Buyers beware: Sellers who can least afford it are hurt the most
After nearly a half century of providing reasonable insurance coverage without having to account for “full-risk” compensation for lost property, the original federal flood insurance program has been turned on its head with last year’s new laws regulating insurance pricing.
The reason for this phenomenon? Most homes and businesses in U.S. flood zones are in river drainages, not along oceanfronts, and buildings can be repaired and replaced at relatively low costs. Most flood damage over the last 50 years has occurred in the nation’s interior, not along its coastlines. But everything started to change after expensive beachfront and urban properties were destroyed by Hurricane Katrina in 2005, and then by Hurricane Ike in 2008 and Superstorm Sandy in 2012. As a result, skyrocketing insurance rates are now in full effect across the board to cover full-risk losses from the most exclusive beachfront neighborhoods to the most remote rural communities.
The unintended consequence of this legislation has pushed rates up on moderately priced properties in the nation’s vast interior in and around historic flood plains. Even the most modest of homes along riverfronts have seen flood insurance premium increase 600% and more – orders of magnitude beyond what the average homeowner in these regions can typically afford. The rates have gone up even more for businesses.
To some extent, owners who are currently residing in their homes remain protected in that premium increases are held to less than 20% each year – but even for them, that ballooning expense is not going away.
Unfortunately, those who are starting to feel the harshest impact of the government’s vast, generational underestimation of coastal property risk will be inland homeowners trying to sell their houses to new buyers who won’t be “grandfathered” in to controlled rate increases. These buyers will face full-risk premiums right away. You may want to sell your house, but fewer people may want to buy it (or be able to secure financing) if they find out that they won’t be able to afford the insurance, and therefore have to take on the full risk of catastrophic loss.
Some lawmakers realize that a “mistake” was made in congress last year, and there is pressure to change the 2012 laws. But in the meantime, buyers should protect themselves by doing their own diligence on homes they are considering. Is it in a flood zone? Has there been flood damage in the past? Historic information like this is one of the most important data points highlighting Housefax Property History Reports. Armed with the most up-to-date report, and after confirming current flood insurance rates on the home that’s being considered, cautious buyers can make their best-informed decision before making an offer.