6 Tips for Taking the Flood Insurance Risk Out of Home Closings
By Brandi Gabbard
How Real Estate Agents Can Use Flood Risk Data to Their Advantage
Flood risk is both a hidden peril and a great opportunity for the real estate industry to better protect their customers and communities as it can hinder real estate transactions and closings in many ways, such as:
- Surprise coverage requirements can delay closings.
- The cost of flood insurance, if not factored into the financing equation in the early stages of a home search, can make the purchase of a home challenging and many times unattainable.
- Lawsuits triggered by lack of disclosure are more and more common and affect E&O insurance claims and create liability for the real estate broker.
Surprisingly, flooding is the most common risk to homeowners across the U.S.—far more likely than any other peril such as fire, theft, hail or wind damage. Despite that, only one in 10 homes at moderate to extreme risk of flooding carry any flood insurance at all. If not required to carry flood insurance as a stipulation of obtaining a mortgage, many homeowners opt out of this important coverage. This situation, referred to as "the flood insurance coverage gap," risks significant financial loss to millions of homeowners, and heavily impacts both the mortgage and real estate industries.
Rather than risk a "you never told me" claim, real estate agents can use flood risk data to their advantage. As the first point of contact for people who are considering buying a home, the real estate agent is a trusted source of information about the purchase. Arming them with the following information facilitates trust and better dialogue with their customers and helps ensure that the transaction process runs smoothly—free of last-minute surprises about flood risk or the cost of flood insurance.
1. Choice: There are now many alternatives to the National Flood Insurance Program (NFIP). Private flood insurers often offer better coverages, better pricing and better terms. They are available in all 50 states and D.C. and are approved under federal law as proof of insurance to banks and lenders at closing.
2. Risk Level: As shown by Neptune Flood's 2020 Consumer Survey, homeowners significantly underestimate their risk of flooding. There is often an extremely high risk, even in zones where flood insurance is not mandatory. A new site (https://floodfactor.com), launched this past summer in collaboration with realtor.com®, provides a free risk assessment for any property. Realtor.com® now displays a link under the property address that will provide the Flood Factor rating of risk assessment, as well as, at times, an estimate of the flood insurance cost.
3. Coverage Gap: Homeowners insurance does not cover flood events, so homebuyers need a separate policy for flood insurance. In addition, it is important to make sure that policies have Contents Coverage as well to replace personal belongings.
4. Price: Consumers often think flood insurance is expensive, when in fact it can be as low as a dollar per day. Run a quote early in your engagement with a homebuyer to take the stress out of the flood insurance cost and purchase decision.
4. Lending Requirements: Closings are often delayed due to consumers' lack of awareness that their lender requires flood insurance. Flood Factor, realtor.com®, the FEMA website—https://msc.fema.gov/portal/search—and many private flood insurer sites, will provide an instant determination of the flood zone of the property.
6. Disclosure: Some states require a seller disclosure that includes information about past flood damage; however, many do not. Agents can eliminate the risk of Errors and Omissions (E&O) claims and legal liability by having informed communication with buyers before the purchase is completed.
The real estate industry is a critical, trusted source of information for homebuyers. Positioned at the front of the home-buying process, REALTORS® have a unique opportunity to help solve the major social issue of financial exposure to flood risk. Reputable agents can turn flood risk into an asset by being a knowledgeable resource to information so homebuyers can properly access their risk and understand the cost and importance of flood insurance.