Sellers Insurance Policy vs What the Buyer is Quoted

Insurance is peace of mind. That's what I sell. I sell peace of mind. What might make a sellers peace of mind might not do that for you as a buyer. We look at that line item. It is a starting point to say, “Okay. You're paying about this. And since we’ve been doing this for 10 years just about every day, we know if it’s within the ballpark, if it’s the number that we look at. You’re at $150 a door.” Well, we’re going to look at it and say, “Well, you probably don't have enough insurance. You’re not covered properly.” If they go in and we have another one we’re working on that is close to a thousand dollars a door, we’re like, “Okay. Something’s not right there. That’s high.”

As far as per door. It all depends on coverage. If someone’s got a Fannie or Freddie loan, we’re able to look at that number and say, “Okay. They might have flood insurance – That's why it’s high.” Or they could have a Fannie or Freddie loan and that's what's running it up. There are just so many different variables, it is tough. A rule of thumb is you’re going to be paying 10% more than the previous guy.

What I see a lot of especially now is investment properties. Most people are going to be number-driven. They're going to look at a quote saying, “Well, this one’s $100 cheaper or $1,000 cheaper,” whatever that number is. You run the risk of, “What are you going to do in the event of a claim that's going to help increase your rates by 10 times that because you didn’t have coverage or you’re going to have to come out of pocket?”

A lot of people get caught up on the number itself. It happens, that’s what you’re looking at. You’re looking at a spreadsheet of numbers, and you want that NOI to be as high as for your investors and for you but you also want to make sure that you're protected, because the last thing you want to do is go to your investors and say, “Hey, look! I know I saved us a bunch of money on our insurance, but that policy did not have ordinance and law coverage.” Ordinance and law coverage is important when you’ve got a building that you're looking at, a value-add play, a building that was built in the '80s, and you have a partial loss now. The city is like, “Well, you’ve got to get this entire building up to code.”An insurance policy doesn't have that built-in most of the time. That's an added coverage. Fannie and Freddie require it. That's how important it is. If that’s not in your policy, you’re going to be on the hook, and you’re going to have to go to your investors and say, “Hey! I know I saved a thousand dollars on our insurance, but I need $20,000 to fix this claim.” That's a tough conversation to have with somebody.

Click the link to listen to the full podcast: https://lifebridgecapital.com/2019/11/ws381-understanding-real-estate-insurance-with-clinton-orr/