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Updated almost 8 years ago, 01/09/2017
Valuing investments in a flood plain
So when analyzing potential investments in the flood plain, do you just factor in the cost of the flood insurance? Assuming two properties are in the same part of town, but one happens to be in the 100 yr floodplain and the other isn't in any floodplain.
Also, would you value differently if it's land instead of a home?
I'm curious, because it seems like you'd want to factor in the cost of flood insurance, in addition to also factoring in that the property will flood every X years so you'd need to save for the deductible that's inevitable. I know that there is always the chance you can protest the flood plain status or make improvements too.
Or do you just avoid flood plains altogether? That was my initial thought, but trying to get a feel from others with some experience.
Thanks!
I have friends who live near the floor plain and looked at properties in the floodplain. He tells me after a property has been flooded twice, Insurance companies will not ensure the property anymore. This is especially the case after the recent Houston floods. That's something you have to keep in mind. Maybe talk to an insurance agent first.
Flood insurance through the National Flood Insurance program is no longer being subsidized by the federal government. Rates are rising 20ish% each year until a structure's policy reaches the acturial rate for a federally backed mortgage. Do some research on the future potential costs before purchasing a structure that will require flood insurance.
Originally posted by @Account Closed:
I have friends who live near the floor plain and looked at properties in the floodplain. He tells me after a property has been flooded twice, Insurance companies will not ensure the property anymore. This is especially the case after the recent Houston floods. That's something you have to keep in mind. Maybe talk to an insurance agent first.
Well, so what if House A on one street is the exact same as House B, except that House A is in the 100 year floodplain. It could be that neither have ever actually flooded, or that both could potentially flood. House B based on comps would go for about $200k, I'm just wondering is there is any sort of formula to go off of to get a value for House A. Also, if the goal currently is short term - the amount of for insurance wouldn't be a major issue since I wouldn't buy/hold the property.
What I'm actually looking at is two residential lots of land, so I can take the risk and potentially lose a few thousand, so it's not like I'm buying a house for $200k. This is my first potential investment and houses have been selling in the area (500 yr floodplain vs 100) and land has sold as well (near, if not in the floodplain).
There is not necessarily a formula for the valuation of House A vs. House B - you need to know the valuation adjustment for the floodplain, assuming the structures are identical. Lets say that House A is in the floodplain and House B sold for $200,000.
You will need to find a comp (House C) that has recently sold in the floodplain and determine the adjustment used for the floodplain (which may mean comparing House C to House D). You would then apply this adjustment to House B. If the adjustment is $10,000, then House A (assuming all things are identical), could come in at $190,000.
The hard part is determing the adjustment. That is what an appraiser would do. Every market area will be different.
Originally posted by @Bryan Wallace:
There is not necessarily a formula for the valuation of House A vs. House B - you need to know the valuation adjustment for the floodplain, assuming the structures are identical. Lets say that House A is in the floodplain and House B sold for $200,000.
You will need to find a comp (House C) that has recently sold in the floodplain and determine the adjustment used for the floodplain (which may mean comparing House C to House D). You would then apply this adjustment to House B. If the adjustment is $10,000, then House A (assuming all things are identical), could come in at $190,000.
The hard part is determing the adjustment. That is what an appraiser would do. Every market area will be different.
Good point, I did spot check a few that sold and none happened to be in the 100 yr flood plain (there was in the 500 yr). Seems like really it just varies by area and there really isn't any rule to potentially follow in the scenario. You've given me some ideas to try to back into a number that could be useful in evaluations, as long as I can find some comps in the 100 yr floodplain (or really anything that's sold).
@Kevin Coggins The rate you will pay for a flood policy is the same regardless of insurance carrier so you should be able to get an exact quote for each prospective property. However, properties that are not in flood plains are still at risk for flood damage. One of our clients had a property at the end of a downhill street. During a heavy rain the water overwhelmed the sewer system and flooded a number of properties at the low end of the street. This incident was considered a flood and not covered by regular property insurance.
The actuarial chances of a flood in a 100-year flood plain is 1% per year or is expected once every 100 years. This risk may or may not be greater than the risk presented in the example above and in my experience these properties have very little if any discount in value.
Property that regularly experiences minor floods are where I have seen a much bigger discount in price.
As a Civil Engineer working in Houston in the hydrology & hydraulics field, I would highly recommend proceeding with caution before purchasing a home within the 1% Floodplain (100-year). You should absolutely factor the flood insurance costs into your deal analysis. However, unless you can get it at an incredible price, I'd expect the insurance costs on a property in the 1% Floodplain would kill your numbers.
If you are in the 1% floodplain, the math bears out that over a 30-year mortgage, you have an approximately 26% chance that the property will be flooded AT LEAST once. I would not invest in a property within the floodplain if I had other options, or unless I had some reason to believe the property could be removed from the floodplain due to a mapping error, or work done to the property.
Also consider checking with the local Floodplain Administrator, Building Commissioner's office, or Engineering/Drainage Department. They should be able to tell you if there is a localized drainage issue and why the site is in the floodplain.
I do the same type of work as Trent Ford - he is correct. Make sure you take a hard look at this.
@Account Closed - Thanks for the tip, I will look into contacting those agencies. I've been looking at this property for awhile - seems like if I want to go this route there is more to look into.
the only way they let you build in a flood plain AND then get flood insurance is to elevate to above flood level and alow flood water to pass through the structure...something like that. 50% discount may only be a deal for the seller.
like a stilt house.
Also know if you your in the "flood way" of the flood plain as this makes a big difference. I would avoid anything in the flood plain. Refer to FEMA for information as well.
Flood insurance rates were tremendously increased by the Maxine Waters Bill. The public protested and revisions were made to extend the increases further out in the future. The ultimate goal is to make flood insurance self sufficient and operate without a taxpayer subsidy. Eventually that will come to be in the future.
Some examples hear have raised flood insurance annual premiums from $700 to $7,000 and $1,200 to $12,000.
In general i would avoid all flood zone properties, if the rates don't get you the flood waters will. I have cleaned up after a flood it is not a pleasant, fun event.
A CPA that I know is investing in house on the fringe of the flood zone, at huge discount prices. He is paying cash, no mortgage and no flood insurance. He's self insuring. He has been doing this for a couple years, and so far has not had any flood damage.
I had a property where the flood zone was 8 feet above ground level. the last time it flooded the water was 13 feet, more than ever in recorded history, with water and mud on the second floor. The flood waters are getting to higher levels due to development and impervious surfaces like giant malls and giant parking lots. the flood problems will worsen in the future.
And lastly, new provisions will be added to the flood insurance regulations whereby you might get one insurance settlement, but be ineligible for any future insurance claims on that property. Properties will be rendered unbuildable and the values will be negligible.
Dont make a habit of buying rentals in flood zones, but if the numbers work....and you arent planning to hold the property forever. I would give it a shot. I have one rental in a flood area, was not affected by the recent flooding, cash flows like crazy and im currently sitting on a great deal of equity.
I have found that flood zones rarely effect rental rates unless it was affected by a newsworthy flood event.
However flood zones always effect the value of the house. Check out www.harriscountyfemt.org for the flood maps. A house across the street not in the flood way will be worth more, no set rule for how much more. Depends on the cost of flood insurance and how that affects their payment.
I have a small house in a flood zone, value approx. $115k. Fema flood is only required by the lender, insurance premium this year is $720, 9% premium increase from last-year.
This is a cost of doing business that gets passed on to the tenant.
A small business owner gets slapped and taxed no differently than a investor buying real estate. A small business must keep operating profitably and increase service and product costs no differently than a landlord increasing rent. All business all relevant.
Franklin
I have an article I wrote on this that you might find useful.