Did you know that about 41 million Americans live in flood zones?
We’re four months into the start of the hurricane season (June-November) as this is published in September. Residents in flood-prone areas may be in for a nasty surprise before the season is through. While we were writing this piece, Hawaii was watching a storm in the Pacific.
Just last year, Hurricane Harvey and three Category 4 hurricanes made their way into the United States. They damaged hundreds of homes in parts of Louisiana and Texas with floods measuring up to 50 inches in certain areas.
The next hurricane to hit the United States was Irma – the Category 5 hurricane that affected the islands along the coast of Southeastern U.S. and then making its way to Florida. Did you see what it did to the Caribbean and Puerto Rico?
Remember Hurricane Jose? Just another hurricane that made it to the East Coast the same week as Irma.... maybe you didn’t hear about that one. It was such an active season last year that a few slipped under the radar.
Although highly improbable, the United States was hit by three devastating hurricanes in less than a month.
In 2017, the National Flood Insurance Program (NFIP) shelled out over $8 billion in flood insurance!
Irma and Harvey wreaked havoc in cities. There were more than 80 deaths resulting from Harvey, and over 60 from Irma. Thousands of people lost loved ones, properties, and businesses.
The economic losses were shocking, soaring up to hundreds of billions.
According to the Federal Emergency Management Agency (FEMA), properties
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Located within a 100-year floodplain and
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With a government-guaranteed mortgage
are required to apply for the NFIP coverage.
Overall, the NFIP covers approximately five million properties in the United States. Houston, Texas was the main city hit by Hurricane Harvey. However, much of the damage in Houston didn’t happen in the floodplain. Many properties were left completely unprotected and ended up depending on ad hoc federal relief.
NFIP Facing Problems
The NFIP generally, although not always, charges lower premiums than private insurance companies. With major hurricanes – Harvey, Irma, Katrina, Sandy, and more – the NFIP can’t cover all of the losses and they have no choice but to borrow money from the government. Meanwhile, the losses from floods keep on increasing. For the most part, this is because of higher property values.
Are private insurance companies better than the NFIP? The NFIP does not generate loss reserves so they are not able to cover large damages. On the other hand, private insurers are required to build reserves in order to cover massive damages and losses.
As a result of all those hurricanes, the NFIP made some changes that went into effect April 1st 2018 and January 9th 2019. The changes include:
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Average increases in prices of 8%
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The increase doesn’t include other surcharges and fees, such as the ironically named ‘Homeowner Flood Insurance Affordability Act of 2014’ fees and a Federal Policy Fee
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Changes to local flood maps that reflect geography and weather patterns
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If you’re rental property is mapped into a Special Flood Hazard Area (SFHA) you will be required to buy flood insurance
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If you are in a SFHA, you will receive a preferred risk policy premium (basically a discounted policy) for the first year. Then you will have your premiums adjusted in multiple years due to the risk
Even with discounted premiums, your rental or flip will still be considered in a flood plain. That may make it more difficult to sell. That’s why even if you are buying a home that is near a flood plain, it’s worth checking to see if there are flood plains close by.
Contrary to popular belief, NFIP is not always cheaper than private companies. The prices vary depending on the location. According to a study conducted by Milliman Inc. and KatRisk, 7 out of 10 single-family homes located in flood-prone areas are cheaper from private insurance companies than the NFIP.
If you’re interested in purchasing a property in a flood zone or if you own one, here are six things you need to know before doing so.
1. Flood insurance may be necessary for some areas.
Flood insurance is different from standard homeowner’s insurance. A homeowners insurance policy does not cover property damage caused by a flood. Which is probably why most mortgage lenders require residents living in high-risk flood zones to purchase flood insurance.
They also need an elevation certificate (EC) which is usually covered by sellers. This certifies that home elevations in flood-risk areas are due to high floodwaters during a major hurricane. The EC is a baseline for insurance companies to know the gravity of the risk, which is a huge factor in determining your premium.
2. Be aware of the risks involved. Ask!
If it rains it not only pours, but it can flood.
Even the sunniest, the hottest, and the driest places in America have had the worst flash floods. Take Death Valley for example. As a matter of fact, almost every U.S. county has experienced flooding at some point. They just have not been designated a flood zone.
For this reason, it’s very important to understand the risk involved in buying a home in a flood zone. Even if they say that a property isn’t in a flood zone, experts say it still could be. While sellers have to disclose all property information to buyers, I highly encourage that you do research on the property and ask questions.
Property owners in highest flood-risk areas may have to pay insurance more than those who aren’t. There are lenders who’ll even ask you to pay a year’s worth of insurance on the spot. Talk to your lender to know more about it. Then use the flood zone designation to negotiate a possible discount with the seller.
3. Know your flood zone designation.
Letters usually indicate the level of risk in an area.
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A and V = High risk
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D = Undetermined risk
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B and X (shaded) = Moderate flood hazard
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C and X (shaded) = Minimal flood hazard
The X areas or the low-risk areas are usually shaded. The shaded portions are levies or dams built to prevent flooding. However, these preventive measures, even if it passes FEMA standards, are not an assurance that flooding will never happen. There’s a 25% chance that it’s going to fail. That’s what happened to New Orleans when Katrina hit.
4. Pay less insurance if you don’t live in a flood zone.
If you think you don’t need flood insurance just because you live in X areas, you might want to reconsider. Flood insurance is a lot cheaper in those areas. You may want to price it out and see if it’s worthwhile, even if you buy the property free and clear. Mortgage lenders will pretty much mandate it if you live in the A and V areas.
Let’s say you live in moderate to minimal flood areas. Did you know that one foot of floodwater in your home could cost you more than $72,000? The good news is that flood insurance is cheaper if you live in low to moderate flood risk (B, C, or X).
How do flood insurance companies base their rates? According to the NFIP, different factors are involved, such as:
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Number of floors
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Building occupancy
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Type of flood zone
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Location of its contents
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Year when the building was built
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Where the lowest floor is based on the flood elevation on the FEMA flood map
5. Find out the cost of flood-proofing, retrofitting and other flood-related repairs.
Picture yourself standing in front of your dream investment property. The only catch is that it’s located in a flood-prone area. What do you do? Ditch the property altogether?
Not necessarily.
There are ways to minimize flood damage – such as minor property renovations to major changes in structure. It’s best to talk to a professional about the cost needed to mitigate flood hazards. Make sure to discuss this with the seller as well.
One of the renovations you can do is to elevate the entire building so none of the floodwaters can go in. Feel free to go all out and elevate the lowest floor beyond flood level.
Small changes make the biggest difference. Well, of course, it depends on the neighborhood and the level of risk. Simple maintenance can also help:
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Ensuring that the downspouts face away from the building. There shouldn’t be any gutter runoff since it will possibly leak in your basement.
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Making sure that you check the cleanliness of the pipes and gutters. Air conditioners and other appliances should be placed above flood levels.
Here’s a little takeaway. If you’re looking to purchase flood insurance, whether for your home or for investment properties, don’t wait for a storm to buy it. These insurance policies usually need at least 30 days before activating.
To Insure or Not To Insure?
As real estate investors, we do everything in our power to protect and safeguard our investments. And this includes considering possible hurricanes and flood.
Also remember that a property situated within a flood zone does not disqualify it from being a killer investment. But expect to have some additional due diligence in the event of natural disasters. Make sure to have everything covered and ensure that your investment remains intact.
If you prefer private companies, choose the ones with experience responding to natural disasters, as well as the ones that understand what consumers need.
What’s your stand? To insure or not to insure? Let us know what you think in the comments below.