Why Having the Right Rehab Insurance is Key for Your Clients

[Joe Assad]

For the seasoned residential real estate investor, the “fix-and-flip” or rehab market is the most resilient sector of the real estate game. It’s also a great place for the not-so-seasoned investor to start, as it comes with some of the lowest barriers to entry.

But for the uninitiated, with Chip and Joanna Gaines’ style Fixer Upper dreams, only getting their facts from shows like these can come with a price tag that could leave them making the biggest mistake in the rehab real estate industry – not having the right insurance coverage.

Why insurance is key

Every dollar an investor spends fixing up a house they’ll soon be flipping cuts into their profit margin. Which is why every renovation they make should both add value and be as cost efficient as possible, protecting their end investment. In fact, one of the most important parts of rehabbing a property is protecting their very valuable asset from further damage.

Savvy real estate investors know that it’s best to employ a multi-pronged strategy to protect their profit including, everything from accurate sales comparables, to vetting and hiring trustworthy contractors, to making sure they’ve got the proper insurance and even that they have a solid exit strategy, should one become necessary.

Reminding your investment real estate clients about being properly insured during a rehab can be one of the easiest ways to ingratiate yourself to your client long-term, showing them that care about helping them preserve their investment. Having the right insurance in place on a rehab allows your investor to protect their assets in case of natural disasters like fires, storms, and floods in addition to other unforeseen damages like those caused by theft or vandalism.

What type of insurance do rehab investors need?

If you’ve got an investor renovating a property for resale, it’s a pretty sure bet they won’t be living there. Vacant homes present many opportunities for investment loss. Which is why it’s so important for investors to look into the right policy for their circumstances BEFORE they complete their purchase.

Things to consider include:

- Will insurance need to be in effect prior to closing?

- Will the property be completely vacant or will there be furnishings or other staging equipment or property stored on the premises?

- Is the property located in a high-risk area? 

Types of Insurance available for real estate investors and landlords:

- Hazard and Fire Insurance

- Liability Insurance

- Sewer Backup Insurance

- Flood Insurance (Only necessary if the property is in a designated flood zone or an area that has a propensity to flood.)

- Builder’s Risk Insurance (the most likely for a real estate rehab investorneeded for vacant or mostly vacant properties that are being renovated the property.)

- Loss of Income Insurance (Necessary for landlord/investment property owners that you are renting to tenants.)

- General Contractor Insurance (Applicable if your investor is also a licensed contractor.)

- Umbrella Insurance Policy (Good extra liability coverage for a variety of situations.)

- Refer them to a qualified insurance agent

While the list above presents a wide array of potential insurance types for real estate investors, depending on your clients’ circumstances, additional policies may be needed. This is why it’s important to direct your real estate investment clientele to a knowledgeable and trustworthy agent who specializes in working with landlords or fix-and-flip investors.

Even if a Builder’s Risk policy is most likely a fit for your rehab investor, it’s a good idea to have them check with their agent before purchasing or starting renovations on a rehab property to make sure that the property is insurable. Some high-risk areas, those subject to repeated flooding, natural disasters, rough areas, etc. may be difficult to find someone to insure. It’s a good idea for your investor to know what they’re up against before buying a property.

What’s a Builder’s Risk policy?

A Builder’s Risk policy is specifically designed to meet the unique challenges and exposures posed by an unoccupied structure undergoing renovation. It takes into consideration the continuous change in property value, as it undergoes its transformation, and it’s completed value.

Builder’s risk policies can include:

- Property purchase price

- Improvement costs and can include such things as materials, supplies and fixtures including those in transit and stored at a temporary locations

- Multiple insurable interests including the owner, contractor and lender