A Lesson on FEMA and flood insurance, and how I made a small fortune by being patient with a sale.
Flood zone insurance isn’t always based on common sense or location – it’s also based on incorrect FEMA maps, surveys, and one square inch of structure being inside a zone.
When Flood Insurance Isn’t The Price The Seller Claims
A few years ago I bought a house on the river that was disclosed as being in a flood zone – a 100 year flood plain. I had to learn all about that in a big hurry. The seller claimed in a section of the MLS listing that the flood insurance cost was affordable at only an extra $750/year. “Not too bad!”, I thought at the time.
This cost turned out to be untrue, and thankfully I got my own quote for flood insurance before I made an offer. It was $750/year for the SELLER to get flood insurance because it was grandfathered in for them because they had owned it for 55 years. That is sadly not the case for a NEW BUYER – the quote I got was $5500/year!!! And it could go up every year based on the whims of FEMA. Turns out that buying flood insurance is way different than shopping around and getting a quote for homeowners insurance. Who knew!
Flood zone insurance is often shockingly expensive because prices are tied to FEMA risk maps, not actual flooding history. Crazy.
If ONE SQUARE INCH of your actual house (yes, all the way down to the lowest corner of your basement!) is listed as being in a flood zone, listen up! If you paid cash you can do whatever you want when deciding whether to buy flood insurance. But if you are going to get a mortgage on that house OR you plan to sell it someday to someone who will get a mortgage, you need to pay close attention. Because you or your future buyer will be forced to buy this very expensive flood insurance by the mortgage company whether you want to or not.
How to Check Any Property for Flood Risk
Because of my experience, I now look up every house I am interested in buying, no matter where it is in relation to water, through this FEMA flood zone address search. Every single house, every single time. You can look up any address in the United States.
Search for the address at that link and then click on the “Dynamic Map”. If ANY part of the actual structure of the house is in either the blue area (flood zone), or even worse, the stripey red area (floodway, very bad!), you have big problems ahead of you.
So I did my research before making an offer. You need to get an elevation survey from a surveyor and then they submit a LOMA (Letter Of Map Amendment) to FEMA. Then you wait a few MONTHS, and hopefully the house is then officially removed from the flood zone without issues.
The Only Real Way Around Flood Insurance
The only way around high flood zone insurance premiums if you have a mortgage is to prove your structure shouldn’t be in the mapped zone in the first place. I learned this is shockingly common.
We did some measurements at the property (very scientifically involving one of us leaning over the river bank with a measuring tape and trying not to fall in 😂) and we realized this house would very likely never actually flood. So we made an offer contingent on the house qualifying to be taken out of the flood zone. We made it very clear in the offer that we would not close until it was successfully removed and that the seller would pay for every penny of that process. It took about 3.5 months for that whole process to happen and for FEMA to approve the LOMA (Letter Of Map Amendment). A LOMA is worth far more than its weight in gold.
This cost the seller several thousand dollars. I don’t recall the exact dollar amount but I can tell you that during the process the sellers were extremely unhappy that they had agreed to this condition. Not only did it cost them a small fortune but it also added months to the closing date. Not MY problem – I was willing to wait. And you will soon realize why.
If I hadn’t gone through with that process of removing the house from the flood zone and had still purchased the house, I would have been forced to pay anywhere from $5500/year to $20k/year or more for flood insurance until I paid off the house and had no mortgage. There are horror stories online about yearly random price increases. They can change the price each year to whatever they want and you are stuck with paying the price unless you pay off your house – you only have the “choice” to drop flood insurance once you own the house outright – THEY DO NOT CARE how much this will cost you. And the price of flood insurance doesn’t include the cost of normal homeowners insurance, you get the privilege of paying for both!!
Why a Letter of Map Amendment (LOMA) Can Instantly Increase Property Value
Now when you put in an address in the link I posted, you will also see this come up…
-Revisions
-Amendments
-Revalidations
Click on the “Amendments” link, and if you see that any of the neighbors to the address you put in have gone through the process to have their house taken out of the flood zone, you had better pay close attention to that dynamic map, find yourself a surveyor, and be ready to open your checkbook.
Why is this important to know even if you are just flipping a house? You will instantly shrink your buyer pool to cash buyers only, that’s why. Buyers who need a mortgage don’t like to hear that they will have $5k – 20k or more in extra insurance premiums EVERY year.
So the results of our elevation survey came back that the bottom corner of the basement is 3.5 ft ABOVE the highest expected flood level, which is excellent. It is now NOT in a flood zone and was officially removed by FEMA. I can now see the address in the “Amendment” link I mentioned earlier. Had the sellers gone through the process to have this done BEFORE listing it, it would likely have sold at a much higher price. Great for me as a buyer, terrible for them as a seller.
Why I Made Instant Equity – and They Didn’t
Now, just think of the value that was added to that property before closing, that the sellers missed out on. The property was listed on the MLS for a very low price due to the flood plain and had been on the market for quite some time because of it. But because I was willing to go through this process, the value of the house increased dramatically by the time I bought it. Why, you ask? Well – the house is no longer a flood plain house, that’s why! I was shaking my head at closing, wondering why the sellers didn’t just do this before they listed the house. I did not pay one cent towards the cost of removing the house from the flood plain – they had to pay for it all because they agreed to it in the purchase agreement. Their loss is my gain and I happily accepted the immediate equity I gained at closing. 💰
This is probably not a common problem to have but it is always worth checking on before making an offer.
This is the kind of advantage that only comes with experience – and it’s a big reason why investors at different stages make very different decisions.
A Mortgage Broker Moment That Still Makes Me Laugh
I enjoy sharing my knowledge that I’ve learned from the School of Hard Knocks and hope you learned something from my story!
Funny side note:
When I was going through this process, at one point my mortgage guy became impatient and told me that there was NO reason not to close early and I needed to just pay the $5500/year flood insurance and then wait a few months for a refund check from FEMA. You know, wait on a check from the government. “No big deal, just pay it”, he said. “It’s a guaranteed refund”, he said.
I laughed, and laughed, and laughed… 😂
I did not take his advice, and “just pay it”. I’m thinking the broker just wanted the commission check. Sure, let me just hand over $5500 to the government and say a prayer that it returns to me at some point in my life.
It’s all such a ridiculous process. Government in action.
Disclaimer: This flood zone situation was an experience from 6 years ago. If you’re dealing with a flood zone today, always verify current FEMA rules in your area.
If You Own Rentals…
If you invest in rentals, the next step after avoiding costly mistakes at closing is finding stable renters. Here’s how I screen without rushing: Why I Wait for the Right Tenant – Even If It “Costs Me Money”
Coming soon: The Windstorm That Tried To Take Out Three of My Houses – And Tried To Take Us Out As Well
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