Has anyone come up with an innovative strategy to take advantage of the FEMA flood zones?

Question

After reading a number of articles and forum pots, it is quite evident that the new FEMA flood zone insurance requirements are adversely affecting a lot of home owners. It is amazing to think that property owners in flood zones can now be required to pay additional thousands of dollars each year. I would assume that from here on out, it will be a lot more difficult to sell these properties. As a result, certain coastal properties could become a lot cheaper to purchase over the next few years.

First, is anyone planning on taking advantage of this possibility in the future?

and ,

Second, Has anyone put together any analysis or innovative strategies based on buying a number of these lower priced flood zone properties with cash and self-financing, and any potential for using a large amount of money to go to these particular properties that will owe tens of thousands of dollars in mandated premiums and loan to them at a rate that is higher than the bank's rate, but lower than the bank's rate plus mandated insurance?

I hope this post makes sense and is in the correct forum category. I am here in Massachusetts and I see a number of properties that are required to carry the insurance because they have bank mortgages. The thought just crossed my mind if their is some way to use the FEMA flood mandates to your advantage and I am curious if anybody has thought the same or even figured it out.

David Krulac · Answer

@James LoisouBuying in the FEMA flood zone is not strategy for either a newbie or the weak of heart. The flood insurance premiums and policies come from the Federal government. The Bigger-Waters law, authored by Maxine Waters was set to raise flood insurance premiums over a four year period to balance the premiums coming in with the claims going out. Prior to that the FEMA flood insurance program was losing $26Billion. The first year that the law went into effect there was a sharp increase in the premiums. One person I know had their premiums go from $700 a year to $7,000 a year. another person had their premiums go from $1,200 a year to $12,000 a year.People protested and wrote their Congressmen and the law was revised to spread out the increase over a longer period of time than the original 4 years. So FEMA won't be in the black for many more years and YOUR taxpayer dollars will continue to subsidize the premiums.I went to a presentation where an accountant thought that this might be an investing opportunity. His idea was to buy property in FL at way below market prices, pay cash or get some private financing and rent the properties for cash flow long term. He can't get a mortgage because if there is a mortgage the institutional lender will require flood insurance. So he would be flying blind without flood insurance and if there was a claim he would have to pay for the damage out of pocket.Personally, I would be leering of such a strategy. all you have to do is look at pictures or video of Super Strom Sandy in New Jersey. Some houses were pushed off their foundations by the power of the storm. Other houses were crushed into a pile lumber.And on a person not, I have a property in the flood zone where the FEMA flood level is 8 feet above the ground. This is the highest flood at that area since they have been keeping records for over 100 years. But due to more development, more impervious surfaces, the flood waters have less area to be absorbed and therefore flood are more devastating in many areas. At my property the last flood was 13 feet above the ground into the second floor 5 feet deep. There has never been flood water that high in recorded history.That is not the first time that I have had to deal with flood clean up and damage, and I can tell you from my personal experience it is no fun and a terrible job, and disheartening to see the damage of a flood.

Lynn McGeein · Answer

While I do not have near the knowledge base on private mortgage requirements and flood-related issues to have answers for you, I do think this is an interesting topic. While there would be a huge market for a private mortgage company willing to offer mortgages at decent, somewhat higher rates in flood zones without requiring flood insurance, how would company investors protect themselves from serious losses going forward? With more severe weather and sea level rise actually occurring faster than conservative models (which I don't think FEMA even accounts for in their new maps), there is a valid reason FEMA is trying to stop subsidizing flood insurance in certain areas as it's just too costly and has created too much development that likely would not have occurred without the availability of cheap flood insurance rates that real insurance companies wouldn't offer. I imagine if you had your own engineers who could come up with areas they find safe but FEMA has designated higher risk, it may be very profitable. The neighborhood we wanted to purchase our retirement home in is now basically off limits as it's likely to literally be underwater by the time we pay off a 30-year mortgage. So instead of a potential investment, it's more like buying a new car, guaranteed to be worth less than what you paid and likely obsolete in a much shorter time than you expected.

David Krulac · Answer

@Matt WoodThe only fly in the ointment is that after the first claim, the insurer could either raise premiums to a much higher level or cancel future insurance. Here some flood insurance premiums went to $12,000 a year, so if you pay that for 4-8 years (your numbers) that would be $48,000 to $96,000 in premiums to cover an $80,000 loss!@James LoisouThe CPA that I heard speak was thinking of buying along the fringe of the flood areas not in the heart of the flood areas to mitigate the potential loss. That might work.Raising houses are an expense proposition. There's a controversy going on here where people have vacation houses on a river island that is owned by a power company and the land is rented to the home owners. FEMA has threatened to cancel everybody's flood insurance in the township, so the power company told all the home owners that their leases would not be renewed after 2017. The home owners must remove their places and don't have the option of raising them. If power company would allow the people to raise their homes, FEMA requires that the piers be steel and concrete, no wooden stilts. It would require getting a barge to transport a cement truck to the island which doesn't have a bridge to it. In the last flood that I mentioned earlier, FEMA determined that since some homes in my area were in a flood prone area and susceptible to repeated flood that FEMA bought the houses and tore them down and prohibited further rebuilding.

Matt Wood · Answer

Buy rental homes that flood often and take the max amount of flood coverage through private insurers like Lloyds of London to save 20% on premiums. You will buy it at a discount due to flooding, rents will = normal non flood areas but when it floods (every 4-8 years) FEMA will pay you close the full policy amount close to what you paid. Example buy a home for 60k that appraises for 80k and have a flood policy for 80k. When it floods 6" deep or more you will get approx 50-60k for repairs. If it floods deeper and stays flooded for longer than a few days you would receive the full 80k. Sub out the work, you buy material and pay labor only, and spend 20k approximate on repairs then you will have an almost new rental. Then increase your rental amount by 10-15%, re-rent, and make sure tennants have a flood contents policy. Everyone wins when it floods. Top secret, but that's how it's done in the flat lands of the south.

James Loisou · Answer

@David Krulac , Thank you for all of that information. It is definitely not for the weak of heart and not to be taken lightly. It appears that most strategies involving these properties would be too risky, but I can't stop thinking that there must be some angle that I am not thinking of that could work and reduce the risk somehow. Although you are right, the pictures from Super Storm Sandy surely wake up many to the dangers. By the sound of it, as time goes by, more and more properties will be susceptible to the floods and zones. And more fees will have to be paid. I will keep on trying to think of some strategy or contrarian niche that could somehow benefit from the increasing flood zones, but it is probably very unlikely that a strategy with an acceptable risk will be found. Maybe the only way to benefit is to invest in house raising and flood clean-up companies.

James Loisou · Answer

Thank you @Lynn M. , I will definitely take a look at it.

Lynn McGeein · Answer

Really good lecture uploaded from Naval War College on YouTube on Sea Level Rise, focused mainly on relevance to U.S., well worth watching, especially if you invest on the east coast. I like their evening lecture series topics as they are serious about preparing their upcoming leaders for the potential problems in the future. https://www.youtube.com/watch?v=TAtCQ7REXAc

James Loisou · Answer

Thank you @Lynn M. , I like your idea of getting your own engineers to further refine the risks in certain areas. I would imagine that when FEMA designated the high risk areas throughout the whole country, they might not have been able to scrutinize specific areas and factors. As evidenced by the fact that a number of people are getting elevation certificates that are proving they are above the flood zone in certain instances. From what I have heard from friends, some of them are being subjected to mandatory flood insurance because there is a river or even a brook nearby. Perhaps those areas could be targeted for further analysis. And as you stated, the flooding zones and potential impacts of the model projections are probably going to be impacting even more people in the future. There has to be some way to benefit from these occurrences, or at least from FEMA's parameters.