Should an "A" Flood Zone Kill a Buy and Hold Deal?

22 Replies

Hey everybody, 

I've gotten myself into a heck of a pickle and I'd like to share this (hopefully brief) account to solicit advice and warn others of potential flood zone pitfalls. 

I bought my first rental 10 years ago and have about 15 right now. My agent is a 30 year veteran of the area and owns the largest property management company in the area and invests in many SFH as well. She recently brought a great deal to my attention and so I began my due diligence. My first fatal mistake was that I used freeflood.com. If you use this, stop. The maps are out of date and you should always use the FEMA site and that site only. Many others are not changed when FEMA decides to redo everything.

So after my EMD is accepted everything is looking good and then I'm told I need flood insurance because the maps just changed. The lady in the county government told me that 18 homes in that division have already been changed from A zone to X zone (insurance not required.) I would need to submit paperwork to have it corrected which requires 4 to 60 days by FEMA, but I would need a survey and elevation certificate.

My agent assured me that flood insurance would only be about $30 a month even if it couldn't get moved, so I went ahead and shelled out the $700 for these reports. After receiving the reports, my insurance premium was quoted by three agents at $1800 a year. This effectively reduces cash flow by enough that it's not worth my while, unless I can get the flood zone changed. Everyone (the agents and lady they know at the county office) seems to think it will get changed as only 1/8 of the house actually lies in the "flood zone," yet I feel extremely apprehensive. 

My options now are to either close and pray or back out and lose the $2,700 I've put into this deal (appraisal, survey/elevation, termite, EMD, etc.)

What would you do?  

What is your cash flow with the flood insurance taken into consideration?  Do you think you will have trouble in the future if you want to sell?

Once your earnest money is deposited didnt you put in the contract you needed X amount of due diligence period and if the flood issue came up within this time you could have pulled out. 

Personally I would only buy a home with flood insurance if it was lake front/ocean front property.  Cut your loses and move on. The extra cost for flood premiums each year would cover your out of pocket cost in less then 2yrs. 

Good luck.

Curt Davis, Real Estate Agent in TN (#00321765)
605-310-7929

PITI + management would leave me with roughly $300 a month. This of course does not account for vacancies, advertising, and all of the other stuff we run into. I too am looking at this in a worst case scenario and have a very hard time putting faith in the idea that it's "almost sure to be approved for X zone status."

I do absolutely think that a flood zone determination (if it stands) would turn most would-be homeowners away. 

The issue I ran into was that this is a HUD home. They gave 5 days for DD and I thought I was clear due to using a site that had it listed as X zone (recent change to A.) The listing agent has stated they "may refund my money," but as I'm an investor they are not required.

Thanks for your input. 

@Ben Stout  

Always use the FEMA website for flood determination. Flood rates are going to be higher every year for the foreseeable future.

An elevation survey would help you get out of flood insurance.  But even if 1/8 of the house is in the flood zone, then your house is in the flood zone.

Being in FL, you probably don't have a basement.  But if you did one solution would be to fill in the basement, since the flood determination is based on your lowest floor, which counts basement floors.  Some houses can be taken out of the flood zone by filling in the basement and turning a basement into a crawl space. 

There are other things that can be done and as a last resort the house can be raised up out of the flood zone by elevation.

David Krulac

This is one of those situations where it comes down to your risk tolerance.  I'm quite sure a number of people deal with such properties all the time, are comfortable with them and make good money.  Im also sure a number of people lose money too...  It would not be for me - as I see it (and I agree with @David Krulac  ) the flood insurance premiums are virtually guaranteed to go nowhere but up.  And there doesn't seem to be an upper limit as to where they can go, either.  So for me, I'd walk - especially because your numbers already seem tight and this will almost certainly affect appreciation (just the uncertainty of future reclassifications will - even if you actually manage to get it changed to X now).

I know it hurts to walk away when you already poured good money into the deal (I've done it myself with an underground oil tank situation), but that may be the cheaper solution in the long run - or at least the solution that lets you sleep better at night.

Do some research on FEMA's current plans. You will get a good understanding that they are shifting the full cost of flood insurance to the homeowners. As @David Krulac  said the elevation will decide your floodzone and that is the base elevation of the lowest level.  If you are buying the place and the base elevation supports the x zone that is one thing but if does not expect the cost will double over the next 10 years and figure that into your cash flow equations.  You could also look at what it would cost to get the base flood elevation (based on lowest occupied level including porches and entryways) into the desired zone to see if that will make it a deal for you.  Moving from X to A means they haven't truely evaluated the flood plain.

If you ever expect you might need to use flood insurance look into how FEMA would treat you as an investor. I am part owner of a Sandy impacted place and had it been straight investment property FEMA would not have helped as they did. I have a lot of caution about flood insurance. That being said ours was AE , known flood zone and not purchased but inherited. I was ultimately glad I did not go to full ownership. It is not a bad thing if you know what you are getting into but I would look at Base flood elevation evaluation carefully before moving forward.

Thank you all for taking the time to respond. I have the elevation certificate and survey now. It is above the BFE, but I'm not sure of the implications. I'm going to take it to the county office in the morning. If they tell me that, given the data on the certificate, it's a done deal as far as having it put in the X zone, I'll close on it. If they give me a shaky answer, I'm just going to exit the deal, curse a bit, then have a good cry at the nail salon. 

Ben we are also buy and hold investors. Can you reevaluate with the bank for a Lowe purchase price. If it is affecting you it's going to affect a lot if other people. What is your risk tolerance? Those margins I am fine with "especially" if I know that they will improve through forced appreciation, ie getting the certificate changed. We have done very well investing in houses that have turned lots of other people off, but we have seen it as a diamond in the rough.

I certainly wouldn't do that with all of our properties but diversify into slightly more risky wit more reward. We try to diversiy among our investments.

@Ben Stout  I believe flood insurance premiums will rise drastically in the next 5 years. I would not buy this home to much risk. Even if the premiums stay exactly the same in 10 years when you want to sell you will reduce the number of buyers interested because some will not even consider a home that needs flood insurance.

(585) 678-6857

Let us know how you make out, my recollection is the FEMA representative was saying 3 feet about BFE was what they were looking for. In the end we could only make that at considerable cost.

In your shoes I would walk  away if I  couldn't get it in a low risk flood zone.  no reason to buy into the extra cost. 

@Colleen F.  

I will let you know. This has taken a while so I'm now into the end of my contract with HUD. I have to apply for an extension which seems to be $25/day until I close. My other option is to pay cash for this house. It's never flooded before even having been around through Hurricane Ivan, our recent storm in April which was crazy, and other hurricanes. If I choose to buy and hold, it might be an OK option and I wouldn't have to carry the flood policy. If I do finance, I could either be fine once it's moved to X zone, or I'm married to the $1800/month policy until the end of the mortgage. I could pay it off early, but that kind of defeats the purpose of paying all the costs associated with financing. If I sell later on and it's in the A zone, I don't think it would be easy to move.

I'm curious as to what the lady is going to say tomorrow. 18 homes have already been taken out of the A zone in that community, so it seems like a fairly safe bet, but assumption is the mother of all.... 

All, 

I'm curious as to if you would blame your realtor at all on this one? I am trying to take responsibility and ownership for this mistake as I didn't realize it was in a flood zone. My excuse is that I have been very busy lately (working overseas) and I did not perform my due diligence (FEMA site) like I should have. That said, do you expect your buyer's agent to keep you privy to and be on the lookout for such things? Seems like quite an oversight.

Ben, 

You should be able to check on your state website for the flood zone maps.  Also flood insurance premiums are a big topic, the cost may rise because of storms like sandy over the last few. Your agent may have assumed it would not increase. That's something that can only be confirmed by a county representative and that's on a location by location case. You'll need to assess what's best for your investment strategy.

Hey Sean, 

The big problem was I didn't even realize it was in a flood zone (had no idea and the area has never flooded.) This was only found after I realized the new FIRM slightly spills over into 1/8 of the lot. 

Flood zones don't always equal actually flooding but they do mean flood insurance premiums if you finance- so if you are in an area with water it is always good to check the flood zone. To your question I would expect relators working in these areas to bring flood insurance up as an issue and know in general what is going on. The specifics on a home I would not expect them to know but in todays world they should know if an area they work is likely to require insurance and if remapping is going.  The relator would be expected to check seller disclosure on a particular house. My worry would not be the $1800 they are looking for now but what it turns into for a premium over time.  A non-flooding home in  place that hasn't flooded for 50-100 years that isn't financed sounds ok. I don't know about your area but around here sometimes flood insurance doesn't seem to follow what you would think just by looking at a place. you would never guess our Sandy house flooded just driving by you would have to know the area well.

My wife and I bought our primary residence in a flood plane near the Ohio River. Flood insurance was approx. $755 a year. I said no, but the wife liked the house so we signed for it in Dec. 2012 unaware of the passing of Biggert Waters Flood Insurance Act of 2012. In Dec. of 2013 got a bill from FEMA stating my premium was now almost $8K per year. That said, there was a delay passed and it is back to around $800 per year currently. However, this delay is only for 4 more years and after this experience I will never purchase another home in a flood area unless I pay cash for it. I would not even have flood insurance if not required by my lender and if I ever have to put in a claim I have bigger problems than just flooding. Just my personal experience and I don't trust the government to get this fixed.

FEMA. Is revising all flood maps. They need more homes in fringe area to help pay for all the pure risk guaranteed to flood areas. And yes, premiums are going to rise every year. This is a federal program that has to keep premiums equal to claims paid out. The insurance companies handle the policies and claims and get reimbursed by FEMA. and this does not even consider all the people who live in flood planes get flooded and seek funds from tax payers, taxes, Ain't it fun?

903-452-8843

Don't blame the broker -- they may not actually know.  Sometimes the sellers withhold this information from the broker.  At the end of the day, if you are buying the property, it's your responsibility to do your due diligence, including investigating the flood zone.

We had a seller withhold flood insurance certificates from us when providing the evidence of current insurance and only discovered the need for flood insurance when we had the survey done.  It added a substantial cost to the insurance for the property, even though only a couple of the buildings were within the flood zone.  Now, it's one of the first things we check for when we get a new deal in the door.

Good call, @Jonathan Twombly. I will never make this mistake again. My due diligence was completely sloppy and I was overconfident. It is a HUD home and was definitely not disclosed. I don't think HUD had any idea and there was never an elevation cert done on it because it was never in the flood zone before. 

If you get it dropped to X zone your rates would drop a ton also and would be worth having some. You mentioned buying with cash, so maybe you could even pay more in cash and they would allow a lower rate of coverage and less cost. "A" zone is interesting one also as it has full coverage for enclosure areas unlike every other A numbered or lettered zone. Most flooding I see is probably in "X" zones outside of major hurricanes where it seems to be more "AE"

The flood program is a great one but it needs some real reforms. Increasing the amount of coverage people can buy (no reason residential shouldn't be more than 250/100), forcing those near dams and such to buy it (most don't have to at moment), and getting rid of some of the subsidies...oh and not giving out so much free money to people who don't have it after floods.

@Justin S.  

 You make great points. My real hang-up here is the resale value. I don't like buying on something I know has limited appreciation due to potential constraints by the government. If the average person is looking to buy a home and finds that the cute-little-ranch has a $150/month flood policy attached to it, I think they'll look elsewhere unless I am asking a very low price that makes it affordable. They'll probably think the same as I do about their resale price later down the road. 

Hey everybody, 

Well, this morning was the big meeting with the development office. The lady was by far the  nicest public servant I've ever dealt with and she said look at this map. The purple stars are the homes who have protested around you and gotten the A zone designation dropped. There were 18 of them. They were all around the proposed property. She said no one has been turned down and she simply knows the FIRM is wrong. She said as soon as I close she'll help me get it taken out. As one poster put it, I believe this property was actually a diamond in the rough. Once the flood insurance is dropped, it will have about $20k built in equity and it would actually make a great flip. I decided to go ahead and purchase it ... but with cash--just in case. 

Thanks to all for your comments and help. I love this community. 

@Ben Stout  good luck with it. Depending how long you decide to hold and how long the process takes to switch zones it may not be the worst to add a little flood insurance on it. Remember it takes 30 days for a new policy to start

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