After all this I might go live in a tent on the beach...
January 26, 2011 2:02 PM   Subscribe

After all this I might go live in a tent on the beach...

Is a house worth less if a small part of the property is located in a special hazard flood zone? Insurance premiums are around $2500 a year.

I had a long explanation typed out to give the special details, but they really don’t matter. Basically we made an offer on a house, it was accepted, and just before the closing we discover its flood zone status, which had not been disclosed. With this discovery comes the cost of the flood insurance.

I don’t need advice about the legal or contractual issues surrounding this. We’ve got it covered. We would never have offered what we did if we knew about this – so we’re going to offer to renegotiate with the seller, otherwise we walk away. We need to come up with a new offer. So, would the flood zone status of a property affect what you would be willing to pay for it? Care to put a percentage on how much it would affect you?

(Please, no comments about flooding, the need for flood insurance in general, the legal issues, contacting the NFIP, our realtor’s responsibilities, title insurance, etc. We’ve got all this taken care of. There will be complaints to licensing boards when all this is done. The issue is not the insurance itself. We like insurance.)
posted by Mimzy to Home & Garden (17 answers total) 1 user marked this as a favorite
Drop the price by $25000, i.e. what it will take to insure it for 10 years.
posted by Tell Me No Lies at 2:05 PM on January 26, 2011 [2 favorites]

Is the house itself in a flood zone, or is it just some random small part of a large property? I'd imagine I wouldn't want to buy a typical suburban home in a flood zone, but if I was buying a 5,000 acre ranch and the house was on a hill, and somewhere else on the property was a creek that was in a flood zone, I might not care.

Basically, I'd pay less for a property if I thought it was more likely that there would be flooding that would actually cause any damage.
posted by tylerkaraszewski at 2:07 PM on January 26, 2011 [2 favorites]

Since it sounds like it's not really a dealbreaker for you, I'd consider negotiating another offer that at least takes into account the additional insurance premiums for a few years. I mean, it'd be no different than discovering that the yard needed to be graded or something - if it was going to cost me $X to do it, I'd ask for a concession of $X from the seller. The ongoing nature of the insurance might make this a little tricky, though.
posted by jquinby at 2:08 PM on January 26, 2011

I have no idea if it's feasible, but is the bit of property something you could donate to a land trust and split off from the rest of the property? It would probably only make sense if the adjoining land was public.
posted by notion at 2:14 PM on January 26, 2011

How far away from the house is the flood zone and how susceptible to any flooding is it? I have a friend who lost his house AND property to a flood several years ago. His property was condemned the flooding was so bad--this from what was normally a 12 inch deep stream that was 30 feet away from his house with a downhill 55 degree, 6 ft long grade from his lawn to the stream bed. The high water mark in the house after the flooding was 2 ft on the the first floor.
posted by KingEdRa at 2:16 PM on January 26, 2011

Flood insurance in my neck of the woods (the beach-in a hurricane prone/storm surge area) is a couple of hundred dollars a year. Homeowner's insurance is expensive still, but it's the wind policy that costs a lot.

Generally there are a lot of flood zones that don't get reported until the appraisal. Our appraiser didn't even get it right the first time he did ours. I looked at the FEMA maps, and according to them, our house was across the state line in a big flood area. I had to call the bank to get it straightened out and have the appraiser adjust his report.

So, I would double-check the flood zone on the property FIRST (here).

And then, I would double check your quote on the flood insurance add-on. That seems awfully high.

Around here, the couple hundred bucks that would have to be tacked on is not a deabreaker or a reason to renegotiate (generally).
posted by Kronur at 2:23 PM on January 26, 2011

If the insurance cost increases by $2500 per year, then one way to look at that is that it reduces the value of the property by the amount needed to earn interest to pay for that insurance premium every year (this is what I would do if I were buying your property). It is difficult to predict the correct interest rate here, because 1) you don't know what interest rates will be in the future and 2) you don't know what the rate of annual increase for the insurance premium is. If this was me, I'd aim for roughly 3% as a real rate of return (i.e. the interest rate minus the inflation rate), which makes the reduction in value roughly $83000.
posted by ssg at 2:29 PM on January 26, 2011 [1 favorite]

I agree that the insurance seems high. We bought a house. Were told it was on flood zone but not to worry. We did not have insurance for some 3 years and then were told we had to have it and a mistake was made in not requiring it with mortgage. We have it now, and have not paid very much more for it. Do double check price for insurance.
posted by Postroad at 2:30 PM on January 26, 2011

I'm having a problem isolating what your question really is. You state that a small portion of the property is subject to flooding. You state that you will be renegotiating the price. Then you ask:

"Is a house worth less if a small part of the property is located in a special hazard flood zone?"

Obviously, you think it is.

You don't want to bother us with the details, but want help deciding just how much less it is worth. As has been asked above, is the entire property subject to flooding? Is an inconsequential portion the part that is in the flood zone? Is flood insurance a requirement of your loan?

Absent the above, and taking your last two paragraphs into account, what is it you want answered?
posted by Old Geezer at 2:43 PM on January 26, 2011

Coming back to add that in my above post, I made it seem like FEMA put our house in another state. FEMA did not; sloppy work on our appraiser's part did.

Also, when we bought our house, the best time spent was researching homeowner's insurance rates. Quotes ranged from $1200 - $3000 for the exact same coverage. Make sure you've thoroughly investigated those options.

And thirdly, your realtor (or any realtor in your state) could give you the answer authoritatively.
posted by Kronur at 3:05 PM on January 26, 2011

We have flood insurance. How much it costs depends on what kind of flood plain you're in--there are different classes. When we bought this house, the realtor told us it was in one class of flood zone (insurance a few hundred bucks a year); it's actually in a higher-risk one, and we pay $1400/year for flood insurance. It never occurred to me to double-check what the realtor told us, but I wish I had. It's enough money and enough risk that if we had realized it, we'd have bought a different house--like the one 3 doors down that is not in the flood zone. I'd say a house that requires flood insurance can certainly be worth less than a house that doesn't, because it's an additional expense you will bear for as long as you live in the house. Even if someone not in a flood zone decides to buy flood insurance, it will be significantly cheaper for them because their risk is lower.

Flood insurance isn't like other homeowner's insurance, as I understand it. Even if it's sold through an insurance agency--we used to get our flood policy through State Farm when we had our homeowner's insurance with them--they're just administering it for the government program that sets the rates. So, as I understand it, you can't shop around for it the way you can with other insurance, and many agencies won't sell it at all. State Farm no longer does, for instance, so we get it directly from FEMA now.

Also as I understand it, your required level of coverage is pegged to your mortgage. Our premiums went way up when we took out a second mortgage to cover some legal bills.

All this is kind of fuzzy; I learned a lot about flood insurance when we first moved here 8 years ago, but I haven't had to really think about it since and I have probably gotten some details wrong.
posted by not that girl at 3:20 PM on January 26, 2011

In order to pay $2500 a year without any extra cost to yourself, you'd have to have about $130,000 in the bank earning interest at 2.5% above inflation (which is about what the best savings accounts offer, from what I understand). This assumes you lose about a third of the interest in tax. So you'd have to offer $130,000 less in order to not lose money.
posted by lollusc at 3:32 PM on January 26, 2011

(Oops. I mean, what ssg said. But I think they disregarded the fact you would get taxed on that interest.)
posted by lollusc at 3:35 PM on January 26, 2011

Response by poster: Ill try to answer some of the questions.
1. Flood insurance in this case is mandated by the national flood insurance program. So the premium amount is the same no matrer where we get it.
2. Our lender requires it for the loan.
3. Only about 200sq ft of the 3/4 acre property is in the flood zone--not any of the structures. Mortgage company and insurance company says that doesn't affect the rate...if the flood zone is on any of the property, they count it as a whole.
4. I realize it's obvious that I feel the property is devalued, but the parties involved can't seem to agree by how much. That's why I asked it the way I did.
posted by Mimzy at 3:39 PM on January 26, 2011

$35k-$40k less.

It's like an extra $200 on your monthly mortgage payments, which would be like borrowing an extra $35k-ish over 30 years. (Assuming an interest rate of 5.5%.) Plus a bit extra for the annoyance and the years after you've finished paying the mortgage.

OTOH the actual value less is just what two parties are willing to buy/sell for. Is there generally a difference in price between properties inside and outside the flood zone? How much would you lose if you pulled out of the purchase now? How is the property market in your area? These are the things that will likely determine the amount of discount you get (if any), not what's objectively fair.

Renegotiating the price at the last minute is not normally looked on favourably by the other party. It's entirely possible that you moving in may not go as smoothly as it could.
posted by plonkee at 3:43 PM on January 26, 2011

I think what matters most is the opinion of buyers and sellers in your area. Time to talk to folks who have had or may be having a tough time selling because of a hazard flood zone issue. Your realtor should be willing to do some legwork for you but you might also contact your local community board, environmental preservation organization, and prospective neighbors.
posted by paindemie at 3:44 PM on January 26, 2011

Flood insurance is for structures only, you can not insure the land for flood. Have the appraiser separate the structures from the land value. You should only pay insurance for the structures, not the mortgage amount. FEMA will back you up on this because if you lose the structures to flood, you still have the land value.

You need to find out what the "Base Flood Elevation" is for your area. There are maps of your area where FEMA has made this designation. It will be a measurement of height. You need to have an elevation survey done on your house. The elevation will be the lowest point of your living area.

For example, the BFE for your area is 10 ft. The lowest part of your living space is at 11 ft. Your flood insurance will be minimal since your structure is 1 foot above the FEMA required elevation.

If your house is below the required 10 ft your flood insurance will be much higher proportionally to how for below 10 ft the house sits. If the home is an older home and was built before your community adapted the FEMA requirements, your home is grandfathered in and you will pay rates as if your house was in compliance.

I lost my home due to flooding in Katrina. I tore down that house and rebuilt a new one on pilings. My new home is at 14ft elevation, FEMA requires 12ft in my area. I now pay about $700 per year for $250,000 coverage on the structure and $100,000 on contents. I receive credit for the 2ft above the required height.

The original house was built in 1978, my community adopted the FEMA program in 1984. My house was then 4ft below the BFE. The first quote on flood insurance was $4,500 per year for $145,000 structure and $50,000 content. I was able to prove that the home was built before 1984, therefore was grandfathered into the flood program. I fought with the mortgage company that the flood insurance required was not the full amount of the mortgage loan , but to replace the structure only. My final premium was about $1200 per year.

Feel free to email me.
posted by JujuB at 5:06 PM on January 26, 2011

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