Flood Zone Adjustment

[PhiloFarnsworth]

I am presently completing what is turning out to be a hellish 2 unit converted old farmhouse. It sits, like most of its comps, on a busy secondary road but behind it is a really pretty park to one side and a bucolic grist mill and dam to the other. The grid, before adjusting for location shows a value of $165k to $175k (the contract is for $165k). But, the subject apparently sits in a flood zone. And what a flood zone. After asking the listing agent (the seller's son) if there was any insurance required for its apparent location in a flood zone (something not noted on the MLS) he offered, yes, $2960 per year.
After looking in vain for a good market derived adjustment, I am coming to the conclusion that, given that this is an investment property, why would I use anything other than a reverse amortization method for this? Then I saw that this would call for a nearly $40k adjustment. There goes my nice, simply report. Here comes a bunch of very pissed people. What gets me is that both realtors told me that it was ready to close 3 months ago via FHA and the FHA appraisal came in at $180,000! Maybe it was appraised subject to being raised up eight feet.
Anyway, in the absence of credible market derived adjustments for a flood zone, would everyone use what an investor would realize if they were to invest that $2960 in more real estate?

 

[Michigan CG]

The principal of substitution comes into play here. If I have a budget of $1,500/month for my house payment I can buy a property for say $200,000 including P and I (ignoring property taxes and insurance). If there is an identical property that requires $200/month flood insurance I have reduced my buying power by $200/month. Let us say that it costs $6/$1,000 to borrow the money I have to spend $200/month on flood insurance that would go to P and I so you have lost $33,000 in buying power. Adjustment is $33,000 for this example.

 

[Meandering]

Investors are not usually that short sighted. Flood insurance rate hikes will happen.

Compliance Update
Consumer Compliance Outlook > 2015 > First Quarter 2015

Lender Force-Placed Flood Insurance
On March 29, 2013, the Federal Emergency Management Agency (FEMA) issued Bulletin W-13017

to announce a change in the waiting period requirements for lender force-placed insurance using the Mortgage Portfolio Protection Program (MPPP). Under the National Flood Insurance Program, when a standard flood insurance policy is purchased, it is subject to a 30-day waiting period unless an exception applies.1 This rule addresses the problem of adverse selection (i.e., that some property owners will not purchase insurance until they believe a flood is likely to occur). Prior to this bulletin, the exceptions to the waiting period included policies for the initial purchase of flood insurance coverage in connection with the making, increasing, extending, or renewing of a loan and lender force-placed insurance. With the issuance of this bulletin, MPPP policies became subject to the 30-day waiting period.

Lenders using the MPPP to purchase force-placed insurance should consider the effect of this change on their policies and procedures.2 Because MPPP policies now become effective 31 days after the date of purchase, lenders should factor that waiting period into the date on which they purchase the MPPP policy. It is important to note that FEMA Bulletin W-13017 applies only to policies purchased through the MPPP. Many lenders use private flood insurance policies that do not have waiting periods for force-placed insurance and, therefore, would be unaffected by this MPPP change.

As lenders evaluate the potential impact of this FEMA announcement on their policies, they should also consider another important change regarding force-placed insurance. On July 6, 2012, Congress enacted the Biggert-Waters Flood Insurance Reform Act of 2012 (BWA). Section 100244(a)(1) of the BWA permits lenders to purchase force-placed insurance beginning on the date that a lender determines a property lacks coverage or the amount of coverage is insufficient, and it permits lenders to pass the cost of that force-placed insurance along to the borrower, including any associated fees. The federal banking agencies and the Farm Credit Administration discussed this in the Interagency Statement on the Impact of Biggert-Waters Act

, dated March 29, 2013.

Thus, if a lender determines that a loan in its portfolio is secured by real property in a special flood hazard area and does not have flood insurance or have a sufficient amount, the lender does not have to wait 45 days to purchase the MPPP policy and risk a gap in coverage.

https://consumercomplianceoutlook.org/2015/first-quarter/compliance-update/

Every change in value can warrant additional flood insurance coverage, and can be forced placed by the lender who gets to charge extra fees plus the cost of the insurance to the borrower.

Think lenders will pass up this opportunity?

.

.

 

[Tim The Enchanter]

I almost never look at the flood zone until I'm writing the report.
Can't recall ever seeing one in a flood zone.

Looked up tomorrows property, and in the last 10 minutes before calling it a day, looked up the flood map.
It's in a flood zone, of 1 or 2 foot depth I think. I think, hmm OK. Then I see this thread.
Ahh, geez, I guess I need to consider the ramifications.

Hopefully my saving grace will be that the hood flood map looks like a lot of canals. I can hope.
It also backs active RR track and busy traffic. MLS says it need repairs to foundation, plumbing, electric, pool.
Lord have mercy.

 

[Meandering]

FEMA FACT SHEET

How April 2015 Program Changes Will Affect Flood Insurance Premiums

Flood insurance rates and other charges will be revised for new or existing policies beginning on April 1, 2015.
In addition to insurance rates, other changes resulting from Biggert-Waters and HFIAA will be implemented that
will affect the total amount a policyholder pays for a flood insurance policy. Highlights of some of those changes
follow. For full explanations and guidance, see WYO Bulletin (W-14053) and the Flood Insurance Manual.
The changes taking place in April 2015 include an increase in the Reserve Fund Assessment, the implementation of an annual surcharge on all new and renewed policies, an additional deductible option, an increase in the Federal Policy Fee, and rate increases for most policies. Key changes include:
. Implementing annual rate changes that set rates using rate-increase limitations set by HFIAA for individual
premiums and rate classes:
›› Limiting increases for individual premiums to 18 percent of premium.
›› Limiting increases for average rate classes to 15 percent.
›› Mandatory increases for certain subsidized policyholders under Biggert-Waters and HFIAA.
. Increasing the Reserve Fund assessments required by Biggert-Waters.
. Implementing annual surcharges required by HFIAA.
....
. Implementing a new procedure for properties newly mapped into the Special Flood Hazard Area (SFHA) and
existing Preferred Risk Policy Eligibility Extension (PRP EE), a cost-saving flood insurance coverage option
for property owners whose buildings were newly mapped into an SFHA. The premiums will be the same as
the PRP, which offers low-cost flood insurance to owners and tenants of eligible residential and non-residential
buildings located in moderate- to low-risk areas for the first year (calculated before fees and assessments) to
comply with provisions of HFIAA.
. Reformulating expense loading on premiums, reducing the expense load on the highest-risk policies as an
interim step while investigating expenses on policies as required by Biggert-Waters.
The changes will take effect on April 1, 2015.

and on and on.
http://www.FEMA.gov/media-library-d...fa95a/FEMA_HFIAA_OctoberBulletinFS_100814.pdf

If your subject is newly identified as being in a flood plain, it's benefiting from low introductory rates that will be increasing.

You need to know more from the owner about the premium, proposed increase, and how long it's been in a designated flood plain.

.