Insuring Your Flip with the Wrong Insurance can Ruin You!

If You Are Smart You Buy Insurance

Latest Acquisition. $50,000 Purchase, Rehab $38,000, Sell for $128,000! Does this project deserve the right kind of Insurance?

Like anything else, when you buy a house to flip, you need insurance. Now everyone's perspective on insurance is a little different. My take on insurance is simply this;

You have insurance to avoid a financial catastrophe.

Most people think that insurance should pay for everything, and that's okay. Because if you want insurance to pay for everything, it's just going to be reflected in the premium you'll be paying. You want to pay a big insurance premium, then keep thinking this way.

At the same time, most people don't like to pay insurance premiums because they think they don't get much for their Money.

This brings me back to the whole idea of insurance. Insurance is to prevent a financial catastrophe. What is a financial catastrophe you might ask? Well for everyone it's a little different. For some people $1000 represents a financial catastrophe. To others it might be $5000. How about your $200,000 home burning to the ground, does that represent a financial catastrophe? I should say so.

Insurance is Black & White

For some People the area of insurance is somewhat gray when it comes to fix and flips. Nope, it is really Black & White!, I know a lot of real estate investors, a lot of flippers, who buy the most basic insurance there is under the guise of a rental policy. In other words, I own this house as an investment, and my intention is to rent it out, check, but you've left one piece missing. Right now, the house is empty and over the next few weeks to a month or two, it's going to be undergoing a complete renovation. So it’s really not a rental RIGHT NOW, is it?

Let's say you did buy this low premium insurance policy, which is really a rental dwelling policy. You've insured your flip, and now you have a claim. Good guess what? It'll take the insurance company less than five minutes to figure out that no one was living at the house with no kitchen, no bathroom, bare walls, ceilings, and floors. In fact, the house was indeed going through a renovation. What do you think is going to happen to your claim? One Guess, “Your claim's going to be denied”.

A lot of flippers buy insurance because they must! They borrowed money, and their lender requires them to have the home insured, but again here's another trapdoor. Lenders don’t even look at the insurance policies that closely. All they see is that the house has been bound, and that the beneficiary statement reads they want it to the read, and that the policy limits are within their lending requirements. They don’t ask whether it is a Fix & Flip policy. They don't understand or even notice that the flipper or investor has purchased a rental policy. What happens to the lender who relies on insuring their secured asset for protection when the house burns down to the ground and the insurance company denies the claim because the person who acquired the policy lied about the use of the premises? Better question is what happens to you the flipper?

What amazes me is there are so many flipper investors who will roll the dice

I have always in matters of the law and doing it the right way, played by the rules. If I need insurance for a fix and flip, then that's what I'm going to buy. I'm buying fix and flip insurance.
Now what's the difference in the cost of the policy? Well in Las Vegas, Nevada for the houses that I'm buying in the price range of $80,000 to $100,000 and renovating to have an ARV of 138,000 to $168,000; my insurance for fix and flip typically represents a premium of anywhere from 1200 to $1400 a year. This is about $600 to $700 more than your standard rental dwelling policy, but the good news is; I get to sleep at night.

If my fix and flip burns to the ground, because vagrants break in and decide to have a little campfire, or, I have a water leak and the entire house floods and is water damaged (has happened), I am going to be okay and so is the lender and my JV Partners, because I did the right thing.

One Minute Nice Flip Next an Ashtray

Claim Denied

I want you to imagine that you have a fix and flip property, you are half way through the renovation and now you have a claim. The insurance company wants to send a claims adjuster to assess your claim. What do you think they're going to be thinking? Is the insurance adjuster going to turn a blind eye and pretend that somebody was living there? Of course, not. The first thing they're going to do is deny the claim. You may as well have not insured the house at all. Why bother? It's like cheating on your exam. You got great grades on the exam, but you still don't know anything about the sex life of a banana because you didn't study and cheated on the exam. Good Luck!

If you're not going to insure your flip property properly, why bother insuring it at all? If you are required by your lender to have insurance, then make sure that you provide the lender with the proper insurance coverage for fix and flip. Insurance companies now in many instances, send out home inspectors when the policy is either about to be bound or within 30 to 60 days of binding the policy. They want to inspect the home's condition and to make sure that they're insuring the right product. I've known some flip investors to have their policies cancelled because they lied to the insurance company. It is a lie about the use of the property and their intention.

Go for the High Deductible

Some of you might argue, but the cost of the insurance is so high. Yes, but it's a small price to pay if you do have a claim. When being quoted for insurance thing high deductibles. I am insuring an 80,000, to $200,000 house, anything that happens to the house in a small way under $2000, $3000 or $4000, I am just going to absorb as part of my renovation or rehab budget. Again, remember, you have insurance to avoid a financial catastrophe. For me a financial catastrophe could be an expense more than $5000.

Wow What Happens if the Claim is Denied because you wanted to save $600!

I ask underwriting to grant me a $5000 deductible because again the whole idea of insurance is to avoid a financial catastrophe. With a high deductible, my premiums are significantly lower.

Now I'm not an insurance professional. I'm just coming from the perspective of if you are going to insure your property, either because you want to insure it or it's required by the lender, make sure that you purchase the right type of insurance for fix and flip properties. The best person to go to and ask questions, would be your licensed insurance agent. Make sure that you talk to as many as you can and get them to bid, quote you, and educate you on the best types of insurance for your project.

Please, please, please don't lie and purchase rental dwelling insurance when it's in fact not a rental dwelling, it may be in the future, but today it is a fix and flip.

Otherwise you'll wake up one day with a whole host of issues and problems that you wish that you did not have, but you are there because you wanted to save yourself a measly 600 bucks.