Builder’s Risk Insurance
It is not uncommon to have to borrow funding in order to purchase a house that was in foreclosure even if the purchase price was set below 30% to 50% of market value. The lender will require the loan to be backed up by mortgage insurance to protect their investment, however, when it comes to lending money to flip houses, the lender may also require additional coverage to protect themselves from liability claims.
A typical homeowner insurance may not be sufficient for the lender, since they are aware that the house is going to be under construction with a variety of individuals going through it and performing jobs that are considered risky. There is also the consideration that the house will remain vacant longer than the investor anticipates and additional insurance will be necessary.
Depending on the area, the house may remain vacant for several months based on the current economic factors and the diminished pool of potential buyers able to obtain a loan. It is, after all, a buyer’s market and no one is in a rush to purchase the first house they see.
Builder’s Risk Insurance is intended for construction companies to protect their investment from catastrophic accidents resulting from exploding gas lines, severe weather, vandalism and other variables, such as lighting and fire. This is a good policy to have if the house is going to be undergoing major remodeling and can’t be flipped within a few days of purchase. Builder’s risk insurance does not cover liability and for those who will be hiring subcontractors, please see the section on that subject.
In the event of having to hire day laborers that will be working for you directly for a pre-determined period of time, you will need to ensure that liability insurance coverage is sufficient. If not, and depending on your county laws, you may need to provide them with adequate coverage in the form of workmen’s compensation because they are, in effect, your employees.
Most homeowner’s insurance policies have standard liability coverage that has certain limits and deductions that are more than sufficient for the typical home owner, but may be inadequate for an investor.
Liability insurance for a house flip should protect the property as well as the investor from law suits and the best way to do this is by increasing the liability coverage or attaching a rider to the current liability policy. Make sure that if a worker on your property gets injured, the insurance will cover his medical costs and time off from work as well as accidental death from a fall or some other accident on the property. Discuss these scenarios with your agent and make sure you understand clearly who is covered and what is covered.
Flipping a house on your own and doing all your own work may not be feasible based on the extent of the damage to the property and the need to quickly rehabilitate the house to be able to resale it quickly. At this point, you may decide to hire subcontractors to do all the work and you assume the role of general contractor.
As a contractor, your job is to schedule the work to be done and stay on top of the subcontractors to ensure they meet their deadlines and do the job they were hired to do. In order to avoid personal liability while working on your property, you must ensure that the subcontractors you hire have appropriate insurance policies of their own.
Once upon a time, I worked for two of the largest construction companies in the area. One of my responsibilities was to ensure that all paperwork was correctly done and the insurance policies were current with the required amount of coverage set by the general contractor. I found that many well-known companies had altered their insurance certificates to read current dates when in fact, their insurance coverage had lapsed.
Others increased the listed coverage by altering the document. In those days, some fakes were easier to spot than they are today. We have color copiers that make fake money look real and manipulating images with software is not difficult to do. A fake can look just like the real thing in a matter of minutes.
At the time, we requested a one million dollar policy per subcontractor. If someone had been injured at the job site, as happens often in a large construction project, the general contractor would have been liable for all damages and opened himself up for law suits and legal costs.
As a general manager, it is your responsibility to require a copy of their current policies and contact the issuing insurance company to verify the coverage dates and the actual amount the policy covers.
What the subcontractor must provide:
- Liability insurance
- Workman’s compensation insurance
- Current contractor’s license
Hurdles to Overcome
Most insurance companies need to be convinced to issue insurance on a property that will be vacant. They see vacant properties as a huge risk that will cost them dearly in terms of claims. The likelihood of the vacant properties being vandalized and used by squatters is exponentially greater than if the house is occupied. Thieves see empty houses as gold mines because they can strip the house of precious copper pipes that have a good resale value and fixtures, cabinetry and expensive tools and materials can be easily hauled away without anyone noticing.
This type of insurance for a vacant property is not only hard to obtain, but expensive to carry. Some insurance companies may be willing to sell short-term insurance coverage that can be renewed if the property remains vacant longer than expected. It may also be more difficult, if not impossible to insure a vacant home in an areas where there is a large percentage of other vacant homes and recurring incidents of vandalism and squatters.
The best way to get the needed insurance coverage is to hire an independent insurance agent.
Bank Rate: Insuring Your Vacant Home; Margarette Burnette
Real Estate photo: Free Digital Photos; renjith krishnan