... your neighbour pays for the other.
You go to your insurance company. They’ll give you half the money, and they expect your neighbour’s insurance company to stump up with the other half.
But what happens if your neighbour doesn’t have insurance and can’t stump up with the money?
Now imagine there is severe damage to the wall between you and your neighbour’s townhouse. That’ll cost even more to fix.
Again, what if your neighbour doesn’t have insurance and can’t pay?
This scenario is rare because most buyers get a mortgage, so have insurance, but it’s worth thinking about.
How do I know if I have to worry about this?
If you are planning to buy a townhouse, look for either a Residents’ Association or a land covenant about insurance. That way you know all owners in the project have to get insurance.
You figure out if this is in place by talking to your lawyer before you buy. This happens during due diligence (The Detail Dive). They’ll read the insurance part of the contract and should flag this as a talking point.
You can also talk to your insurance broker to see what happens in your specific situation.
What if I want to buy a property that doesn’t have a Residents' Association?
There isn’t anything to say you can’t or shouldn’t buy a townhouse that doesn’t have an RA.
In fact, skipping one can be tempting … levies usually start from $2k a year (including the cost of insurance).
However, it’s important to understand the trade-offs. Without an RA, you’ll shoulder more responsibility of coordinating with your neighbours.
Sure, nine times out of 10, your neighbours will be insured, but it’s that rare one in 10 that could make things messy.
The best-case scenario is when everyone agrees to use the same insurer, although this doesn’t always happen.
I once had a case where most investors wanted to use the same insurer, but one owner worked for an insurance company, so wanted to use their employer. In the end everyone got insurance, but not with the same company.
Buying without an RA isn’t necessarily a deal breaker, but it does come with a few more things to think about.
