Hello, BP! Over the past few months, many investors, bankers, and realtors have asked me about the process I underwent when a fire destroyed a duplex. Hopefully, this post will help you be less stressed and be able to follow-up with your insurance company to get paid. Some of these steps may or may not apply to your locality, but this is what I had to undergo in my current market.
Step One (Day 1): You receive a call from the property manager that a fire damaged your unit(s). You drive to the property and see extensive damage from fire, water, and firefighter axes.
In addition to fire damage, you will have extensive water damage from the hoses. Furthermore, the firefighters will break every window and chop holes in the roof to let smoke escape and check for further fire in the attic.
You made tenants buy renters insurance (If you didn’t, make them when you renew a lease!). This will help them find a place to stay and replace their private property lost while you take care of the damaged unit.
Step Two (Day 1): File a claim. Call the insurance company and notify them of the fire. They will give you a case number (don’t lose this because it makes communication with them more difficult). Next, they will assign you a claims adjuster that will be your “person on the ground”. This person will come and inspect the property to calculate the damage. If you have a PM, give the insurance company their contact information.
Step Three (Day 1-3): Secure the property. To prevent injury, squatters, and theft of any functional appliances or copper pipes, screw plywood over each open window and door. Patch the roof to prevent further damage from the elements. Order a dumpster and clean out all the debris.
Two Cautions: First, don’t keep the dumpster there for long or you will become the neighborhood dump. Second, the adjuster will need samples of carpet or flooring to test the condition, so cut out a sample before pitching it in the dumpster.
Step Four (Week 1): Gather all financials on the property, including rents and renovations since the insurance company will reimburse you for lost rent (if it’s in your policy) and change the replacement cost if materials are updated. The insurance company will want copies of the rent agreements and other documentation, but your PM will send this to them if you don’t self-manage.
You will also need to contact the lender because they will want to know that the property has gone up in smoke! I would still tell the bank of a fire regardless of total loss because the insurance check will also list them as one who suffered a loss. All lenders are different, but some may want you to pay down some principal and others glad you are improving a property to basically look like new.
Step Five (Week 1-2): Schedule contractors for repair cost estimates and insurance adjuster to have access to the property. I had two contractors meet us at the property at the same time as the adjuster. This way they brainstorm real replacement costs for the damages.
Step Six (Weeks 2-4): This is the stage that is most frustrating. The property is vacant, and you’ve been checking items off that checklist so quickly that you can stop smelling smoke and smell that check! However, your adjuster is busy with many other claims, and they go on vacation for holidays or weekends, too. He or she will calculate all the numbers according to formulas developed by the insurance company. If you have a cash value policy, they will depreciate each part of the property according to age. For example, your roof is 5 years old? “Oh, well, that costs X amount of dollars, so you will be reimbursed $X-Y%.” On the other hand, a full replacement policy will pay for a full roof replacement without depreciating it a certain percentage.
Step Seven (Weeks 4-5): During this time, the adjuster will have finished the report and delivered it to the insurance company. The company will finish the claim and the check will be on its way! My experience was that the report was sent on a Monday, but the claim check was not written until Friday. The check was mailed the following Monday and received on a Wednesday.
Step Eight: Now that you have the insurance check there are three options (which you really should have already decided). First, you can hire a contractor to rebuild/renovate the existing building structure and everything will be fine and dandy. The insurance should pay for loss of rents during the work but check your policy to make sure!
Second, you can demolish the property. A demo in my market costs around $10K. This includes the cleanup of the work. If you are going down the demo route, the city must be contacted for permits. The utility companies will come pull their meters and cap any gas lines. The water company will cap the sewer and water lines to the property. The city where I am located also makes units built before the 1970s be tested for asbestos before any work will be permitted.
Third, you can demo the property and build whatever you desire if the city will allow. If the property is on a concrete pad, make covered private parking. If it has a good foundation, build a multiunit building, etc.
Some insurance companies will only want you to rebuild and not demo. Check your policy and ask the adjuster if you have questions during the claim process. Remember to call and email each week to stay current and spur the claim process forward. BE NICE but persistent.
Hope this helps,
Jay
