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.

Characteristics of Savannah, GA, “Quick Sales”

The average days on market (DOM) for homes in the greater Savannah, GA, real estate market is approximately 4 months. Occasionally, sellers who list their properties do not have the luxury of waiting for months. Given the current economy, it is common to have the prospect of a job relocation (or job loss) driving the selling timetable. As a result, sellers frequently ask Realtors, “What can I do to achieve a “quick sale?” From the period of August 1 – November 3, 2011, there were 1,102 residential closed sales in the Savannah market. Of those, 337 (30%) were on the market for 45 days or less. For purposes of this analysis, “quick sale” is defined as those homes selling in the 45 day or less time frame.

In response to the seller’s question, Realtors counsel sellers to consider a variety of tactics designed to facilitate a quick sale, including but not limited to:

-Make sure the home is in top condition before beginning the marketing process.

-Don’t underestimate the potential for curb appeal.

-Have the home pre-inspected. Most professionals advise against selling a
home “as is” if at all possible. http://theweeklybookscan.blogs.realtor.org/2007/04/04/book-review-home-makeovers-that-sell/

-Get an appraisal to confirm price positioning, especially for a unique property.

-Hire a professional stager to maximize design, flow, and buyer first impressions. Author Barb Schwarz reports that staged
homes tend to sell in 35 days or less. http://speakingofrealestate.blogs.realtor.org/2009/06/15/to-stage-or-not-to-stage/ In fact, statistics gathered by Stagedhomes.com shows that 94.6 percent of staged homes sell within 33 days, compared to an average
of 196 days for homes that are not staged.


Using raw data from the Savannah Multi-List Corporation (MLS), an analysis was conducted to determine if there were other characteristics or commonalities among quick sales in this market. Factors such as price, the presence and impact of foreclosures, and the geographic dispersal of quick sales were items deemed useful to assess. As part of the review, a series of assumptions were developed:

1. Distribution of properties sold in 45 days or less would be concentrated in MLS areas where the average prices have been trending lower.
2. The percentage of REOs would be high, i.e., over 50%, representing the “deals” of the market that buyers recognize and act upon with urgency.
3. Average prices of quick sales would be substantially lower than the average for the market area as a whole.

Using the data for August 1 – November 3, it became apparent that these assumptions did not reflect reality. Some interesting findings were noted:


1. The distribution of quick sales mirrored the distribution of sales overall for each MLS area. In only one area, Bryan County, the quick sale percentage was slightly (about 2%) higher. That means that there isn’t a particular area in the greater Savannah
real estate market that has higher than average potential for quick sales.
2. Contrary to expectations, the REO percentage of quick sales equated to half the sales in Downtown, Midtown/Eastside, and Bryan County. In other market areas, the percentage was variable and significantly lower.
3. Quick sale “discounts” in price did not exist in Midtown/Eastside or Southside. In other words, quick sale prices were about the same as the average sale prices overall. Even though the aforementioned areas had the highest percentage of REO sales, the prices did not reflect huge buyer savings. Two factors could be at work: a) the lowest priced foreclosures may have already cleared the market; or b) the banks have begun to agree to very aggressive initial pricing in order to clear their collective balance sheets of the assets. The initial assumption of a lower price or discount facilitating a quick sale appeared to hold true in The Landings,
Westside, Effingham, and Bryan, all of which had quick sale average sale prices at 9 to 13% below the area’s average. Incredibly, the quick sales in the downtown market segment were almost 48% below the average sales price for that area.

What do these findings mean for sellers?

-In most market segments, sellers have a strong likelihood that a quick sale can be achieved, even when competing against
foreclosure properties.

-A seller in the Downtown market is going to be fighting an uphill battle for a quick sale if the fight is limited to price. Downtown sellers need to consider other elements of the transaction to make their properties more competitive, i.e., pre-inspection, warranties, impeccable condition and/or staging, or closing cost contribution.

-For sellers in other Savannah area market segments, achieving a quick sale can be facilitated by setting a price up to 10% below market average to open up the highest possible buyer pool. This is especially true for market segments with historical overall higher price points.

For more information about the local real estate market, go to www.affordablesavannahhomes.com or contact me at VLinscott@comcast.net to assess your specific property need.

Savannah Housing Inventory Shows Improvement

Over the last three years, the real estate market in and around Savannah, Georgia, has mirrored the volatility of the national trends. One key statistic to measure market recovery, or lack thereof, is the "months' supply of inventory." According to the National Association of Realtors (NAR), the U.S. housing inventory stands at 8.5 months, based on its 10/20/11 press release. This means that the top twenty metro markets studied have shown considerable improvement and stand poised for recovery. In fact, NAR cites that price stabilization occurs at around 7 months' supply. Nationally, the news is promising. However, as any Realtor will comment, "all real estate is local." So, how is Savannah performing?

The last three years have been the most volatile in real estate. Looking at local statistics sourced from Savannah Multi-List Corporation data, the local Savannah real estate market areas continue to show a high degree of variability. In this recent past, both the Historic District and The Landings on Skidaway Island were hit hardest in terms of standing iinventory (and price). Significant changes in price and market timing for new listings have resulted in improvement in those sub-markets, but both areas remain at over twice the "stabilization" target. What does this mean for sellers? For the foreseeable future, there needs to be a continuing focus on pricing strategy. Only 16 to 18 homes are selling per month at The Landings and Historic District, respectively. Therefore, understanding what it takes to be in that number will be incredibly important. Certainly, that's what a good Realtor will bring to the table.

The perimeter sub-markets of Savannah (Pooler, Bryan, and Effingham) are outperforming all other market segments. All have standing inventory of less than 10 months. Certainly, Bryan County has benefitted from changes in military personnel. Pooler has experienced the benefit of having the highest concentration of new homes available. Key drivers of the reduction of inventory in Effingham County are less discernible. The major result for all areas, though, is clear. Prices will continue to stabilize as these sub-markets lead the way to an overall real estate recovery for Savannah. What does that mean for buyers? For those who want to live in the Savannah suburbs, a sense of urgency should govern home shopping. Home bidding will be more competitive and buyers will pay closer to list price for their selections.

The remaining sub-markets of Savannah, i.e., Midtown, Southside, and Islands, still have a way to go, but the statistics are promising. "Deals" remain abundant on the Southside. A good percentage of Midtown homes are being purchased with cash, a sure sign that investors recognize the overall attractiveness of the real estate market, and perhaps more importantly, realize that now is the time to buy. Islands sales are relatively strong, with more than 30 homes selling each month, but more improvement is needed. Negotiations in this sub-market remain more intensive.

For more information about the Savannah real estate market, visit www.affordablesavannahhomes.com.