Since Hurricane Harvey, Houstonians have had hundreds of questions about flood claims, building codes and buying up water-damaged properties as future investments. Li-Hsi “Leash” Yu, president of Agency Yu, Inc.* in West University, recently came to the Greenwood King office on Kirby Drive to talk about flooding (and its aftermath) from the insurer’s point of view. In the course of the hour, he fielded dozens of questions from realtors.
Cameron and I were so impressed by Yu’s knowledge and the way he explained complicated concepts that we followed up with even more questions of our own. Here’s what Yu told us.
My home flooded in Hurricane Harvey. How do I maximize my flood claim?
When you file a FEMA flood insurance claim, the adjusters who arrive are paid based on the amount of the claim. So, it behooves them to adjust your claim properly and generously.
Even though they are incented to not nickel-and-dime you, they oftentimes miss things because they just don’t or can’t spend adequate time to accurately assess the damage to your home and its contents. To maximize your flood claim on your home, it would be prudent to find a reputable contractor who can give you a second opinion on the cost to replace the damage to your home. If the contractor’s estimate is higher than your flood adjuster’s estimate, and if the contractor’s estimate is within the scope of the covered flood loss, your adjuster should have no problem accepting your contractor’s higher estimate.
To maximize the flood claim for your contents, create a detailed spreadsheet of all of your damaged belongings. Most adjusters will tell you, “If it touched water, we’ll pay you for it.” Consequently, if it touched water, put it on the spreadsheet. You will need to include the item description, when you purchased the item, the cost new of the item and a link to Amazon’s website validating the cost. Pictures are helpful (especially for high-dollar items), but not always necessary.
Remember, FEMA’s flood policy will only pay you replacement cost minus the depreciation incurred on the items you are listing. The newer the items, the less the depreciation. Obviously, the more personal property that is damaged, the more your claim will be, so list everything that was damaged … socks, shoes, handkerchiefs, everything. Don’t wait for your adjuster’s instructions to complete this list. Start as soon as possible, because it will take you some time to create this list.
I received my insurance check. Now what?
If you do not have a mortgage on your home, you are free to do whatever you’d like with the check. Spend it to renovate your home, or take a vacation if you’d like. There is no law dictating that you must use the funds to fix your home. But if you ever sell your home, you’ll definitely have to disclose that you received insurance proceeds but didn’t fix your home.
If you do have a mortgage on the home, the check will have your name and the mortgage company’s name on it. You will have to talk to your mortgage company and ask what their process is to cash the check. Most mortgage companies will hold the funds until you have proven that you have fixed their collateral (i.e. your home). If you choose not to fix your home and/or walk away from the home, the mortgage holder could keep your insurance claims proceeds and apply it to the balance of your loan.
Should I renovate, build new or walk away from my damaged home?
This is a very tough question that only the homeowner can answer, but I will try and provide some guidance here so you can decide for yourself. The answer to this question relies on several factors. The main factors are: Your home’s flood zone determination, whether your home is in-compliance or out-of-compliance with building codes, and whether or not you have a mortgage on your home.
If you are in Flood Zone X (low-moderate risk areas), you should be free to renovate the home without worrying about permitting, so this may be your best option regardless of whether you have a mortgage.
If you are in the High-Risk Zone and your home is built in-compliance, you are also free to renovate without worrying about permitting, so renovating may be your best bet.
If you are in the High Risk Zone AE and you are not in-compliance, your lender will likely dictate your options.
If your home is out-of-compliance with the local building codes, you may have to raise the elevation of your home (yes, physically raise your home) before the city will issue you permits to renovate your home. I have seen quotes to raise homes in the range of $75,000 to $500,000, of which only $30,000 may be reimbursable to you if you file an “increased cost of compliance” claim on your FEMA flood policy. The rest of the funds to raise your home will have to come out of pocket. Your costs really start piling-up when you add this to your current mortgage, other repair costs and additional rent payments if you can’t live in your home due to flood damage. When you are faced with this out-of-compliance situation, all of the options – building new, renovating, walking away – must be responsibly considered.
Can I insure a damaged home?
A flood-damaged home, or a home in disrepair, is uninsurable with traditional homeowners insurance policies until the damage is fully remediated. Cash buyers or buyers using investment/construction loans can purchase a damaged home and place a “builder risk insurance policy” on the home until it is fully renovated.
A builders risk insurance policy is designed for structures that are under construction or renovation. It covers the dwelling and the improvements being made to the dwelling. It is a good tool to insure homes under renovation, but lenders providing traditional home mortgage financing on homes will not accept this as proof of insurance. In order to insure a home and to secure a traditional 30-year mortgage on a home, the home must be free of disrepair.
Please briefly explain the base flood elevation, an elevation certificate and “compliance.”
The base flood elevation (BFE) is the elevation (above sea level) where there should be rainwater if it rains 14 inches in two days. This is otherwise known as the 1 percent elevation – which means there’s a 1 percent annual chance that it will rain 14 inches in 2 days. A BFE is established only in high-risk flood hazard areas (Zones AE, VE, etc.).
If your home is in Zone AE and is built at least one foot above base flood elevation, the home is considered “in-compliance” with building codes. If a home is not at least 12 inches above BFE, the home is “out-of-compliance.”
How do you know how far above sea level your home sits? The only way to know the elevation of your home is by obtaining an elevation certificate. An elevation certificate communicates the elevation (above sea level) of the home and compares this elevation with the BFE. You get elevation certificates from a surveying company — the same folks who do surveys on your home. My vendor of choice is Survey One. (If you call and tell them I referred you, they will do it for $300.)
Are the flood maps changing?
Maybe. FEMA and the flood control districts are constantly reviewing flooding characteristics in flood-prone areas. After every major flooding event, there is always a necessity to review the effectiveness of the current flood maps. This process could take years.
Will insurance rates increase?
Yes. I would conservatively anticipate double-digit (10 to 20 percent) increases for home and auto policies and high single-digit increases for flood insurance.
How can I find out if a house has ever flooded?
FEMA provides a flood claims report for every property eligible for FEMA flood insurance. This report will communicate any flood claim paid on the property since 1978. If the property owner has flood insurance on the property, this claims report is sent to him or her at the annual renewal of flood insurance.
If the property does not currently have flood insurance in place, the property owner can request this FEMA flood claims report by faxing (yes, faxing) a request to 301-209-7049. This request must include the property owner’s full name, address, phone number, mailing address or fax number, a statement proving that the requestor is the property owner, and the signature of the owner. Once FEMA receives this request, they will fax or mail the claims report, typically within three days.
I want to buy a flooded house as an investment. What do I need to know?
If you are buying a flooded home and intend to bulldoze and build new, please obtain an elevation certificate (see above) for the home if the property is in the high-risk flood zones (Zones AE, VE, etc.). You must build in-compliance (at least 12 inches above the BFE, see above) if you are in the high-risk zones. Check with the local permitting department to validate their permitting rules.
If you are purchasing a home that has flooded and intend to remodel it, check with the permitting offices to validate that it can be renovated without having to be raised to compliant levels. If the home is in-compliance, or if the home is in the low-risk flood zones, you should have no issues renovating.
Just remember: If it flooded once, it will likely flood again. If you do decide to bulldoze a compliant home or a home that is in the low- or moderate-risk flood zone, you may want to rebuild a foot or two higher than the water line, just to be on the safe side.
*Agency Yu, Inc., located at 6115 Edloe across from West U Elementary, is part of the Iscential Insurance Agency group here in Houston and is a full-service insurance agency with a particular focus on luxury homes and homeowners. Yu is a graduate of Texas A&M University and has been an insurance agent since 2002. He and his wife and two daughters live in West University.