Flipping Homes In a Flood Zone

7 Replies

I'm looking into a home in Fl that is in flood zone AE, has anyone had any experience flipping a home in a flood zone? Do they sit on the market longer than flood zone X? Also will a hard money lender require me to carry a flood insurance policy while I own the home?

The general answer to your question is yes. Particularly if there are not a large number of homes in flood zones in your market.

Any traditional lender is going to require you carry flood insurance and any new buyer will have to do the same.  A hard money lender may or may not ask you to carry the insurance, depending on their level of sophistication.

Not only will you have to deal with the stigma but you will have to deal with the increased monthly payment for a buyer  when doing  calculations for whether not they can afford the property. 

Overall you can usually plan on a flood zone property selling for 10 to 20% less then a similar home in a similar neighborhood And being on the market for longer. 

In other words, I would only buy it if it was a phenomenal deal.

We require you to have flood insurance in a flood zone, but we’re based near the ocean so it’s something we’re familiar with.

In the town where I live, there are a lot of houses in a flood zone. The flips that are in a flood zone do tend to take longer to sell than the ones that are not. Right now, people can kind of choose to be picky because there were a ton of foreclosed houses and now more and more people are flipping those houses so there are options. I would imagine that when there are less options, people will start buying the houses in flood zones more quickly because they won't have another option. 

In my opinion, it is even more important to buy a house in a flood zone that you intend to flip at the right price with a really good handle on the costs to flip it. That way you can make sure you're pricing it at market value or just below because with the flood zone it probably won't sell above market value to make-up for extra costs you encounter along the way. I'd also just make sure you are very conservative with holding costs in case it doesn't sell as quickly as you'd like.

@Dan Carbone As with all things, price is the great equalizer. Just at a macro-level, if there are two identical properties and one is in a flood zone and one isn’t...well...

1.) I’d rather not live in a flood zone, so I’ll pay less.
2.) Lenders don’t love it, so I’ll pay less.
3.) Flood insurance isn’t free, so I’ll pay less.

So if you list your property for $140K and the competing property is $150K I’ll never by yours. If you list yours for $100K then it might be a different story.

What you don’t want to do is to re-market it and pretend you don’t know it’s in a flood zone. An offer that falls through because a buyer finds that out (and they 100% will) just increases your days-on-market, holding costs, etc.

So just look at what flood zone comps sell for, how long they were on the market, and you’ll have a starting point.

Dan,

One thought from an Insurance perspective.   The Elevation of the lowest floor house compared to the flood level has a big impact on rates.  Depending on what needs to be done in the flip, there may be ways of lowering the future flood costs.   It may require getting a survey done to determine this (the current owner may have one). 

Talk to your agent and have some comparisons done on flood costs if the Base Elevation changes.  One way to do change the elevation is to raise the house.  There may be other ways.   I have heard of contractors filling in a basement half way (made it into a crawl space to change the elevation.   Adding Breakaway panels that allow water to flow through could be another way.   Check with builders operating in that area as they may have investigated those options already. 

@Dan Carbone. Although I am not in the flipping market and don't fully understand how you would figure out the cash flow of the project.

I do know that flood Insurance (specifically on the government option (National Flood Insurance Program) NFIP) are out of control and have seen some properties go into foreclosure due to the cost of flood insurance and the property has never flooded. If the property has never had a loss (a flood); there is a great chance you can get a private flood policy for 50% less then the government option. We are talking about savings from $500 - $2500 or more. 

Private flood options although have been around for 10 years -  some communities don't know about them because the government having a 50-year monopoly on flood insurance has made the marketing of private flood insurance slow. That being said Florida has one of the hottest private flood markets. 

I don't know -  however, -  am guessing if those that are buying flipped housed are usually first time buyers, flood insurance seems to scare people and sometimes it is scary, I believe if you have flood coverage on the property when it is listed (especially if your getting a great price through the Private market) it shows that the property can be insured, it gives the new homeowner an idea of how much the cost of flood insurance is (so you take that question off the table) and few insurance agents know and fewer homeowner understand that a flood policy can be transphered to the new owner. 

Most of the time lenders (that have government-backed loans) require the homebuyer to pay for the flood insurance the first year and the will escrow following years. With all the closing cost this is a deterrent and hurdle for a first time homebuyer. I think there is a strategy to working this into your deal so that in a sense you make it easier for the homebuyer to get the home by offering to transfer the flood policy with the sale of the home. 

I would recommend that you check the availability of the home to get cheaper flood insurance before you buy it. If you are working with a flood expert that will shop the policy for you will be able to see if the flip will cash flow. Good luck. 

If you're in FL then people build in Flood Zone all the time. What is the number after your AE? The way to flip in flood zone is to lift the house. The AE number provides your base elevation. So an AE 13 would need to have a finished floor 14' above sea level. Depending on the current elevation of the house that could mean you need to lift the house 6" or 15'

Coastal communities are accustomed to flood zones so it should not be a problem. However, if you're out in the panhandle and everything for the next 100 miles is flood zone X then it will be a problem. 

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