The New Stigmatized Property: Homes in a Flood Zone

A couple of weeks ago, I had a real estate closing scheduled for a great property in a southside Savannah neighborhood.  Inspections were completed, the loan was approved, and a week before the closing, my Buyer asked me to get him out of the deal.  It was the first time that had happened in 13 years.  Why did we terminate?  Flood insurance. 

What happened?  The neighborhood is landlocked.  There are no rivers, streams, or even lagoons in sight.  However, the City has a drainage canal running through one section of the subdivision near the home.  During the “due diligence” period, the Buyer researched the canal.  We also searched available on-line resources about the flood zone.  The Seller did not have flood insurance, but we soon determined that the home did indeed have a small portion of the back yard (not the house) in a designated AE flood zone.

The flood insurance premium for homes in “high risk” zones, i.e., those designated with the letter A or V, are based on a building’s elevation above, at, or below the Base Flood Elevation (BFE) set for the zone.  Generally, the higher the building is above the BFE, the lower the premium.   To determine the exact premium (set by FEMA), a Flood Elevation Certificate, prepared by a licensed surveyor is required.  The process of finding or generating a Certificate is not difficult.  However, the rules of the flood insurance game changed with the Congressional passage of the Biggert-Waters Flood Insurance Reform Act of 2012.    

 

Although the B-W Act was passed last year, the implementation is just now rolling out.  In a nutshell, Buyers can no longer assume an existing homeowner policy or “grandfather” a policy.  In fact, the Act will eliminate the subsidy for flood insurance that has been provided by the federal government for years.  On October 1 of this year, over one million US policies will be subject to 25% PER YEAR premium increases until the premiums are increased to full risk rating.  These increases can range from a few hundred to tens of thousands of dollars per year.

In the case of the closing that was terminated, the Buyer was facing a 2013 policy premium of $800/year, with annual increases until the premium grew to $5,000/year.  In other words, his mortgage payment was destined to be $800/month but, ultimately, the flood insurance would add another $400/month, destroying the affordability of the home.  The loss of the home was tough on the Buyer, but the prospect of a potential future foreclosure due to the increasing expense of flood insurance would have been tougher.

In the Savannah area market, approximately 20% of the homes actively listed require flood insurance.  What should a Seller do?  Those who live in a flood zone may now be holding “stigmatized” property, with Buyers ruling those homes out of consideration.  Many of the desirable waterfront properties in Savannah may languish on the market indefinitely or reduce prices to achieve some measure of competitiveness.

Sellers should immediately contact their insurance providers and get more details about how premiums for their homes will change.  Many Sellers do not have updated Elevation Certificates that meet today’s requirements for writing a new policy.    In the Savannah market, this will become a hotly negotiated term of any future transaction.

Occasionally, changes in the law and federal programs have resulted in unintended consequences.  On the heels of some measure of local Savannah area real estate market improvement, the changes associated with the National Flood Insurance Program may cause setbacks.  If you need more information on the changes, or need a referral to knowledgeable insurance providers or surveyor, contact me for assistance.