House caught on fire and insurance didn't pay!

41 Replies

Investment Info:

Single-family residence fix & flip investment in Mcallen.

Purchase price: $80,000
Cash invested: $40,000
Sale price: $104,000

Had it under contract to sale at 165K and it caught on fire on the day of closing! The money was en route to our account, we had already signed and had to stop the recording and the wire so that we didn't burn someone else's house down. After that, insurance wouldn't pay and we decided to lick our wounds and move on instead of trying to break even on it

What made you interested in investing in this type of deal?

Was a great flip. We were scheduled to clear about 35K and instead lost about 20K.

How did you find this deal and how did you negotiate it?

Wholesaler - paid what they wanted

How did you finance this deal?

LOC

How did you add value to the deal?

complete remodel and permitted extra living square footage.

What was the outcome?

Lost 20K

Lessons learned? Challenges?

Sometimes its better to take a loss and move on rather than letting ego make your decisions.
Get clear on what insurance is needed.
Know who you're in business with.

@Ruth Geller because of the vacancy. Our insurance agent directed us to a bad policy for a flip, but it's my fault for not asking the right questions. It happened to be on the queue around the same time we had a hurricane locally so I think that played a role in the decision. There were a lot of denied claims locally.

@Marlen Weber yes thank you. Our hope is that we would learn and many others would as well. It was a surreal experience that could’ve been much worse. Luckily it didn’t sink the ship and we can simply keep moving forward

Originally posted by @Boone Tyson :

@Ruth Geller because of the vacancy. Our insurance agent directed us to a bad policy for a flip, but it’s my fault for not asking the right questions. It happened to be on the queue around the same time we had a hurricane locally so I think that played a role in the decision. There were a lot of denied claims locally.


At least it seems like you have a good attitude about it and perhaps learned some things from this experience. I am curious what type of insurance policy you had that didn't allow for even one day of vacancy on the day of closing? I've had quite a few different types of policies (e.g. home owner's, landlord, builder's risk, etc), and never heard of that. But definitely want to make sure I don't ever accidentally sign up for that type of policy.

@Boone Tyson  

@Kyle J.  

I assume it was vacant for more then just one day. You need to disclose to your agent if the property is going to be vacant or occupied. There are usually vacancy clauses in policy - if the home is vacant over 30-60 days insurance can be voided. 

@Boone Tyson - nice to see the positive attitude and always important to learn from mistakes!

As an Insurance Broker I can't stress enough how important it is to keep your broker in the loop of any changes that occur at the property. A good broker will ask questions when writing the policy to be sure it's being done properly. But it's important to let them know of any changes that may happen over the term. 

@Ruth Geller   Ah, I think you're correct.  When I first read it, for some reason I thought the fire happened the day @Boone Tyson closed on it as the buyer.  But now that I re-read it, I see that it probably happened on the day he was trying to close on it as the seller (and the property had likely been vacant for a while during his remodel).  So yes, it was probably vacant for more than his policy allowed, which makes sense.  I believe my landlord policies only allow my properties to be vacant for 30 days.  

Originally posted by @Boone Tyson :

@Ruth Geller because of the vacancy. Our insurance agent directed us to a bad policy for a flip, but it's my fault for not asking the right questions. It happened to be on the queue around the same time we had a hurricane locally so I think that played a role in the decision. There were a lot of denied claims locally.

there should be a blog on insurance.. this type of insurance denial happens to landlords quite frequently when they dont realize that their policy loses coverage if their house has been vacant more than ( 90 days is typical) and that you need a vacant home rider. 

Yes for flipping you need builders risk. 

 

@Ruth Geller , @Kyle J. , @Jay Hinrichs - I thought early on the coverage was sufficient and I felt we had disclosed it was a flip rather than rental, but I don't think we had made it clear enough so the policy was more of a landlord policy that one with a vacancy clause.

We are in the process of litigation though because right after purchase, our county went into a covid related total lockdown (Hidalgo County Texas). All the county announcements and even those from the governor were sent to our agent. Between our lockdown which prevented our "nonessential" contractors from working, and the moratoriums in place which kept most tenants in their residences, I think we have a good case.

It was actually set to close prior to the fire by about 3 weeks but 2 days before closing, the city stripped our certificate of occupancy because there had been an enclosed addition in 1997 that wasn't permitted. They flagged us when we ordered a roll-off dumpster and so it couldn't be sold.

Got the enclosure permitted and we were ready to close when it caught on fire ahaha! Nightmare scenario!

Originally posted by @Boone Tyson :

@Ruth Geller , @Kyle J. , @Jay Hinrichs - I thought early on the coverage was sufficient and I felt we had disclosed it was a flip rather than rental, but I don't think we had made it clear enough so the policy was more of a landlord policy that one with a vacancy clause.

We are in the process of litigation though because right after purchase, our county went into a covid related total lockdown (Hidalgo County Texas). All the county announcements and even those from the governor were sent to our agent. Between our lockdown which prevented our "nonessential" contractors from working, and the moratoriums in place which kept most tenants in their residences, I think we have a good case.

It was actually set to close prior to the fire by about 3 weeks but 2 days before closing, the city stripped our certificate of occupancy because there had been an enclosed addition in 1997 that wasn't permitted. They flagged us when we ordered a roll-off dumpster and so it couldn't be sold.

Got the enclosure permitted and we were ready to close when it caught on fire ahaha! Nightmare scenario!

Yup lots of problems there..  hope it works out.

 

@Jay Hinrichs - It'll absolutely work out. My degree cost a lot more than that and I imagine I'll use this experience way more than a degree long-term!

Originally posted by @Boone Tyson :

@Ruth Geller , @Kyle J. , @Jay Hinrichs - I thought early on the coverage was sufficient and I felt we had disclosed it was a flip rather than rental, but I don't think we had made it clear enough so the policy was more of a landlord policy that one with a vacancy clause.

We are in the process of litigation though because right after purchase, our county went into a covid related total lockdown (Hidalgo County Texas). All the county announcements and even those from the governor were sent to our agent. Between our lockdown which prevented our "nonessential" contractors from working, and the moratoriums in place which kept most tenants in their residences, I think we have a good case.

It was actually set to close prior to the fire by about 3 weeks but 2 days before closing, the city stripped our certificate of occupancy because there had been an enclosed addition in 1997 that wasn't permitted. They flagged us when we ordered a roll-off dumpster and so it couldn't be sold.

Got the enclosure permitted and we were ready to close when it caught on fire ahaha! Nightmare scenario!

 If you disclosed the correct use of the property, they should have written the policy correctly. Of course it depends on what can be proven. Hopefully you have statements in writing that disclose the actual use. Different uses require different policies; flips, long term rental, short term rental, owner occupies are all different. I hope is works out.

@Joe Splitrock I take responsibility for not explaining the nature of our business more fully and asking better questions. Was it the wrong policy? Absolutely. Should my insurance agent have been more aware? I think that’s a no brainer. A rental policy on a flip house because it was easier to underwrite? No doubt it was wrong.

That being said, it’s still my fault and I value the education it provided.

I know much more about insurance for sure.

But the greatest thing of all cake while I was driving around mulling over what to do and this question came to mind.

“Can I flip 2 in the time it will take to finish this one?”

The answer was an absolute yes. So that’s when we elected to sell because we knew it would be a long project to break even at best and our crews would be tied up rather than somewhere making us money.

We have picked up 1 great deal since then and have our guys working on a 2nd that is looking like our best flip yet. And we have a 3rd under contract that should close in a week or so. The profit from those, if things go even halfway correct, will triple the loss and way more hopefully.

And I think only 1-2 other deals of those would’ve happened if we hadn’t liquidated.

@Boone Tyson

Now you know yiu need to get builders risk policy for the arv amount. Its the flippers vacant and rehab policy.

Most rental policies allow 60 days vacant which is plenty for my rental rehab and simultaneously advertising fir a tenant. I usually take the reservation fee before flooring goes in during painting.

But flipping needs vacant insurance. Best of luck with collecting something. Tnx fir sharing.

Originally posted by @Boone Tyson :

@Steve K. Soldering a water spigot that had broken off on the front porch actually.  

That’s crazy, sorry to hear that. Insurance can be such a pain. We have properties in the mountains out here in CO and with the wildfires we’ve had the past few years, we constantly run the risk of being dropped. I’ve had clients whose places have burned and insurance never seems to be the safety net that one would expect. 

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