The Impact of Flood Zones on Valuations
The Best Course for Due Diligence
By Rich Reade
Today, flooding is a topic of major interest and concern to investors, lenders, and homeowners for good reason: It is the #1 natural disaster in the US, having affected 99% of all US counties in the last 20 years.
Flooding can happen anywhere and not just limited to coastal areas, near bodies of water, nor the Federal Emergency Management Agency (FEMA) designated high-risk zones.
Flooding can cause disastrous consequences even in relatively minor cases. Just one inch of water can cause $25,000 in damage, with an average flood insurance claim payout of $52,000 from the National Flood Insurance Program (NFIP). Flood damage can cause rotting of building materials, mold and bacteria growth, and structural damage, all of which can affect the overall investment value, short or long-term.
Statistically, natural disasters are occurring more frequently and with greater intensity. Ninety percent of disasters include flood impact, and 42% of homeowners are concerned that weather events such as wind, rain, or flooding will damage their homes in the next three months.
With such impact and ever-evolving data supplying the guidelines of flood risk, it is crucial to have an expert resource to help you precisely and unambiguously answer these questions:
» “What level of flood risk applies to my investment now?”
» “What level of risk may apply in the future?”
» “Do I have any options to challenge the official flood status of a structure?”
How Flood Risk is Dictated
FEMA produces the Flood Insurance Rate Maps (FIRMs) that show all the geographic areas FEMA has defined according to varying levels of flood risk. These flood zones illustrate where low, moderate or high-risk areas exist on the landscape. Every property is in a flood zone of some type, whether high, moderate or low-risk.
The high-risk zones are called Special Flood Hazard Areas (SFHAs) and include the zones that have a 1% or greater chance of flooding in any given year and a 26% chance of flooding over a 30-year mortgage.
FEMA’s Effective FIRM represents and dictates the current location of all flood zones, including SFHAs. Effective FIRMs are continuously updated using data and input from community floodplain administrators working with local engineers and surveyors. FEMA relies on this ongoing collaboration to keep the maps as accurate as possible because flood risk can change over time due to new land development, weather patterns and other factors.
FEMA’s Preliminary FIRM shows changes that have been proposed based on new community data showing changes that may come into effect in the future. Communities have 90 days to submit technical data to support an appeal to a proposed map. Once a new map is adopted as an Effective FIRM, amendments to the map can still be made through the Letter of Map Change (LOMC) or Letter of Map Amendment (LOMA) process.
An important takeaway is understanding that an ongoing and collaborative process exists in establishing and maintaining guidelines for flood risk management as well as insurance requirements. In certain cases, a structure’s official flood status can be challenged and overturned, via the previously mentioned LOMC process, potentially removing insurance requirements.
When Insurance Is Required, and When Insurance is Recommended
Flood insurance is required by law whenever a habitable structure comes in contact with an SFHA, if that structure has a mortgage from a government-backed lender. This is why structure-based precision is important, to be certain where the structure sits in relation to the FEMA flood zones.
If you live in a low to moderate risk area, flood insurance is typically not required. Low risk, however, does not mean a flood will not occur. In fact, one-third of flood insurance claims come from moderate-to-low-risk areas, and this value does not include properties that do not carry flood insurance, but flood just the same.
Even if a government mandate is not force-placing flood insurance on your investment, it is highly recommended to always confirm your structure’s flood status and consider flood insurance. Options include insurance through NFIP, which covers up to $250k, or private insurance which can cover higher amounts.
Challenges Frequently Encountered in Confirming Flood Status
There are an overwhelming amount of well-meant free resources available online that are unofficial, confusing or potentially misleading property owners. Users face a major learning curve or an exercise in futility when exploring mapping data and complex resources on their own, let alone resources that lack the detail required to have clarity on flood status.
Even official flood zone certificates come with pitfalls of their own. Many are limited to the industry standard 1-page Standard Flood Hazard Determination Form (SFHDF). These single-page forms present the essential question, “Is the Building/Mobile Home in a Special Flood Hazard Area?” with checkboxes to indicate “Yes” vs. “No.”
It is not uncommon for the checkbox to be incorrect for one of many reasons, including but not limited to, the certificate being produced on the wrong property, or it is based on an imprecise assessment of structure location in relation to the flood zones.
The SFHDF is a text-only document and a one-dimensional snapshot of flood status that could be based on outdated or incorrect data. Homeowners, lenders and investors deserve clearer, better information.
Best Course for Due Diligence Around Flood Status
For any endeavor requiring confirmation of your true flood status, it is best to secure an official, certified and insured flood zone determination report that uses a comprehensive approach to confirming accurate flood status.
An ideal provider will utilize the most up-to-date and available data, highly detailed mapping, (including FEMAs Effective FIRMs and any Preliminary FIRMs that may exist) as well as absolute precision in identifying structure location.
An ideal provider will issue certified and insured reports protecting the user from liability due to Errors and Omission. And you should have access to support from trained experts like Certified Floodplain Managers (CFMs). Precision and expertise are the best assets for obtaining a clear picture of a structure’s official flood zone status and in determining whether there is opportunity for an official status to be challenged and successfully amended.
When challenging or pursuing options for removal from the high-risk zone, CFMs will be valuable throughout the next steps, such as securing an elevation certificate and submitting all documentation required to pursue a Letter of Map Amendment (LOMA). This level of clarity and support is the best course for due diligence and protection for your investment.
