REI INK

Springfield, Massachusetts

Looking for Stabilization, Growth in 2021 and Forward  by Carole VanSickle Ellis Like most of the country right now, the Springfield, Massachusetts, housing market is hot. Median sales prices rose more than 17% in the Springfield area between January 2020 and January 2021, and Realtor.com reported in May that homes were selling, on average, for 2.63%above listing price. However, there are some signs that the Springfield market could “stabilize”as early as this fall, said local investor and residential real estate expert Alex Anthony. “I think we will still feel the pinch until the end of the summer, but I think the urban flight will subside provided the pandemic numbers continue to decline,” Anthony explained. “That will alleviate some of the pressure we have felt in this area.” In addition to working with retail buyers, Anthony, who is a realtor with William Raveis, works with real estate investors to acquire investment properties in the region. She reported she already is seeing signs that the pinch in inventory could be loosening in Springfield as multifamily property listings begin to hit the market along with desirable residential properties. “The entry-level homebuyer is starting to get more opportunities,” Anthony said, noting that high-end homes with outdoor entertaining areas are still in high demand. However, not everyone agrees with Anthony; WalletHub.com recently ranked Springfield among the “worst cities in the country for first-time homebuyers,” citing “expensive housing and high real estate taxes.” According to other data analysts, the city’s high quality-of-life rankings often cause would-be homebuyers to overlook these potential downsides to ownership in the Springfield area. Perhaps the most telling indicator for real estate investors interested in acquiring property in Springfield is a report from CoreLogic. The “Markets to Watch: Top Markets at Risk of Home Price Decline,” report uses CoreLogic’s Market Risk Indicator (MRI) to predict the overall health of housing markets. CoreLogic placed Springfield at the top of the “at-risk” list in July, assigning a probability between 25 and 50 percent that the market would see a price decline by July 2022. With continued demand in the area high, real estate investors hoping to buy and hold rentals or fix-and-flip to retail buyers are likely to see continued demand for properties—if they can acquire them. A History of Innovation and Resilience Springfield, which often bills itself as “The City of Firsts” and “The City of Progress,” was founded in 1636 and designated as the site of the Springfield Armory due to its central location (at the time) in the 13 colonies. The armory produced Springfield rifles for the Union army during the Civil War, and the local national park features the largest collection of historic American firearms in the world. Springfield also boasts firsts including the first American dictionary, the first American gas-powered car, the first successful American motorcycle company (Indian Motorcycles), and the first American musket. These innovations made the city an early center for precision manufacturing, but Springfield fell into an economic decline beginning in the 1970s following the closing of the Springfield Armory. However, by 2015, revitalization projects like the Hartford Line, a joint-venture project between Connecticut and Massachusetts that provides commuter rail service between New Haven, Connecticut, and Springfield, Massachusetts, were beginning to attract new residents and business to the area. The Hartford Line and Springfield’s relative proximity to both Boston and New York City made the area an attractive refuge for workers leaving these higher-cost areas during the COVID-19 pandemic in 2020. Local experts believe many of these residents may be induced to stay permanently, and local policymakers were creating incentive programs for telecommuters moving to Western Massachusetts as early as 2019. One proposal provided up to $10,000 to cover relocation costs, office equipment, and acquisition of co-working space. “If done correctly…it can be a tremendous opportunity to expand job creation and opportunity, especially to regions that have been left out of the last 20-plus years of tech and biotech growth,” observed state senator Eric Lesser. He noted that the western area of his state, which includes Springfield, has “excellent schools, cultural resources, open space, and quality of life.” He hopes to add an east-west rail link connecting Boston to Springfield in the near future as well as improving internet connectivity in communities with lower-quality connectivity. Many of these communities will be areas that will interest investors because they contain lower-priced homes or are “gateway cities,” as Massachusetts defines midsize urban centers that have suffered due to the disappearance of manufacturing jobs. “Gateway cities face stubborn social and economic challenges, [and] as a result, they retain many assets with unrealized potential. These include existing infrastructure and strong connections to transportation networks, museums, hospitals, universities, and other major institutions, [and] disproportionately young and underutilized workers,” according to the 501c3 Massachusetts Institute for a New Commonwealth (MassINC). Springfield is classified as one of the 26 gateway cities in Massachusetts. MassINC analysts believe emerging small-business communities in Springfield and other gateway cities position them to “once again serve as engines driving growth in regional economies.” Milken Institute analysts Misael Galdamez, Charlotte Kesteven, and Aaron Melaas agree that Springfield could emerge as a driver of economic growth in the western Massachusetts region in the coming months. The trio of researchers authored the Milken Institute’s 2021 “Best-Performing Cities Index” report, which placed Springfield in the top 10 for Tier 4 cities in the study. Although Tier 4 cities may suffer from low-quality broadband and lower long-term growth rates, they were still considered noteworthy in the final results of the study. Study data showed Springfield’s job growth and wage growth remained on a positive trajectory although other data from the University of Massachusetts Donahue Institute indicates that more than half of renters in the area are considered “cost burdened,” meaning they spend 30% or more of their income on housing. The demand for housing is unlikely to decline in the near future; housing demand exceeded available units in 2020 by more than 11,000 units. “Much of this…can be explained by the slow

Read More

Padlocking Flip Projects Into Profits

Flip Factory App Solves the Flipping “Cashflow Problem” from Inside the Industry by Carole VanSickle Ellis When Raleigh-based flippers and general contractors Jake Harris and Juan Huerta invented the Flip Factory App, they were aiming for a solution to one of the oldest problems in the fix-and-flip industry: cashflow. “There is one key component in real estate without which nothing else functions,” Harris explained. “Before we could solve any other problem in flipping, we had to attack and solve that component, cashflow. After that, the rest comes naturally.” Intriguingly, the “cashflow problem” Harris and Huerta describe is not exactly what most investors reading might think. Instead, it is an issue much more pervasive than simply gaining access to capital and much more insidious than making the wrong decision about which project upon which to lend money. “The issue is mistrust,” Huerta said ruefully. “Misappropriation, robbing Peter to pay Paul, has become a hugely problematic side effect of the way flippers and lenders handle funding on their projects. In the traditional cashflow model, once funds are commingled it can be really hard to escape that hole that investors both new and experienced create for themselves. Flip Factory App helps you avoid that pit from the beginning and get out if you are already in it.” The compassion with which Harris and Huerta describe flipping’s “cashflow problem” rings clearly through their description of the creation of their app. Flip Factory App is exactly what the name implies: an app that enables fix-and-flip investors and every real estate professional involved in the flipping process to handle a project from start to finish from the screen of a phone. The unique program not only simplifies the process for investors; it also strengthens the degree of security lenders can feel about projects. Funds flow through the app only to designated projects and properties, and the program helps contractors and professionals document their progress and get paid in almost real time when their portion of the work is completed. “We built Flip Factory App from the inside out because we were building the program for ourselves as well as for the industry,” Harris said. “We knew that the best way to make the whole process work from beginning to end would be to provide value across all the personas involved in the renovation or construction process.” “We can hold a conversation with anyone in this industry about any aspect of this industry,” Huerta added proudly. “We are from this world, and we built Flip Factory App for ourselves so we could do more projects. We are not tech guys who built the program and then started looking for a home for it in real estate. We were already at home in this industry when we created the system.” The Challenge: “Padlocking” a Project in a Way that Supports Everyone Because Harris and Huerta were initially simply trying to design a system that would enable them to complete projects in a more efficient, streamlined fashion, the creation of Flip Factory App started out, appropriately enough, in an extremely traditional format. The first version of the system manifested in the form of a flowchart laid out on a diner table under the nose of a somewhat exasperated waitress. “We were together at a local breakfast restaurant having one of many conversations about the process of flipping a house,” Harris recalled. “We started writing down everything that needed to be done on flashcards and arranging them on the table.” “I think we might have really annoyed our waitress,” Huerta laughed, “but the end result was a template that we used and constantly improved upon as we continued to build and renovate houses.” That original “flashcard layout” can be seen today on the Flip Factory App website, where the founders’ “How to Flip a House—in Phase Order” educational breakdown showcases the final result of all that fine-tuning. “Little did we know when we were getting started that we were going to be able to solve a problem that was plaguing (and continues to plague) so much of our industry,” Huerta noted. “We were just trying to develop something to make ourselves better!” Those efforts soon paid off, with the duo handling more projects with greater efficiency than ever before. Soon, they were describing the flipping “template” and all of the interconnected but often independently provided processes to one of their lenders. That was when the lender issued them a challenge that would change everything. “They said to us, ‘If you could put a padlock on that schedule, that process, and the budget of a project, you would really have something,” Huerta recalled. “We took that challenge and were on the way to changing everything.” The reason lenders often wish for a “padlock” on projects is that traditional cashflow models in fix-and-flip projects usually involve the lender making funding available directly to the investor. Then, the investor disburses those funds to the general contractor, and the general contractor disburses them to subcontractors. “That is the way it almost always works and almost always has worked,” Huerta said. “It sounds like a straight line, but really funds often end up commingled between projects. That is where the mistrust between lenders and investors and between investors and contractors comes in, and that mistrust makes it harder to borrow money if you are a new investor or if you are experienced but working with a lender who is new to working with you.” To create a truly straight line for the cashflow process, Harris and Huerta created a digital “wallet” for each project in a Flip Factory App account. The wallet functions as an individualized bank account for the property, holding the funds that normally would be distributed directly to the investor by the lender until itemized benchmarks are reached. Once a benchmark is documented by a contractor and the work is approved by the investor, funds assigned to that piece of the project are distributed directly to the service provider. “As investors

Read More

Velocity & Scale in Acquisition Strategies

What SFR Investors Can Learn From iBuyers by Josh Jensen The process of buying and selling homes is complex and there is plenty of room for improvement. In today’s lightning-fast market, investors need all the help they can get. Low housing inventory and record-high buyer demand have created a frenzy in the U.S. real estate market. And it is not just the COVID-19 pandemic that is causing the demand. Millennials are reaching their prime time to purchase their first homes and Gen-Xers are hitting their peak years for move-up buying. And interest rates have been historically low.  What does it take to stay on top of your game in this market? Fueled by massive amounts of venture capital, real estate tech continues to advance and introduce innovative companies and new models. Adapting your playbook is not only a need; it is a requirement. Success depends on acquiring homes faster than ever before. Why iBuyers? An iBuyer, or “instant buyer,” is a real estate company that uses technology and algorithms to buy and sell homes quickly. iBuyers focus on speed, certainty, and simplicity, but they still have a way to go to gain market share on real estate transactions. In 2019, they accounted for 60,000 transactions (or 0.5% of the market), which had doubled from the previous year. Growth seemed promising, but due to the pandemic, iBuyer transactions were down 50% in 2020. However, they still have a growing national presence. Clustered in about two dozen markets, they are currently expanding into previously untapped markets, such as the northeast. On average, iBuyers purchase homes valued in the $250k-$300k range which is around the US median price point. This could mean additional competition for investors already competing with homebuyers. To gain ground, major iBuying players lose tens of thousands of dollars per home on average. But while they may be losing profit, they are learning valuable lessons on assessing and acquiring homes quickly and at scale. Lesson 1:Acquiring Homes Quickly With limited inventory and rising prices, investors need to be able to assess and react to available homes quickly. According to Zillow, home values have increased 13.2% over the past year and they predict values will rise an additional 14.9% in the next year. This means when you do find a home to fix & flip, you need to ensure the condition and cost of repairs still leaves room for profit. A home inspection is the most surefire way to gauge the condition of a property. An inspection will tell you a home’s cosmetic issues in addition to the state of the major systems and components such as structural, electrical, plumbing, HVAC, roof, attic, basements, foundations, windows, and doors. Every home has issues, even most new construction builds, but is the biggest issue a leaky faucet or is it a foundation issue costing upwards of $100k to repair? A good inspection will leave you with the answers to those questions and give you the confidence to move forward or to turn and run. To move forward quickly with an acquisition, investors need a qualified inspector onsite right away. The traditional method of finding an inspector is by looking at websites, listings, reviews, and calling or checking their booking system to see if they are available. This is tedious, time-consuming, and uncertain, which is why a lot of the major home-buying players, like iBuyers, are going in a different direction. Inspector marketplaces, like Inspectify, offer an easy way to book an inspection anywhere in the country in mere minutes. This not only saves valuable time but also gets a qualified professional on-site in days, not weeks. They can also provide added benefits like repair cost estimates. Lesson 2:Getting the Right Data When it comes to assessing and acquiring a home to invest in, an investor’s needs differ from those of a traditional homebuyer. Most inspections are standardized, but it is up to the inspector (and their state minimum requirements) regarding what information will be in that report. When considering a home to fix & flip, you may want to know additional details about the home such as countertop square footage, door and window dimensions, or measurements of the walls and floors. Those items are not found on a typical home inspection but could be a gamechanger when deciding on an investment property. There is no better time to collect that information than when an inspector is already on site. You could create a form for the inspector and hope they answer it or that they send somebody else onsite to collect that data. However, iBuyers have found a better way. They are working with companies like Inspectify to create custom inspection templates that collect the data they are most interested in and then feed it into their pricing models and acquisition processes. This approach is saving them valuable time and resources and is helping mitigate their investment risks. Lesson 3:Scaling and Cutting OPEX costs With iBuyers purchasing homes in dozens of metros across the country, they are learning that it can be hard to scale into new territory. You may have your acquisition process down pat in your area but that may not be where the next best investment opportunities are. Finding listings nationwide has become increasingly easier over the years since the birth of search portals like Zillow in 2005. But how do you get through the next part of the acquisition process from miles away? At first, iBuyers were setting up shop in each new metro and building internal teams to execute on home acquisitions. However convenient, hiring and keeping employees busy 40 hours a week brings a lot of overhead to the organization. It also keeps them limited to that geographic area and unable to pivot quickly when the market shifts. Now, iBuyers are taking a different approach and relying on companies like Inspectify to be their internal team. They can get the customized inspection data they need quickly and fed directly into their systems via API, saving them

Read More

Factors Affecting Fix and Flip Investors

But Help Is on the Way…Eventually by Rick Sharga Most fix-and-flip investors will agree that a housing market with high demand, low supply, low-cost capital, and rising prices is their ideal scenario. And generally speaking, that characterizes today’s market. But like many generalizations, this one does not hold up well upon further scrutiny. Partly, this is due to excesses in all the categories mentioned above. Supply of homes for sale—both new and existing homes—has never been lower. Homebuilders have under-built for the last decade, and existing homeowners have been staying put longer and longer: the average tenure of a homeowner today is almost 12 years, more than double the length of time a homeowner stayed in place a decade ago. And consumer psychology has also played a role, since prospective home sellers first hesitated to list their home during a global pandemic, and now are concerned that if they sell their home there is nothing for them to buy. At the same time, demand has been driven to a high level by demographics—namely, the largest cohort of Millennials (the largest generation in U.S. history) is rapidly approaching the prime age for home ownership. The COVID-19 pandemic played a role as well, accelerating the movement of urban renters to become suburban homeowners. Also driving demand were historically low mortgage rates. Sub-3% rates on 30-year, fixed-rate loans bolstered affordability, and in many cases made it less expensive to make a monthly mortgage payment than to pay rent. This huge supply/demand imbalance led to bidding wars, which in turn led to massive price increases (15% year-over-year), and to properties spending almost no time on the market. The median number of days-on-market dropped from almost 60 in June 2020 to 37 in June 2021 according to the Federal Reserve Bank of St. Louis. And in many markets, the actual days on market could be measured in weeks…or even days. So, all the factors that normally play out in favor of fix-and-flip investors have been so extreme that they have made it extraordinarily difficult for flippers to prosper. Limited supply is good; virtually no supply makes it hard to find anything to buy. Rising prices are good—they make it easier to capture ROI; prices that rise so fast they eat away all the margins are not so good. Low-cost capital is useful unless it turns traditional homebuyers into well-funded competitors for this limited inventory. Home Flipping Falls to Lowest Level in 20 Years It is probably not a surprise that the fix-and-flip market has flopped in recent quarters. According to a recent report from RealtyTrac’s parent company ATTOM Data Solutions, flips accounted for only 2.7% of home sales in the first quarter of 2021—the lowest level since 2000. This was down from 4.8% of home sales in the fourth quarter of 2020 and 7.5% of sales a year ago. The number of homes flipped dropped significantly, and so did the gross margins, due at least in part to the rapidly escalating cost to purchase a home. According to ATTOM, the gross profit on a flip in the first quarter of 2021 was 37.8%. This was down from 41.8% a year ago, and is the lowest margin reported by ATTOM since 2011. Unsurprisingly, ATTOM noted that the percentage of homes flipped dropped in over 70% of the markets covered in its report. There were two other interesting items in the ATTOM report, both of which reflect the reality of the current housing market. First, the percentage of homes purchased with cash by fix-and-flip investors jumped to just over 59%, highlighting the importance of being able to move immediately on a potential property without having to wait for financing. Second, the length of time between purchase and flip dropped to 159 days—the fastest turn times since the third quarter of 2013, and an indication of how strong demand from homebuyers is today. Help is on the Way…Eventually One of the factors undoubtedly hampering fix-and-flip investors today is not just the lack of inventory, it is the lack of foreclosure inventory. While foreclosure activity was running well below historical levels prior to the pandemic, the federal government’s foreclosure moratorium and CARES Act mortgage forbearance program effectively stopped almost all foreclosure actions over the past 18 months. In its mid-year foreclosure report, ATTOM concluded that foreclosure activity was down by 61% compared to the first half of 2020, and 78% compared to 2019. Fix-and-flip investors have historically been ideal buyers of foreclosure inventory, and part of a win/win situation for the housing market—buying below-market properties that needed repairs, getting the properties ready for occupancy, and selling them, often to first-time buyers. While there are other types of properties that fit this buy/fix/flip model such as homes from probate sales or bankruptcies, homes in previously underserved communities, and homes where the owners simply have not kept up with maintenance over the long term, foreclosure properties have been a mainstay for most flippers, and have been in increasingly short supply during the pandemic. That situation may be on the verge of changing. The Biden Administration has indicated that the foreclosure moratorium will have ended by July 31. The Consumer Finance Protection Bureau (CFPB) which regulates how mortgage servicers execute foreclosures, had been expected to put rules in place which effectively would have made it impossible to initiate foreclosure proceedings on defaulted borrowers until the end of 2021. But, somewhat surprisingly, the CFPB rules actually included several carve-outs that should result in foreclosure properties entering the market over the second half of the year. Specifically, the Bureau stipulated that loans that had been in foreclosure prior to the moratorium—some 250,000 in all—would be eligible for immediate processing, as would vacant and abandoned properties. The CFPB also allowed foreclosures to begin in cases where the borrower was “unresponsive” to servicer outreach, or where the servicer had exhausted all loan modification options unsuccessfully. At RealtyTrac, we are now expecting to see several small waves of foreclosures—one shortly after the moratorium expires, made up

Read More

Mid-Level Remodels to Get the Best ROI

Work Smarter and Not Harder by Erica LaCentra Home flipping levels are not what they used to be. According to the first-quarter 2021 Home Flipping Report from ATTOM Data, only 2.7% of all home sales in Q1 of 2021, or 1 in 37 transactions were flips. That is the lowest level since 2000. According to the same report, that latest figure was down 4.8% from Q4 of 2020 and down 7.5% year-over-year. While flipping rates have been down overall for nearly the last year, the returns were still hefty. For those that were able to navigate inventory issues and find the right deals, flipping was still a very profitable venture. However, returns on home flips have also dropped in 2021. As the rate of flips has dropped, so have profits and profit margins, with the gross profit on a typical home standing at $63,500 in Q1 of 2021 versus $71,000 in Q4 of 2020. The market has finally gotten to a point where flipping homes has become very challenging to be worthwhile due to home prices that have spiked over the last year. Whether this is truly a downturn for the flipping industry or not is hard to say. With government intervention finally coming to an end, there are many possible ways that the housing market as well as the flip market may be affected. For those investors that are still looking to flip or maybe add some additional money into properties they currently own, there are definite areas to focus on that will give them more bang for their buck. So, what are those worthwhile ROI improvements? Minor Remodels of Major Areas When investors are reviewing what parts of a property should be rehabbed to ensure a good return, they should be thinking about the parts of a home that get the most use. The kitchen and bathrooms are the highest traffic areas and remodels of these rooms are typically going toprovide the greatest return. However, that does not mean that a major gut remodel is necessary to result in larger profit margins. Investors should be thinking about mid-level remodels to get the best ROI. For a kitchen, that would typically entail refacing or replacing kitchen cabinets, installing new countertops, putting in new faucets and fixtures and updating appliances. This level of renovation will cost, on average, around $20k–$25k versus a major kitchen renovation that can cost anywhere from $40k to $70k, saving an investor a tremendous amount of money on a project. For bathrooms, a similar approach can be taken. Fresh paint, refacing a vanity and new faucets and fixtures can go a long way towards giving this area of a home a facelift. If the layout of the space works and the essential parts of the bathroom are in good shape, there is no need to do a gut remodel. A basic remodel of a bathroom typically costs $10k versus a major bathroom remodel costing an average of $14k to 18k, again saving an investor money while still improving the space. Fresh Paint A fresh coat of interior paint has an average cost of $2k but according to HomeGain, an interior paint job can have sellers seeing up to an 107% return on investment. Choose colors with your end buyer in mind and stick to a more neutral color pallet. You will see the greatest return by choosing white, off-white, light grey, or tan paint colors throughout the home. This ensures that potential buyers can see the home as a blank canvas that is move in ready or is easy to paint over. Curb Appeal Focusing on curb appeal is a must! Because the exterior of the property is the first impression potential buyers get of a home, it makes sense that it is a good place to spend renovation dollars. According to a recent article from CNBC, the “majority of projects offering the greatest returns in resale value were related to curb appeal.” Something as simple as replacing garage doors showed a 94% return-on-investment. Other projects to consider include updating the siding, painting the exterior of the home or adding a manufactured stone veneer for a more appealing look.  Investors should also take landscaping into consideration. Not only will future buyers be looking at the home in person but usually an exterior shot of the home is the first thing they will see in the property listing. Attractive landscaping can add up to 28% to your home’s overall value, according to John Harris, a landscape economist. Finally, investors should be looking at basics such as repairing damaged fencing, repairing or re-staining an existing deck or porch, sprucing and cleaning up walkways and re-sodding anydead grass spots on the lawn. A little TLC spent on the outside of a property will ultimately bring in bigger returns. Lighting Interior and exterior lighting can have a significant impact on a potential buyer’s opinion of a home. Upgrading the lighting is another easy fix to modernize a property without major effort. Investors should find more modern and timeless fixtures. This will not only prove to be less expensive but will also have greater appeal for future buyers. Also, do not overlook smaller touches like updating outlets and switch plates. According to HomeGain, upgrading the lighting can see an ROI of close to 300%. Some other key projects include installing dimming switches in common rooms, increasing the wattage of all bulbs around the house and making sure the lighting functions properly. If there is room in the budget, consider investing in smart home technology, as well. Flooring According to Realtor.com, in 2019, homes that had hardwood floors sold for 2.5% more than homes with other types of flooring and provided an ROI of between 70% and 80%. Investors should consider ripping up existing carpets and spend the money to either refinish the underneath flooring (if hardwood) or put in new flooring. New flooring will make a home look more attractive and eliminate any smells or stains that may appear on

Read More

Choosing the Right Coverage

How It Can Make or Break Your Fix-and-Flip Investment by Jen Sitko Choosing the right real estate insurance to protect your investment projects can seem like a superfluous and unnecessary cost. After all, you want to sell the project as quickly as possible, so why opt for additional coverage? As a lender, Fund That Flip operates daily in the world of risk management, so we see firsthand where cutting corners for a lower cost leads to more trouble than it is worth. We’ll explore some of the supposedly “cost-saving” insurance missteps that could lead to disaster for your fix-and-flip project—and, more importantly, how you can leverage insurance to help minimize your risk and maximize the benefit to your business. Your Time is Money One of the most common mistakes when selecting an insurance policy is not carrying enough coverage on the property. As a real estate lender, we often see policies only written with enough coverage to protect the total monetary investment into a project (purchase cost plus your renovation budget). However, that calculation does not account for your time and labor, which, of course, are often some of the biggest costs for your business. While a total loss could be covered in this case, you will be left with nothing to show for the time you spent executing the project. …And Don’t Forget Replacement Costs Another oversight that real estate rehabbers often commit is failing to consider their estimated replacement costs. Insurance companies will evaluate based on that replacement cost, meaning it will be assessed on the cost if you were to knock down, excavate, and rebuild. If you choose to under-insure a property, you could potentially face coinsurance penalties and be shorted or denied claims if you fall below the standard 80% coinsurance clause. While not all coinsurance is 80/20, this is the most common, and the penalty will apply for any under-insured property, regardless of the ratio. Let’s take a closer look at an example: Your newest investment, a fix-and-flip, is evaluated at a $1,000,000 replacement cost by your insurance company, but to save on the premium, you only insure it for your anticipated sale price of $650,000. In this case, the home is under the 80% coinsurance clause ($800,000) and therefore, puts any claims you would make at risk for penalty and short payment.  When evaluating real estate insurance, be sure to consider your time, labor, and most importantly, your replacement costs when calculating your coverage. Accidents Can Happen Another common misstep when choosing insurance is failing to specify on the documentation that there will be renovations made to the property. As a real estate investor, you know that unintentional incidents can occur at any job site, even to the most meticulous and careful. That is why it is a good idea to explicitly document that you will be renovating the property when choosing insurance. A vacant homeowner’s policy will protect the property as it currently sits; however, it will not cover the renovations being made or claims or losses caused by the renovations themselves. Take care that any policy you take out includes a builder’s risk endorsement or language stating that the building improvements are covered.  When in Doubt, Choose the Special Form Now we’re really getting into esoteric knowledge. You may be surprised to learn that the actual form on which your policy is written matters. Special Form should always be your top choice so long as it is available. It is the broadest type of policy and coverage that you can secure, meaning that you basically are insured against any cause of loss that isn’t excluded on your form. If your agent says that Special Form is not available for the property in question, consider shopping your options. Not all agents may have knowledge or access to quoting you on a Special Form. Here’s an easy way to differentiate between the two: Special Form – if the policy does not specifically exclude a “cause of loss,” then it will be covered. Broad/Basic Form – if the policy does not list a specific “cause of loss” as covered, then it won’t be. Carrying General Liability in Addition to Property Coverage General liability coverage tends to be the less expensive portion of a premium, but investors may wonder why having this additional coverage is necessary when they are simply renovating a property. As a general rule, property coverage relates to the physical property, while liability relates to unforeseen events that leave the property owner open to risk. For example: If you or your realtor are showing a partially finished flip, and someone trips over exposed materials and causes themselves bodily harm, any potential lawsuits that might arise will likely name the owner of the home (which, since you’re working on the project, is you). In this case, general liability coverage will protect you. Your contractor likely carries general liability as well, but something many investors do not know is that, as the owner of the property, you still need the coverage individually and in the name of your LLC. Your contractor’s coverage only extends to bodily injury or property damage caused by their trade work. It does not insure the property you own and any claims that arise which are not directly related to them. While it can be tricky to navigate all the different options and types of insurance, choosing the plan that best fits your real estate investment project can be crucial to maximize your profits and give you a competitive edge. It is helpful to understand the choices available to you and which ones make sense for your business. Oftentimes, the options that might seem to be saving you time or money could ultimately have a negative impact on your project or business. Most importantly of all, make sure you partner with insurance providers who understand your real estate business and whom you can trust to give you the best plan for your needs.   

Read More