You may have heard of this thing called FEMA or something about flood insurance rates rising, but do you really know what that means for you and your investment properties? Today, I’m going to tell you what exactly is going on and how you should prepare yourself for the coming blows.
Recently, Congress put into effect changes to the National Flood Insurance Program through FEMA (Federal Emergency Management Agency) called the Biggert-Waters Flood Insurance Reform Act of 2012. This reform “is a law passed by Congress and signed by the President in 2012 that extends the National Flood Insurance Program (NFIP) for five years, while requiring significant program reform. The law requires changes to all major components of the program, including flood insurance, flood hazard mapping, grants, and the management of floodplains. Many of the changes are designed to make the NFIP more financially stable, and ensure that flood insurance rates more accurately reflect the real risk of flooding.” (http://www.fema.gov/media-library-data/20130726-1912-25045-9380/bw12_qa_04_2013.pdf)
This law will bring changes to your flood insurance and could cause serious increases to your policy. Now, not everyone that has flood insurance will be affected by this reform. Those most affected by it are those that own subsidized non-primary residences. Those that own these types of properties especially in a special flood hazard area will see a 25% increase annually to their insurance rates until their rates reflect true risk. Others that will see a 25% increase include owners of subsidized property that has experienced severe repetitive flood losses, owners of subsidized business properties in a special flood hazard area and owners of substantially damaged or substantially improved subsidized property.
Your policy is probably subsidized if it is in a high-risk area, is “Pre-FIRM” which means it was built before your community adopted its first Flood Insurance Rate Map, or has not been substantially improved (which means it would need to be brought up to code).
The reform also addresses grandfathering of rates. If you were in compliance with the BFE (Base Flood Elevation) before they issues any Flood Insurance Rate Maps, but were below the BFE on the 1983s latest Flood Insurance Rate Map, your premium was calculated as if you were still in compliance with the BFE. This break will no longer be available.
Consider a policy that covered $250,000 for the building and $100,000 for the contents. If you are in an “A” zone (there’s a 1 percent chance of flooding in any year) and you were rated at the BFE and now you are a foot below the BFE, your premium will increase from $1,724 to $5,225. If you are in a “V” zone (there’s a 1 percent chance of flooding in any year and/or risk of coastal storm surge and wave action) your premium will increase from $8,603 to $11,583. The increase will be phased in at 25% per year for five years. If you had a discount removed as per above, you may face double jeopardy.
Many policy holders in these high risk areas are not happy, and you can probably see why. The states most affected by these changes are California, Texas, Louisiana, Mississippi, Alabama, Georgia, Florida (being the number 1), North and South Carolina, West Virginia, Pennsylvania and New York. Protests from some of these states are already occurring. One recently would be the Mississippi lawsuit against FEMA.
But how does this really affect you? Well this impacts home owners ability to afford to stay in the home ( you’ve got your mortgage, fire and hazard insurance, taxes, now flood insurance too). Not only is there added cost but lenders will require this coverage to stay out of default on your loan.
The fact is, people simply may not be able to pay that much per month in these high risk areas now. Demand will be impacted thus resale prices are effected. Property values could go down due to affordability for the first time buyer. The same thing applies to mobile homes and those buyers who are going to live in these homes.
Also, anyone buying a property they are considering as a rental or turnkey rental without proper due diligence might get slammed in the near future with a jump in holding costs due to flood insurance increasing. Not only that but keep in mind that there are more increase to come over the next 5 years that could cause their income generating property to break even or worse yet, turn into a negative cash flow property, thus being difficult to sell that income generating property to the next sucker.
The changes are coming whether we like it or not. The best way to prepare is to know if your home and investment properties are located in flood hazard areas and by talking to your insurance agent. Your insurance agent can help you take the necessary steps to soften the blows as more changes are implemented. Going forward, make sure you do your proper due diligence when investing in mobile homes as these FEMA changes in certain states will greatly affect your costs.