Flood Insurance Question

8 Replies

Hey All! First, sorry if this is mentioned elsewhere. There's so much material to dig through.

Right now, I'm considering a property thats somewhat a "house hack". The parcel contains one detached SFH and 5 units for cashflow. The catch, I need to purchase flood insurance.

My question, do you typically purchase flood insurance per unit on the property or can you purchase a blanket flood insurance policy to cover all units?

Per building. Be careful flood insurance is increasing at about 20% per year, should continue for 6-8 years. So $1000 in premium today could be $4,000 before the full rate hikes are over.

(Government declared no more subsidies for flood insurance and actuarial rates will apply).

May be able to get a private market policy, but still seeing similar increases.

I recently received a quote for a SFH in Zone AE, it was $1800. I am contemplating doing an elevation survey and possibly a LOMA since the flood zone starts in the middle of the street --literally about 10-15 yards from the front door. The insurance agent told me that the rates they experienced in zone AE were generally about 1500-1800 so if I do an elevation survey and I am in the flood zone still then I could maybe save $300 per year. I purchased the property cash via my heloc and did not realize the property was in a flood zone until I went to refinance. The home was purchased from the bank and I am told they do not have to disclose that information. Due diligence was neglected in that area. I may just find a way to accelerate the payoff of this home to avoid the cash flow killer.

@Josh Springer good question. @Derek Lacy wicked smart guy. And I endorse Derek's answer to your question Josh the policy needs to be written to the property owner per building, especially if this is a rental (apartment) situation. It doesn't sound like this is the case but the only time I have seen participation buildings have been in the case of a Townhome, I have seen some "renovators" in the Denver area get creative where they take a larger home and brake it into (condo/townhome) type units and then require each unit owner to acquire their own flood policy even though technically it is one building. I am no expert and don't fully understand how they are accomplishing this. I know why someone would want to do it but do not think it is a good practice. I wrote a blog post on this on my blog but quick summary is what happens when the whole building floods and there is a fight between the different carriers as to how much each one will pay out, or they discover that the by-laws were that they had to buy collectively  this is not a good place to be especially for a homeowner who just wants insurance to cover the darn loss. Or another gut-wrenching possibility is say - one unit floods and they didn't have flood insurance can can't afford to fix the unit. Guess who's responsible for the unit. Anyone who owns a portion of the building. What a headache, property values decreased the whole gamut and you know what the unit that didn't flood may have a flood loss on their record for the building. 

Wow, what a bunny trail, didn't intend that. Anyway, As for the increase, there are ways to keep this from happening if your agent is a flood nerd and the policy is rated correctly. The NFIP does have the increase for Pre-firm properties (anything built before 1973) if the property isn't rated off of a Elevation Certificate (EC) this is the government's way of forcing the homeowner to get these documents. Most private flood policies do not require the EC they have different ways of underwriting. I some private markets raise their rate when they see the NFIP do so. In my opinion, this is poor practice and most "SOLID" private market policies have kept their rates consistent for the past 5 years. Here's what I see as the good news. As the private market grows more and more competition will be coming and this will control rates especially for the properties that have never flooded and are sitting at a higher elevation. One word of caution though private market policies have tricky language in them and many consumers buy policies that they don't understand just on price, only to find out after a loss that they really had a crappy policy. Work with a flood expert or someone that has more then 700 flood only policies this is someone who can make sure you are getting the best for your unique needs. I know a guy =P or can point you to others if needed. 

@Robert Murphy

Thanks, but just an insurance nerd.

The reason to usually convert to condo is not so unit owners can get coverage, but to increase the nfip max.

Flood should always be carried by the COA, not the unit owner. It’s an odd duck. COA’s can cover $250k per unit. It includes the contents and interior of the units. COA flood breaks all normal insurance rules.

So here in Florida the land of towering coastal COA’s, you can easily have an ITV of $60,000,000 on 80 units.

So max nfip value on that is $20mm. Then they’re buying 40mm in excess.

And I get to here from the smartest guy in the room that the first or second floor would only flood. Then I explain that the sand that the building is on can just leave in a major storm ending in a total loss.

But excess is penny’s on the dollar compared to nfip (they get to write a $20mm deductible).

By no means am I saying it didn’t happen, but those guys split up the risk to raise the total cost of insurance (NFIP charges more on base premium and fees per policy). If you find those guys, easy sale for you. Recombine to NFIP rules, add excess.

I never got to the first point. Some agents don’t sell excess. So if you have 5 units in a $1.1mm building, they convert to COA to get $1.25 from NFIP.

When really they would be better with the NFIP amount and excess flood over.

@Derek Lacy wow you really are a nerd. =P thanks for the very thorough explanation complete with figures and acronyms. 

No wonder insurance is so confusing, I do not hold the same gift of math as you seem to Have. 

Question though and maybe it is a better discussion VIA email so we don't bore someone coming to this form for real estate advice.  

How do you make the sale of insurance on top of access to the client when 

1) they wouldn't even have the flood policy if they could get out of it. 2) they believe they are NEVER going to Flood (even if they live right on the ocean and on a barrier island. 
3) they all seem to have a story that the "Big" storm came in and although they saw water close with-in 3-inches from their home but never came in so they must be safe. 

How do we educate about the need for flood coverage when the government has failed for over 50 years?

And even a few of my clients that have flooded once tells me this is the 100year event so they are now safe for 99, 98, 88 years or so. 

Oh just in case someone doesn't understand the COA* or ITV** that Derek referenced (honestly I had to look up these terms to make sure I understood what he meant. 

Derek, if you meant something else by these acronyms, can you clear it up for me?

* (Certificate of Authority (COA)  (3) A certificate issued by a state department of insurance showing the power of an insurer to write contracts of insurance in that state.

**insurance-to-value this means something to the insurance company and will likely be something you will get very familiar with when finding out in a claim your ITV wasn't addressed. Article for those who want to learn more. 

Having worked in so many different fields these mean different things to others that are not nerds in insurance. This could also mean something different if you are talking about the insurance company and the Bi-laws of the Condo community. 

COA means Condo Owners Association. Otherwise yes.

Feel free to email or call whenever.

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