Mountain homes uninsurable b/c of wildfire risk?

Question

I read news about insurance companies pulling out of high-risk areas, but this week is the first time I saw it affect a deal of mine here in Colorado.

My clients were under contract on an awesome STR property in the mountains west of Denver. Nine out of 10 carriers they called would not cover them, and they rightly thought, we should listen when the people whose job is to assess risk think this area is too risky.

Seems like this is going to be an issue going forward, and I see wildfire risk affecting buyers' opinions in a few ways.

•  They literally cannot get a carrier to insure the home.
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•  They find a carrier to insure the home, but the preponderance of carriers denying them scares them off.
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•  They worry the backside resale value is compromised. (If we're having a hard time getting insurance now, what about buyers when I need to sell in 5 or 10 years?)
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•  For my clients buying this as a vacation rental, even if they got coverage and could rebuild after a fire, the value of the short-term rental in Colorado would be ruined b/c no one wants to visit a scorched mountainside.

If you're an agent like me working with STR/second-home buyers, or your just buying yourself, navigating the wildfire risks and other natural-disaster risks of a home are now part of the transaction.

Bruce Woodruff · Answer

@James Carlson Is there 'real' wildfire risk? Or is this an insurance CYA thing? I recently bought a property that was in a 'flood zone' and required Flood Insurance because of a loan.

It made me think twice for a day or so, but after research (driving around/looking at aerial maps/talking to neighbors, I came to realize that there was almost zero 'real' risk.

As you so astutely pointed out....this creates opportunity for investors that can do the research and can stomach a little perceived risk....

Marcus R. · Answer

Same thing as Bruce with the flood zone...on paper was located in a flood zone but the actual risk seems very low and the owner of the last 40 years never had a problem.  But now that I mentioned it...it'll probably flood tomorrow.

It was an off-market purchase in Jackson MS with a partner who's local.  Tough market to navigate and very different market dynamics than CO.  Business partner is a real close friend so I just couldn't say no.

James Carlson · Answer

@Marcus R.

Totally agree. If you are comfortable with the risk, then the difficulty of buyers getting insurance is a negotiating chip.

This reminds me of how I view STR regulations in Colorado. The trend in Airbnb laws is toward restriction and prohibition. So there are fewer places you can operate a vacation rental. Not good for the investor, right?

But ... if you can find a home in one of the diminishing number of cities or counties that allow it, then you might face less competition overall.

In Clear Creek and Gilpin counties, for instance, in the mountains west of Denver, they have caps on the number of short-term rentals. But if you happen to have one of those licenses, you're in an market with artificially limited competition.

Congrats on your new purchase. Where is it? What are you doing with it?

James Carlson · Answer

@Bruce Woodruff

I guess it depends on how you define "real risk."

Is the risk of any one Colorado home going up in a wildfire that high? Probably not.

That said, the risk of wildfires across the state is increasing. (Eleven of the top 20 largest wildfires in Colorado occurred just in the last five years, and four of the top five occurred in just the last three years, according to the Division of Fire Prevention.

The idea that your mountain home burning down is inevitable is not correct, but neither is the idea that there's zero risk.

And maybe a bigger issue than actual wildfire risk is just the fear of wildfire risk. Again, if nine out of 10 carriers won't cover now, what will happen five years from now when you go to sell and can't find a buyer because of this?

I agree, there's opportunity, but I'm not someone who's not worried about it.

Marcus R. · Answer

Always sending us gems...thanks James!

It's a copycat league so figured we might eventually see this in CO after watching things unfold in CA and FL.  I recently went through something similar with a purchase OOS in a flood zone.  Had some add'l work on the front end but was able to just take over the existing policy.

One potential positive...if you have a higher risk tolerance and you're the buyer use this position to your advantage to negotiate a lower price point.

Ruth B. · Answer

@James Carlson I bought the policy through a brokerage that specialized in high-risk properties and businesses (like bars). Not through Proper. I sold that property, and the fire risk certainly factored into the decision. Too bad that Lloyd's would not insure your buyers' property. Their premiums were actually reasonable.

Ruth B. · Answer

@James Carlson In 2015 I ended up with a policy from Lloyd's of London for a mountain short-term rental property. Because of the wildfire risk, options were extremely limited. At that time Farmers would cover the property if it were my primary residence but not if I turned it into a short-term rental. For all of the reasons you outlined in your post, I suspect this will continue to be a topic of discussion and a source of heartburn for investors.

Steve K. · Answer

I've had good luck lately with State Farm, Farmers, American Family, Allstate, USAA and California Casualty up in the mountains/ close-in mountains. Bolder Insurance is a good local broker too. They found me a policy on my 8 plex on West Colfax that I had trouble insuring (not in the mountains, but harder than any of my mountain properties to get a policy for, go figure).

James Carlson · Answer

@Ruth B.

Was that a policy through Proper? I know they're underwritten by Lloyd's of London and do mostly STRs. Do you still own that property?

I know that Lloyd's of London would not qualify this Colorado property, if that tells you anything.

Mountain homes uninsurable b/c of wildfire risk?

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