Tag: national flood insurance program

With Hurricane Season Approaching, Now’s the Time to Purchase Flood Insurance

Hurricane season 2022 officially begins on June 1, and it’s expected to be a busy one.

With climate change and sea level rise intensifying tropical storm and hurricane rains and storm surge, now is the time for real estate owners in coastal communities and well inland to consider purchasing flood insurance — if they haven’t already. This is especially important because standard homeowner’s insurance policies do not cover flooding.

Property owners who plan to wait until a storm is aimed at their region to purchase flood insurance are making a big mistake. New policies under FEMA’s National Flood Insurance Program take 30 days to take effect.

Property owners who purchase properties using government-backed mortgages are required to purchase flood insurance policies. Many owners who purchased their homes using cash self-insure their properties. Some owners who are self-insured are under the mis-impression that because they’re located outside of designated flood zones that they shouldn’t be concerned about flooding. This can be a costly mistake. Estimates are that 25% of flood damage occurs in low-risk flood zones. An extreme example of this hazard is the fact that more than half of the homes that flooded in Houston, TX, during Hurricane Harvey were located outside designated flood zones.

Flood insurance policies cost on-average $700 a year, though FEMA has started to place a heavier premium burden on properties built in higher risk areas. The policies cover up to a quarter million dollars in damage. Buyers should also be aware that a seller’s flood insurance policy can be transferred to them at closing often at a significant savings.

Flood insurance is clearly worth purchasing. According to FEMA’s Flood Damage Cost Estimator, one inch of floodwater can cause up to $25,000 in damage and one-foot up to $72,000. As building materials and labor have become much more expensive in most regions of the country, these estimates are most likely on the conservative side.

Owners and buyers of real estate at risk of flooding can get more information about National Flood Insurance Program policies from the National Flood Insurance Program website.

What Does a Foot or More of Predicted Sea Level Rise Mean in Real Real Estate Terms?

The foot or more of sea level rise government scientists recently predicted coastal cities and towns will see by 2050 doesn’t sound like much, especially if you live in a community that isn’t being impacted by the first foot of sea level rise that’s accumulated in the last hundred years. To people who own real estate located in areas that are now experiencing sea level rise flooding and those in the red zone targeted by the next foot, it’s a huge deal. I live in South Florida, and I’m witnessing firsthand what sea level rise flooding can do to a coastal community.

The Union of Concerned scientists predicted that an additional foot of sea level rise will put 140,000 homes at risk of flooding every other week. This means coastal cities and towns are going to have to step up their efforts to fend off floodwaters by, among other things, building higher seawalls, installing pump systems, elevating roads and other critical infrastructure, expanding flood-water absorbing wetlands, and replenishing eroded beaches.

Private real estate owners, too, are going to have to be more diligent in taking steps to protect their properties. More and more of them are going to have to install, reinforce or heighten seawalls and elevate docks, structures and entire homes. In condo communities, owners face the specter of higher association fees and special assessments to cover the cost of protecting common areas and buildings from flooding.

In cases where sea level rise floodwaters cannot be held back, private property owners are going to face a host of problems. As owners of real estate located in neighborhoods that flood now can attest, typically the first sign of sea level rise is seawater collecting on roadways or rising up out of storm drains that would normally drain into the ocean, a harbor or other waterway. Sounds like a minor problem, until you have to park blocks away from your home and wade through the water to reach your front door. Driving through seawater is out of the question. The salt is extremely corrosive to vehicles.

The next step in the typical sea level rise flooding progression is floodwater collecting on a property, where it can rend septic systems inoperable, pollute freshwater wells, and damage landscaping and exterior structures. In cases where the seawater enters a home, the costs can be devastating. FEMA’s National Flood Insurance Program website has a flood damage calculator that estimates an inch of water alone can cause nearly $27,000 damage to a 2,500 home. A foot of floodwater can cost over $72,000 to repair.

In extreme cases, local governments are determining that it’s no longer cost-effective to maintain and rebuild roads and critical infrastructure to serve properties that are repeatedly inundated. Officials are insisting on buyouts, where they pay an owner fair market value to abandon their homes. It’s important to note that buyouts are expensive and only possible where federal and state funding is available. It’s uncertain how long the government will be able to afford buyouts. If the funding dries up, real estate owners could be left with properties that regularly flood, aren’t insurable, and are impossible to sell.

The immediate coastline isn’t the only place at risk from sea level rise. In areas like South Florida that are built on porous limestone or Honolulu that are built on porous volcanic rock, higher seas can push seawater inland underground. The dense seawater, in turn, can force the fresh water table upward toward the surface where it saturates soils. This can create three problems: 1) Unable to absorb rainwater, the saturated soils can cause surface flooding; 2) Septic systems that rely on dry soil to filter impurities can become inoperable when saturated soils can’t handle any more water; and 3) Fresh water well systems can become polluted by saltwater making them unusable.

Beyond the physical problems floodwater presents to coastal communities, private property owners also have to keep an eye on trends in the property tax, insurance and mortgage sectors. Coastal communities are fighting for federal and state funding to pay for sea level rise control projects. When the money runs short, local taxpayers will have to cover the bill for flood prevention projects.

The National Flood Insurance Program is already in the process of making sure that owners of properties most at-risk of flooding pay higher premiums. And, after the tragic condo building collapse last summer in Surfside, Florida, mortgage backers Fannie May and Freddie Mac are now forcing condo associations to answer detailed questions about building maintenance and the level of reserve funds available to cover routine maintenance and repairs. In instances where buildings are deemed to be poorly maintained, short on cash, or unsafe, lenders will be barred from issuing mortgages. This new policy is already wreaking havoc in the South Florida condo market, where closings are being delayed due to the stringent requirements. The threat is compounded by the fact that even cash buyers can be forced to show that they will be able to get a mortgage if they don’t have enough resources to cover the cost of a condo.

With all of these factors in play, it’s clear that the prospect of another foot of sea level rise is something that real estate owners and buyers can no longer afford to shrug off and ignore. Every additional inch of water that accumulates between now and 2050 is going to compound the challenges faced by coastal communities. Due diligence — staying up to date on the latest developments and responding appropriately — is the only way to protect real estate investments.

Hundreds of Flood Survivors Demand that FEMA Do More to Protect Them from Climate Change-Driven Natural Catastrophes

The Federal Emergency Management Agency (FEMA) asked for public input on changes to the National Flood Insurance Program (NFIP) last fall. Over 300 people hit by flooding are responding by signing a petition drafted by Anthropocene Alliance — a nonprofit group “fighting for climate and environmental justice”.

Anthropocene Alliance doesn’t mince words in the petition, which is addressed to FEMA Administrator Deanne Criswell. In the introduction, the group states clearly, “We are flood survivors, and we are angry.”

“We’ve witnessed death and destruction from Hurricanes Harvey, Florence, Laura, Sally, Sandy, Matthew, Irma, Delta, and Zeta, as well as from overland flooding in the Midwest,” the petition states.  “We’ve lived without electricity, running water, and secure shelter. We’ve heard our children cry from the absence of friends, school, and safety. And we’ve confronted homelessness, illness, and mind-numbing red tape from insurance companies and government agencies.”

The petition makes very specific demands of FEMA, including:

  • Stop allowing developers, disreputable planners, engineers and politicians to use the NFIP to encourage building in flood zones that puts the new properties and surrounding properties at risk of flooding.
  • Stop paying for the repair of property that floods repeatedly and, instead, “prioritize mitigation measures such as elevation, home buyouts, and community relocation.”
  • Start planning now to relocate whole towns and cities threatened by sea level rise flooding.
  • Improve the accuracy of FEMA flood maps that take climate change and sea level rise into account.
  • Require states to to pass uniform seller’s disclosure laws that clearly state a property’s flood risk in order for properties in the states to be eligible for coverage under the NFIP.
  • Set NFIP premiums that adequately reflect flood risk, and ensure it’s “affordable and accessible to low-income households until such time that the communities can be moved out of harm’s way.”
  • Make buyouts more desirable by covering the true cost residents of areas that flood will have to pay to move to areas free of flooding.
  • Protect or restore natural barriers to flooding, such floodplains, wetlands, forests, watersheds, salt marshes and beaches.

In the closing paragraph of the petition signed by Harriet Festing, Anthropocene Alliance’s executive director, the group encourages FEMA to open a dialogue with them.

“The flood survivors below all believe that for our children to have a safe and healthy planet, we need to quickly end fossil fuel use and transition to an economy focused on the satisfaction of real, human needs,” the petition states. “At the same time, provision must be made to protect individuals and communities from present and future harms due to more intense storms, rising sea levels, subsidence, bad development, and flooding.”

With so much at stake, buyers, sellers, owners and real estate agents in coastal areas need to band together with groups like Anthropocene Alliance to pressure the federal, state and local governments to do what’s right for all property owners in coastal areas susceptible to sea level rise flooding. Voting for candidates who not only recognize the challenges posed by climate change and sea level rise flooding but who are prepared to do something about them is also essential.

Get Ready for FEMA’s New National Flood Insurance Program Rate Structure: Risk Rating 2.0

The National Flood Insurance Program, which is administered by the Federal Emergency Management Agency (FEMA), is about to undergo a major rate structure overhaul. Real estate owners and buyers will soon find out if rates for a given property are going to decrease, stay the same, or maybe even increase substantially.

FEMA is making the flood insurance rate adjustments to bring fairness into the program. The agency says under the current rate structure, property owners in low risk flood zones are often paying higher insurance premiums than property owners in higher risk area, and property owners with less expensive properties are paying more than owners of properties with higher replacement costs. The agency is encouraging owners to call their flood insurance agents in August to find out what to expect when their flood insurance bills are released in October.

According to FEMA’s website, 23% of policyholders will see an average of $86 a month premium reduction, 66% will see a $0-$10 a month increase, 7% will see a $10-$20 a month increase, and 4% will see their premiums increase over $20 a month.

Real estate buyers should find out how a property of interest will be impacted by Risk Rating 2.0 when they’re considering submitting a contract. They should also consider asking the seller for information about the existing policy to find out from the insurance provider if assuming the policy at closing will result in savings.

Buyers, sellers, owners and real estate agents can find out more about Risk Rating 2.0 and the National Flood Insurance Program on FEMA’s website. The website also features valuable information on the steps owners can take to reduce their premiums.

With sea level rise continuing to cause ever-more flooding in coastal communities, everyone living near the water needs to stay on top of the latest developments regarding flood insurance.

Sea Level Rise Poses Challenges for Commercial Real Estate

Residential real estate isn’t the only sector facing challenges from the threats posed by climate change and sea level rise flooding. Commercial real estate is under pressure, too.

According to a report recently released by Dechert LLP, a global law firm that advises corporations, financial institutions, sovereign states and wealthy individuals, “Climate change is forcing the commercial real estate industry to re-think the effectiveness of flood insurance that developers, lenders and investors have relied on for decades.”

The report notes that extreme weather and sea level rise flooding are pushing the commercial flood insurance system “to a breaking point.” Specifically, the report notes that 14 weather and climate disasters in the United States resulted in $91 billion in damages. Each event had losses exceeding $1 billion mostly from damage to residential and commercial real estate.

Among the challenges faced by the commercial real estate sector discussed in the report:

1) The National Flood Insurance Program (NFIP) administered by Federal Emergency Management Agency is financially unstable. The program is now running over $20 billion in the red, and it relies on government bailouts to continue to operate. Its authority to operate is due for renewal next fall. If it’s not renewed the report says, “The potential for disruption is most concerning for property owners in special flood hazard areas seeking mortgages from federally-backed entities and federally regulated banks because flood insurance is legally required for these loans.”

2) FEMA’s flood maps, which are supposed to identify a commercial property’s exposure to flood risk, are notoriously outdated and they do not consider sea level change or increased flooding estimates. “This has led to costly and catastrophic errors,” the report says. “For example, in 2018, at least 140 Florida homes were demolished following the destruction of Hurricane Michael. However, the relevant FEMA flood map reflected that the properties were in flood zone X (0.2% chance of flood in any year) and flood insurance was not required.”

3. Flood insurance only covers damages, not loss of value. The report says this is a problem because as properties become increasingly vulnerable to flooding, the will inevitably lose value over time. “The worst-case scenario here is particularly bleak,” the report says. “Billions of dollars of real estate will be underwater not only in terms of their market value being less than the outstanding mortgage debt, but also because these properties will be at greater risk of someday being literally underwater. Refinancing these mortgages and insuring these properties will undoubtedly become more challenging each passing year.”

The report goes on to explain how uncertainty in the flood insurance market is leaving the the commercial real estate finance industry without a “uniform strategy to underwrite the increased frequency and severity of flooding due to climate change.” The report says the public and private flood insurance industry “will soon be forced to adjust to face the environmental and economic realities of a country more prone to frequent, catastrophic and repeated flooding.”

The authors predict that the commercial real estate finance industry will evolve to meet the challenges to the marketplace. They identified several issues that need to be monitored: “Among the questions are whether the National Flood Insurance Program will be reformed, whether private flood insurers raise their rates to levels only wealthy real estate sponsors can afford, and whether banks and real estate bond buyers will call for more detailed disclosure to more accurately balance the risk of loss.”

The Dechert LLP report focuses on the commercial real estate industry, but most of its discussions, conclusions and warnings also apply to residential real estate. Buyers, sellers, owners and real estate agents in coastal areas should take the time to read this insightful report to better understand the broader issues that will impact their local real estate markets and property values.

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