Flood insurance is more expensive than your regular homeowner’s insurance. Perhaps this is because it covers a specific eventuality so the damages can be anticipated.
It is also mandatory in many jurisdictions and can be quite the headache when you need to sell the house fast. You have to convince your potential buyers not only to buy a house susceptible to flooding but also to take up a costly insurance policy for the problem.
If you have found yourself in a position where it seems you can’t sell the house because of flood insurance, all might not be lost.
We are here to look at how homeowners get into that situation and how they eventually get out of it. Stick around because one of these methods might literally get you out from under the water.
Several flood hazard mapping programs have been created under the National Flood Insurance Program (NFIP) and are hosted on the Federal Emergency Management Agency (FEMA) website.
They are updated through a collaboration between local communities and FEMA to keep them relevant. Every community participating in the NFIP program has a floodplain administrator who coordinates with FEMA in mapping.
Flood mapping helps your community to understand the prevailing flood risks so that you can make informed decisions and strategize about mitigating and managing the risk. Mortgage lenders also rely on these maps to determine their insurance requirements per region.
You can look up your address on the Flood Insurance Rate Map (FIRM) on the FEMA website to check your flood zone determination status.
This flood map identifies Special Flood Hazard Areas (SFHA) that are prone to flooding throughout the United States. It zones these areas based on their flooding risk rating—the likelihood they will flood in any given year.
The flood insurance premium increases with the flooding probability, so your insurance agent will also look at the flood zones to determine how much your flood policy will cost.
Flood risk is dynamic because floods are unpredictable. Suppose your location is declared a FEMA-designated flood zone. In that case, your mortgage company will require that you provide proof of flood insurance, or they will purchase the flood insurance policy on your behalf to protect their interest.
The insurance can run up to a couple of thousands of dollars per year, depending on your house’s market value and the risk rating of your location.
Carriers using FEMA’s risk rating system apply flood zoning to set up insurance premiums, with higher premiums being levied proportionately to the risk level. Renewals are subject to the prevailing zone at the point of renewal, so your premium might be different when it comes to renewal.
Another aspect they consider is the base flood elevation (BFE) in the area, which measures how high the floods reach in the region. The higher it is, the higher the premium payable. They will also factor in your house’s foundation, elevation, and other local risk types.
Flood Zones Can Be Classified into two broad categories:
Zone X has a 1% chance of flooding within a year, zone B has 0.2%, while zone C has even lower chances than zone B. They are not considered special flood hazard areas, so a flood insurance policy is not mandatory in these zones.
However, because floods are unpredictable, you can arrange for your own private flood insurance cover from any insurance company. You may also decide to stick with the FEMA-backed NFIP program, which is optional so that you are eligible for a FEMA grant in case of a flooding incidence.
Homeowners in these zones are also eligible for preferred risk insurance policies cheaper than your standard flood insurance policy. You can use them as a property owner to protect your investment at a lower premium.
Both these zones have a 1% or greater chance of flooding in a year which qualifies them as special flood hazard areas. Flood insurance coverage is mandatory if your house is in these areas and you have a running mortgage.
It has to cover whichever is lower between the principal balance of the mortgage, the amount it will take to rebuild your home or the maximum building coverage offered under the NFIP program (which is currently $250,000).
To be on the safe side, even when it is not a legal requirement, your typical mortgage lender will require flood insurance coverage if the house is in a high-risk special flood hazard area.
A huge chunk of NFIP flood insurance claims is received from policyholders whose homes are not in high-risk flood areas. Lenders prefer to err on the side of caution.
You are eligible for federal financial assistance if participating in the NFIP program. This is one of the reasons homeowners who are not mandated to take up insurance covers still do it. The funds are released to support critical recovery initiatives after a flood.
However, it is not easy to get approval for a FEMA grant and even when you get it; the amount might fall short of covering your property losses. You shouldn’t exclusively rely on it for disaster assistance. It can be used as a selling point to convince your buyer that they have a backup, though.
You must disclose any known shortcomings to the buyer before they commit to the purchase by signing the agreement.
The idea behind seller disclosure in real estate transactions is to give the buyer a fair chance to evaluate the house to make an informed decision about the purchase.
Hiding material facts about the house that might influence the buyer’s decision to buy it can be grounds for a lawsuit if they come up later and the buyer feels shortchanged.
Assume that the buyer will also conduct their due diligence, which includes a home inspection and a title search. Special flood hazard areas are listed openly, so they will know at some point even if you didn’t declare it.
The inspection will be more thorough if the buyer is being financed. Lenders always order a full-blown appraisal before approval. If done right, it will reveal that the house sits on a floodplain.
Seller disclosure requirements vary from one jurisdiction to another because each state has its own ways of applying the law that is enforced by local ordinances. The rule of thumb is not to withhold material information or give false information.
The buyer needs to know that they will have to spend a substantial amount on flood insurance coverage to make the necessary adjustments to their purchase plan.
You may lose a couple of prospective buyers because of this disclosure, or it will cost you a few hundred dollars as a discount on the price, but you will have the peace of mind that comes with covering all your bases.
The standard homeowner’s insurance doesn’t include flood coverage, so your lender will need you to purchase an insurance policy specifically for flood damage. If flood insurance is included as part of your mortgage requirements, you will probably have to maintain the insurance until the mortgage is paid off in full.
At the point of sale, you can decide to include it in your listing price or leave it out and let the buyer make their own arrangements after the sale closes. Then you will either ask for a prorated refund if you sell within the insured period after the buyer gets their own policy or transfer the cover to their name.
The floodplain registry is constantly updated with other stakeholders, and your house’s value might change suddenly if a new search is done (another reason why full disclosure is recommended).
The zone might be upgraded or downgraded at the time of the sale. This will increase or reduce the applicable premium respectively.
You can challenge your property’s designation as a flood zone or by appealing through FEMA for the designation to be reviewed, allowing you to pay a lower premium. Unfortunately, this takes time to be applied, which might delay the sale if you base it on this approval.
Another way to reduce the insurance burden is to sign up for private flood insurance. The FEMA-backed NFIP program has a $250,000 cap on building coverage and a $100,000 cap on content coverage.
It also has a 30-day waiting period before the coverage begins, which is a long time when discussing flood damage. Private insurance companies can offer higher limits at lower premiums.
You need time and sufficient cash reserves to go through the motions of the sale, seeing as they won’t be the ideal selling circumstances.
Your listing can take ages on the market, which makes the house seem condemned. Before you give up and start thinking about a short sale, you should invite cash offers and see if you can redeem the house or even make a profit. You can sell your house fast for cash.
This is the most efficient way to sell the house if you lack the fortitude or resources to deal with repairs after water damage when you don’t have time for them or the elongated sale process. You can walk away from the house with your cash in hand in under a week if there are no unforeseen delays.
Because they mostly don’t seek financing to buy the house, these private real estate investors can buy the house as is.
They are also not bound to insurance requirements, so they can apply more of their cash towards renovating the property and getting rid of every flood hazard to raise the property’s value. Their end goal is to flip it for profit.
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