Are they required to have Flood Insurance?

Do they really need it?

Let's address those questions today...

We've discussed Flood Insurance a few different times in the newsletter. Most recently, I did one on how condo buildings handle flood insurance, which was very well received.

I figure it's a good time to do another "back-to-basics" newsletter by outlining the NFIP and helping answer some of your buyers' initial questions about it.

As we did before, let's start with a few definitions:

NFIP - National Flood Insurance Program, created by Congress

in 1968 to address recurring significant property losses

due to flooding.

FIRM - Flood Insurance Rate Map created by FEMA (Federal

Emergency Management Agency) showing areas of

relative flood risk (flood zones). FIRMs are updated

periodically to reflect changes in observed flood patterns,

residential and commercial development, road

construction, and other factors affecting an area's flood

risk and BFE.

BFE - Base Flood Elevation - level within a flood zone to which

floodwaters have at least a 1% chance of reaching during

any given year.

Elevation Certificate - document completed by an authorized

surveyor, civil engineer, or architect that shows a

structure's flood zone, design, position on the property,

and lowest point relative to the BFE.

Cities, towns, counties, and communities voluntarily participate in the NFIP by adhering to the floodplain management practices put out by FEMA and having their FIRMs updated periodically.

Two laws direct all federally-overseen lenders (just about all companies extending mortgage loans in the US are federally-regulated) to require Flood Insurance for the acquisition or construction of buildings in Special Flood Hazard Areas (A or V zones).

They are the Flood Disaster Protection Act of 1973 and the National Flood Insurance Reform Act of 1994.

In addition to federal regulation, for decades lenders have required Flood Insurance as part of their own risk management when extending financing on properties in these higher-risk zones. This applies to purchases as well as refinances.

Important

Flood Insurance is only required when there is

mortgage financing on a property.

Flood coverage is required on financed properties located in

flood risk zones starting with "A" or "V", as shown on the FIRM.

Many lenders now want Flood Insurance premiums escrowed

along with property taxes and other hazard insurance.

If your buyers learn only these 3 points from you about Flood Insurance, they'll know more than most others!

If a property is owned free and clear or is being purchased with all cash, the owner may choose to be "self-insured", personally accepting full risk and paying for all damages out of pocket.

However, homeowners/hazard insurance policies specifically exclude flood damage.

Even when financing is not used, I feel Flood Insurance is a good idea for properties in those A and V higher-risk zones, especially if the first floor is not elevated from street level.

What determines Flood Insurance applicability and rates?

- Property location on the FIRM (geographic flood zone risk)

- Type of construction (concrete block or wood frame; block,

poured, or piling foundation)

- Lowest floor height in relation to BFE, and building position

on property (Elevation Certificate information)

- Occupancy (primary residence or second home)

- Flood mitigation measures (flood vents, breakaway non-

structural first floor walls, elevated electrical service and

HVAC)

- Year built

- History of severe repetitive flood losses

How do we apply everything we just discussed to a specific property?

The first step is to find the property on a flood map (FIRM) so we can determine the NFIP zone. The following sites are clickable links, then enter the street address and ZIP code on that page :

Collier County:

http://apps.colliergov.net/dfirms/DfirmMap.htm

Lee County:

http://leegis.maps.arcgis.com/apps/Solutions/s2.html?appid=0e132205d6be493c919e420a19febc0f

Miami-Dade County:

http://gisweb.miamidade.gov/floodzone/

Anywhere in the US:

https://msc.fema.gov/portal

Remember, Flood Insurance is only required when there's financing involved and the property is in a flood zone

starting with an "A" or a "V".

If the property IS in an A or V flood zone and the buyer will be using financing, we need an Elevation Certificate to see the BFE and the lowest floor's relationship to that BFE. Since ECs are often done along with a survey, the seller or property owner may have one. If none can be found, a new one will be needed.

At this point, it's time to turn things over to a licensed insurance agent trained and experienced in the NFIP and how it relates to South Florida properties. He or she can then give your buyer or homeowner an idea of premium costs.

If the property IS NOT in an A or V flood zone, AND the buyer will be using financing, lenders want verification that the property is not in one of those higher-risk flood zones. In this case a "Flood Cert" one-page document is prepared by a licensed surveyor, civil engineer, or architect stating the subject property's location and zone on the FIRM.

This "Flood Cert" is the non-higher risk flood zone equivalent of an Elevation Certificate for properties located outside those A or V zones.

Personally, I feel it's a good idea for sellers to make available for buyers either a current Elevation Certificate or a "Flood Cert", whether or not the deal will be a cash or financed purchase.

And there we are, a brief overview of Flood Insurance basics to help you answer buyers' questions.

Identifying flood zones and exposure is an important part of all residential lenders' risk management. It's yet another variable in qualifying the property along with the borrower on a mortgage loan.

Whatever questions your buyers may have, provide them with the details they need to make an informed decision.

Well-informed clients make our trip to the closing table so much smoother...

Let me reinforce the trust

your buyer has placed in you! sm