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uninsurable = diminished value??

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Frank Bertrand

Junior Member
Joined
Aug 21, 2002
Professional Status
Certified General Appraiser
State
Pennsylvania
cost of homeowner's insurance skyrockets in some areas, and with some homes it is downright un afforadble.

has anyone ever seen this and how would one adjust for "insurability" factor if there is such a item??

If one has to discount the perceived value to close a sale because home owners insurance is prohibitive (say the insurance going from $600 to $2200 in one yr)
this would effect your opinion of value, yes?
 
In the absence of any sales of similarly affected properties from which to measure the effect of this, one possible way to address the extraordinary cost of home ownership due to the cost of insurance would be to estimate the additional cost of insurance above the typical cost for the area and then capitalize the annual cost difference at an appropriate rate to arrive a discount amount for the affected property. This is consistent with the principal of substitution and would be argueably reflective of the actions of "an informed buyer acting prudently in his/her self-interest [paraphased]" as stated in the Definition of Market Value.
 
Frank, ....You may not have explained exactly what is causing that increase from $600 to $2200 per year. Was there a local flooding episode, a broad area of forest fires, some subsidence from old coal mining in your area ? We have had substantial forest fire effects upon insurance for some homeowners. Most of the intensity of those ramifications were for pending transactions awaiting the announced 100% control of the fire and an extinquishing of all front lines of advance. I just finished a report on property very close to that action. The effect on values from July to now is quite amazing. Why ?...because people do not want to re-experience those chaotic weeks of being out-of-house and not knowing how you fared...and for sure not getting in that same situation again. My subject neighborhood was 2 and 1/2 mile from the line, evacuated, but not directly burned. What I asked about in calling on all 5 sales and the one listing was about insurability at time of sale. The reply was that folks "got" the coverage to complete the purchase...and the 5 sales were all conventionally funded. I expected perhaps more cash purchases in lieu of insurance, but they got the policy written. As for costing 3 and 2/3's as much, I do not recall hearing comments like that, but the comments from agents were definitely that "we did not expect to list so long or drop our prices so much". Low demand, ample supply, prices come down. The cause of the increased insurance in your case may affect the monies that are part of the "down" payment to get the house, and to re-coup that "loss" a buyer just may demand the home price come down by $1,600. Maybe, they get the seller to pay that first insurance premium as the needed concession. If so, I guess it could be legitimately recorded as such.
 
What you have is economic obsolscence and it would be reflected in both the cost approach and the market approach grid. If all the comparable are similiarly affected then no adjustment will be necessary in the grid...if not, you will need to adjust it. Since there is no line item for this, I would use the bottom line on the grid and make it economic obsolscence.

We are seeing some of this in relationship to the Hayman Wild Fire burn area. Insurance companies are either excluding properties in high risk areas or making the cost of insurance prohibitive. What is a good adjustment? I honestly don't know since there is insufficient data to support such an adjustment at this time.

One method, which has been accepted in the past for unusual financing costs, is to compare the cost of insurance in other areas and make an adjustment for the average length of ownership.

Example: Typical insurance rate is $1,000 per year. Your property has a rate of, say, $1,600 per year. The average length of ownership is, say, seven years. 7 x $600 = $4,200 or rounded to $4,000. If you were to do this and explain why and how you arrived at your adjustment it most likely will be acceptable to your lender and underwriter. Ideally you should find comparables and do a pair analysis to determine the "market perception of value".

Just remember...if you take economic obsolscence in the grid, it should be reflected in the cost approach and visa versa.

I wish you well.
 
Thanks folks for the replies. Mike I think hits the bull's eye with
economic obsolescence. In some states I have read that it is getting harder and harder to get any type of HO. My sister in Fla had state farm for years, then they get up and leave, making her go to an out of state company. And she has never had a claim in 10 years. I suppose entire areas, say hurricane, fire or flood could also be affected by this event.
 
Homeowners insurance has jumped as much as 200% in 1 year. There is a premium charged if there has been a repaired claim for 3 years. What this does is change the affordability of the home. The affordability is based on loan cost plus taxes and insurance. If the insurance goes up $150 per month, that changes whether or not a buyer can afford a home. Now, if this is a general issue, it does not affect value per se but may affect marketability, which would show up over the long run. If, however, there are companies that will write a policy at lower rates but Bob the Borrower will not qualify for said policy (credit scoring, etc), then it is not a market issue but an individual issue.

Roger
 
sometimes issues can be previous claims. I've also been told there is some kind of rating system called C.L.U.E. but I don't know what it stands for and it determines the likihood of a claim. I suppose that would be earthquake fault lines, hurricane or tornado historical paths. etc. Or even the builder of the home, that gets a reputation for shoddy work and more claims arise from lackluster repairs, etc.

I need some help on grasping this issue. because back East here the only thing we have to contend with on a regular basis is winter with ice storms and such. (We've had our 500 yr flood back in 1972 with a hurricane and tornados are rare so we travel to them instead of flee, and our earthquakes are about 4.5 Richter ;o)
 
The CLUE system is a "claims alert" process that is used by insurance companies to identify higher risk properties - those that have had a claim filed. In many cases, when an individual home owner files a claim, the insurance company drops the policy and informs other insurance companies via the CLUE system. This makes it difficult/nearly impossible to obtain insurance on the home in the future at any reasonable price. (If a home is uninsurable - is it marketable? Think about that - where you gonna get a loan?).

Insurance companies invested your premiums in the stock market during the past decade after taking a bath in the REITS during the S & L meltdown - they ain't been doin' real good in the profit department for awhile. I believe that they are really starting to feel the pinch and are looking for any way to reduce claim payouts while increasing premium income.

Oregon Doug predicts: This will become a real hot button issue soon and a really good business opportunity for the astute residential appraiser. (who better to quantify "loss of value" than an appraiser.) Get educated on mold 'cause its gonna be involved.
 
So, if a home--for WHATEVER reason--can't get homeowners insurance, it still has value, but to a cash buyer who discounts the value in line with the perceived risk of its uninsured satus.

It seems I may have to add a line in my owner's questionaire to ask if the home has homeowners coverage.

I can see where this is considered economic obsolesence in that the opinion of value should reflect the discount. I think it would be next to impossible to field check the amount of discount due to the lack of verifible data on insured vs non-insured matched pairs. So the amount to discount would be generated by formula.
 
I had posted this elsewhere, but it seems to fit here also;

insurance company's are now Rating HO policy's via "credit reports" also, it has come to pass that over the years now, they have been able to link- that there is a direct correlation between the two; IE: lower credit rating; below middle income earner, have been noted to inflate claims made, thus tampering with the layout of capital for those claims.

alternatively, this has been compounded by 9/11 and the drop off of airline product now being used, this all leads to the capital increase in all insurance fee's; supplemental changes that are geared to fill the void. If you have a claim, get three opinions to cure the problem and don't go nuts, your carrier will or should not drop you and possibly may not even increase your rates. Under this scenerio honesty may be the best policy :D

8)
 
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