How to protect assets when purchasing a second home (vacation condo) at beach in high-risk flood area

[lea75]

I am looking to purchase a condo in a beach town in NJ. Flood insurance rates are unpredictable. In the case that they become too expensive to afford and we cannot sell our condo because no one can afford the flood insurance and the value of the property drops, is there a way we can protect our asset? We own a home outright in PA. We were thinking of forming an LLC for the condo, which we will be renting out weekly in the summer. However, we are not sure if this will protect our assets if we ever have to foreclose on the property, being that our names would be on the mortgage for the condo.... any advice?

 

[lea75]

I am looking to purchase a condo in a beach town in NJ. Flood insurance rates are unpredictable. In the case that they become too expensive to afford and we cannot sell our condo because no one can afford the flood insurance and the value of the property drops, is there a way we can protect our asset? We own a home outright in PA. We were thinking of forming an LLC for the condo, which we will be renting out weekly in the summer. However, we are not sure if this will protect our assets if we ever have to foreclose on the property, being that our names would be on the mortgage for the condo.... any advice?

 

[adjusterjack]

any advice?

Yeah, don't buy it.

New Jersey is a recourse state which means that the lender can seek a deficiency judgment against you, personally, for the balance that is not covered by the sale of the property. A judgment will allow the creditor to garnish wages, levy bank accounts and attach non-exempt property. New Jersey doesn't have a homestead exemption so the equity in your personal residence can be attached to pay the deficiency judgment.

If you want the LLC to buy the property, the lender will want your personal guarantee on the loan anyway.

So, if you think you can just walk away from the property with impunity, think again.

 

[Taxing Matters]

However, we are not sure if this will protect our assets if we ever have to foreclose on the property, being that our names would be on the mortgage for the condo.... any advice?

A LLC does not shield you for debts that you personally guarantee. So even if the LLC owns the condo, you'll still be personally liable for paying the mortgage on the place. The risk of that kind of flooding is not that severe in the NJ beach areas I'm familiar with, but if you think that the risk in this location is truly that significant that flood insurance rates alone could make the investment go south then the best thing to do is avoid it entirely.

 

[FlyingRon]

TM... Flooding of the NJ shore areas *IS* a serious problem and it doesn't take a storm of the magnitude of Sandy to cause it. We got substantial flooding from just severe high tides in many areas and it's projected to get worse in coming years.

 

[Taxing Matters]

TM... Flooding of the NJ shore areas *IS* a serious problem and it doesn't take a storm of the magnitude of Sandy to cause it. We got substantial flooding from just severe high tides in many areas and it's projected to get worse in coming years.

I'm just relating my experience with beach areas I'm familiar with. I'm well aware that it may be that the various areas of beach might be different. Still it seems unusual to me that the problem would be so severe that flood insurance would be so costly as to be the main reason the investment would tank. In any event, as I said before if the flood insurance is really that big a deal in this instance then it's probably best to avoid this purchase altogether.

 

[FlyingRon]

I wouldn't say they're unpredictable. It's a federal program and FEMA pretty much determines the risk factor and the rates. However, the Jersey Shore is definitely getting to be riskier (unless some artificial fiat denies that the risk is occuring, not beyond the realm of possibilities). You can be assured the flood insurance rates WILL go up. So, yes, you either pay it, or you pass, or you do things to mitigate the risk.