As with life, you can’t really predict anything. No natural disasters could save you from the possibility of acquiring damage. That is why it is important to think about insuring your properties in case calamities happen. Keith gets down to the details about flood insurance – what you need to know about it and how to go through it. He shares some personal experiences with Harvey that will give you time to reflect on the possible consequences you may meet along the way. Furthermore, he gives a great overview by covering flood insurance from the perspective of lenders as well as the state.
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The Pros And Cons Of Getting Flood Insurance
Flood insurance is a topic that’s near and dear to my heart for a few reasons. Number one, my wife and I went through our own flood insurance claim on our primary residence back in April of 2009. No named windstorm, no Harvey, no Rita, none of that. Just a freak springtime thunderstorm that sat over West Houston and dumped a tremendous amount of water. That’s one reason. The next reason is the flood policy through the National Flood Insurance Program. You’ll buy it through State Farm, Farmers, Allstate or whoever, but it’s relatively cheap. They sell the policy and they will administer any claims. It’s all backed by FEMA, the Federal Emergency Management Agency. That’s why it’s cheap. It’s a government subsidized. This is one case where as an investor you have to take advantage of the subsidy and the relatively low price it would cost your borrower to have the flood insurance.
In my daytime and my real life, not just on TV, I’m a licensed insurance adjuster. I hold property casually, that is. I hold licenses in four states and reciprocity through a whole bunch of others. In the last few years, I’ve adjusted several commercial and industrial flood claims whose settlements total in excess of $160 million. I’ve seen some flood claims and what it can do and have handled a lot of other people’s money during that process. The moral of the story is after Harvey, I now demand flood insurance on all of my notes. People say, “It’s not in a floodplain.”
Back in 2009 when my house flooded, we were fortunate enough to have good neighbors across the street from us who only took on a little bit of water in one corner of their room. We had a young baby at the time. The neighbor said, “Come on over.” We waded across the street. We were talking with the neighbors and they asked if we had flood insurance. I said, “Yes, I’ve always had it. My dad beat that in my brain. If you’re going to live in the Houston area, you better have flood insurance. There’s no getting around it.” I asked them if they had flood insurance and they said, “No, we don’t because we don’t live in a floodplain.” I pointed to my house across the street and I said, “Neither do we.” If you live in a low-lying area or near the coast or river, you should go ahead and expect that those flood policies are going to cost more. The likelihood of a 100-year event or a 50-year event damaging a property is pretty high. If you’re not in a flood zone, it is relatively cheap and you can go to the National Flood Insurance Program to find out more or call your agent and then talk to them about it. I’ll treat this like any other real estate investment. We bought the house in early 2006. It was 1,500 square feet. Nice little ranch-style home in Spring Branch area of Houston. It had an 8,500-square foot lot, 1,500 square feet of living space. We paid $120,000 for it. We lived in it for a few years before we flooded.
That's the beauty of insurance; whether it be flood property or not, funds do not matter as a lender.
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During those three years, it costs $300 every year for flood insurance policy. We had it at closing. I demanded it at closing and kept renewing it every year. By the time we flooded, I had paid $900 into flood insurance premiums. At the end of 2009, after the house was all rehabbed and remodeled with the building and the contents. My total flood insurance claim was $95,000 is what I got out of my claim. That didn’t cover everything but it did allow me to spruce up the house. I became the general contractor myself because I do have a construction background. I got all the sub-contractors, the electrician, the HVAC, sheetrock, painting and flooring. I put in some nice hardwoods, some four-inch oak with a nice dark stain. I let the wife choose the pallets in all the rooms and all that fun stuff that goes along with remodeling a house.
We held onto it for a few more years and we were able to sell it for $315,000. I consider that my best investment I’ve ever made. When we flooded, I had already remodeled the three bedrooms in the hallway myself. All that had to be redone. At least with the National Flood Insurance Program, I had it through Allstate at the time, it took care of it. Let’s look at how it happened. It starts raining on a Monday night. About [4:00] AM on Tuesday, I see little geysers coming up between the hardwoods. I say, “We’re flooding.” It was on. After the flood waters went down, I notified my agent and I got an appointment with an adjuster. He came out in a typical fashion. He wasn’t too keen on repairing much more than about a foot of damaged sheet. He was under the impression that I didn’t get much water in the house. We had a few inches. Once he found out that I was in the business, it became a little easier to negotiate with him. I was able to speak his language to get a little more out of it, which I thought was justified. It’s not like I was adding onto the house or anything.
We had put in some nice material in the bedrooms and the hallway. He had originally scoped it down like the cheap builder’s grade stuff. A little back and forth we got it $95,000, totals about $65,000 in the dwelling. They send me a check for $5,000 to get going right off the bat. That gets the dumpster in the driveway. I get my friends, the beers, the pizzas. I go cheap because I’m the general contractor in real estate investors. We’re notoriously cheap people. We just rip it out and thank you to Erin, Christian, Cabot, James, Matt, Andrew, Michael and Nian as well. Those guys helped me out on the demo. They had a lot of fun. It’s always fun to go to someone else’s house and beat the crap out of it and rip stuff down without any consequence.
Fast forward a few months, I totally remodeled. I get all-new HVAC, all new ductwork, new lighting, recessed cans, granite in the kitchen, granite in all the bathrooms. We went with porcelain tile. I removed the tile myself and took the savings and put it into porcelain rather than ceramic tile. That’s a little thing I recommend in areas like Houston or the Gulf Coast where you have clay-based soil, we call it gumbo soil. When it dries, it shrinks and it cracks. That’s why you’ll see cracks in the ground, and then when it’s wet it swells up because there’s a lot of clay. The porcelain won’t prevent your tile floors from cracking as your foundation shifts but they’re a little more durable, just a little tip to the wise out there.
They gave me a $5,000 check right there. They put in for it and I got it a few days later. That got me going. I went to my parents, I said, “Let me borrow some more.” I thought I’d get the money, make the repairs and then get paid back. Wells Fargo at that time had purchased my mortgage. That first check for $5,000 went straight to me. That was the get going. My first draw was written to me and Wells Fargo. They were the mortgage holder on my policy. They didn’t require flood insurance, they’re glad I have it. The mortgagee is the bank, Wells Fargo. I get the check. I’d have to send it to them. They would endorse it. They send it back to me. I would endorse it and then be able to put it into my account to pay for the repairs. Each step of the way there was an inspection. They sent out an inspector, it didn’t cost me anything. At least nothing outside of what I paid my monthly interest and whatnot. The inspector came out and saw that the work had indeed been done. It was good to go. When I finally had the inspector to come out, we were about 93%, 95% complete. All we had to do is basically paint and we were done, so they released all the funds to me. That’s the beauty of insurance, whether it is flood property, it doesn’t matter. As a lender, I demand property and flood insurance on every property. It’s like a homeowner’s policy or a landlord’s policy, a dwelling policy at a minimum.
Wherever you’re reading this from or whatever country, it’s good to have the property insurance. If you’re anywhere near water, even if you’re not, it’s smart to do so. If I’m loaning to a real estate investor, let’s say he’s going to flip a house. He buys the house and I loan the money. I don’t loan all of it, I just loan what he needs. As he does his work, I do the draw and that gets inspected just like the bank. That way I’m not loaning all the money out at once. I don’t want to have paid more for a house than it’s worth at any point in time. Give the purchase price then you do the draws. The banks do the same thing when a claim comes along. They want to make sure that asset, that property that’s backing their investment is indeed going to be fixed up and they have that control, so do you as the lender. You’re the mortgagee. You’re the mortgage holder or the lien holder. It’s part of your paperwork that it’s a requirement to have property insurance, title insurance and flood insurance. If they don’t carry property or flood, that’s grounds for foreclosing. You can default on the note.
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As the lender, you can put policies against that asset that’s backing your investment. Whereas in Wall Street, there’s no direct insurance policy. There are options. There are other ways to hedge your bets, but you can’t go to a Wall Street broker and say, “I want to buy an insurance policy that my IBM stock doesn’t go down.” It doesn’t happen that way. This is yet another reason why I love private lending and investing in notes because there are insurance policies specifically to protect that asset. I didn’t always require flood insurance but after Harvey, I sure did. That was because over the last few years in Houston, we’ve had some pretty horrendous floods. The Labor Day flood, the Tax Day flood, Harvey and each time it seems like parts of town that had historically never flooded were getting flooded. This goes not just for Houston but anywhere, particularly in Houston because of the population density, but along the coasts in general. It’s not a question of if, it’s when now. Is it 100 years from now? Five years from now? A thousand years from now? Mother Nature doesn’t care.
One of the beautiful things about the National Flood Insurance Program is it’s cheap. The national average is about $700. Coastal areas, low-lying areas, all that’s included. If you’re not in a floodplain, you’re not going to pay that much. I was paying $300 a year in ‘06, ‘07 through ‘09. In ‘10 it went up to $360. It went up very little even though I had a claim. I expected it to go up since I had a claim. If they’re flipping the house for six months, they can get about half that money back. They can get half of their premium back. They have to show that the house has been sold, etc. There is a process. If they’re going to balk at that, it might not be that good of a deal especially if you already are in a low-lying area behind a levee, behind a damn, near a canal, lake and river. To me, it’s a no-brainer to add to it. You can say, “You’re a Houstonian. You’re living in Houston. You’re in a crap area for floods.” “Yes, you got me,” and this has definitely colored my vision on flood insurance and especially as a lender.
At the end of the day, it’s my money. It’s my investment. It’s my retirement, my rules. I’m happy to walk away from anyone who’s not going to get flood insurance and people have balked at it. That’s their prerogative. It’s my prerogative to decide I want to have it on all my loans or the properties that I loan against. It’s their prerogative to say, “I don’t want to use that guy because it costs me too much money.” That’s fair. I don’t have any problems with that. If you’re lending money, I highly recommend you demand flood insurance from your borrowers. A lot of people think that homeowner’s insurance covers flood and it doesn’t. That’s why there’s a separate program that’s backed by the federal government to subsidize the premiums. It might cover your pipes, you have to look at it and you have to see to determine. One thing I can categorically say it won’t cover is a flood that comes from rising waters of any stream, pond, lake, ocean, sea, any body of water that comes up. If your street floods, backs up and comes in, homeowners will not cover the damages for that. It will not be a covered claim under a homeowner’s policy. Demand flood insurance. I’m sure I’m going to anger a lot of investors by saying it, but I’ve already told you my reasons. My money, my rules.
I’d to like to thank you for reading and sharing your most valuable asset with me, your time. I’d like to remind you to go over to PrivateLenderAcademy.com to get on the waiting list to find out all that fun stuff. I hope I can launch it in January of 2019. Please rate and review. Go to iTunes and leave me a rating and review. In your review, go ahead and promote your business. If you’re a wholesaler, you’re a landlord, you have anything to promote, you’re a dentist, put it out there in the review. Periodically, I check them. Please go do that. Connect with me on Facebook, Instagram, Twitter, LinkedIn and BiggerPockets. I’m trying to increase my presence on the social front. It’s a little difficult, but please reach out for me there. I wish you happy and prosperous lending and investing. I’ll catch you on the next episode.
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