FEMA: Buyer AND Seller Beware
Board: Buying or Selling a Home
We recently gave up on a 5 month long effort to buy a fabulous river front property, after spending an unrefundable $1500 on the effort. While I'm not pleased at having spent that money, it paid for one heck of an education, which hopefully you can get here for free.
The house was build to code, out of the 100 year flood plain as it existed at time of construction. Four years ago, FEMA changed the flood plain, so that the bottom floor of the house was now 2' below the new 100 year flood plain. This resulted in the mandatory flood insurance quote going from the $325/year discretionary insurance the seller had bought and maintained since she bought the house 5 years earlier, to $9300/year.
We thought for sure this had to be an error on Fema's part. Perhaps they did not understand that the house was on stilts? After requesting several times for an elevation certificate, which the seller and her agent insisted they never had, we shelled out close to $500 to get one of our own.
Lesson No. 1: Make the seller provide or pay for an elevation certificate if you believe flood insurance will be required.
Clearly, we violated lesson #1. The seller on this property was difficult at best, and we really wanted this property. We ponied up the $500 only after checking in with the county planning office to see if they had one on file, and while indeed an elevation certificate would have been needed for construction, the files of that era were in complete disarray. I had also contacted the surveyor of the plat I had in my hand for the property, to see if they had the original elevation cert, but either they didn't understand what I was looking for, or they wanted me to pay for a new one, which is what I wound up doing.
FEMA, elevation cert. in hand, came back with the same verdict of $9300/year. This time they suggested we look to "grandfather" the property. If a property was built to code, with proper permits, it could be insured for the flood plain it was originally built on. We had two people go search the files at the planning commission to no avail, to try to find the original elevation cert. Calling around, using random phone numbers that were written on the original subdivision plot some 25 years earlier, I finally track down the original cert, ironically at the office which I hired to do the new one. At the same time, the listing agent finally decided to make an effort to sell her listing, and tracked down the original cert at the settlement office they had used. Her family has been the only agents to handle this property over the years. How I wish her epiphany of where to look had come in to play when I first started asking for it when the contract was ratified 2 months earlier!
Lesson No. 2: Look for elevation certs at surveyors offices and settlement offices before shelling out good money, or better yet, tell the listing agent to earn their commission and do so.
So after a couple more weeks of deliberation, and the bank kindly extending our rate lock for a couple of weeks for free, FEMA comes back to us to tell us that the "shed," consisting of 4 pieces of plywood enclosing 4 of the piers, effectively made the first floor at ground level, and the rate was...you guessed it...$9300. To help you understand the absurdity of this, that annual premium is for an insurance value of $200,000 and on a property that was essentially unscathed in major flooding that submerged houses along this river in the 1990's. The shed, whose contents would not be insured, also houses the pipe bringing well water up to the house, the pressure tank for the well, (supposedly, as we never saw it,) and the soil pipe bringing the waste water down to the septic system. I don't know how the property could have been built without it, but again, no records. Welcome to rural WV.
So at this point, we shift tactics. It was our understanding that if flood insurance had been continuous, there would be no significant changes to premium if the policy were transferred at sale from one owner to another. There was even what is basically an ad campaign from FEMA that encourages those in an area whose flood plain will change soon to get insurance now. They point out that it is a good marketing approach to get insurance before flood plain changes, because as a seller it will make your property more marketable when you go to sell it with the low flood premium.
Our problem with transferring the policy is that the seller has USAA, which being for military, we didn't qualify for, so it could not be transferred. By this time, however, the seller's policy was up for renewal, and she was able to transfer it to a more conventional agency, where it could in theory then be transferred to us.
FEMA gave us a provisional transfer rate of $380/year, and told us the official one would be in our hands within a couple of days. We celebrated, and tried darn hard to get the bank to schedule settlement, but by now FEMA had violated their timing promises so many times that the bank refused to move until the firm offer was in our hands. We begged, we pleaded, and reminded the bank that by law they only needed to see proof of flood insurance within so many weeks of settlement, and did not need it to settle. If they did not proceed TODAY, we would lose our free rate lock and have to pay over $1,000 to extend it for another month.
FEMA of course went well past their promised time. Our bank provided rate lock was expiring, and we got the less than stellar Realtors on both sides of the transaction to pick up the $1,000 to extend it for the final 30 days. The rate lock extension only would be charged if the property went through to closing. 10 days later, FEMA comes back with a verdict...$9300!
Lesson No. 3: DON'T PROCEED ON A PURCHASE WITHOUT THE FLOOD INSURANCE RATE DECLARATION IN HAND!!! Thank God that bank was such a PITA, because it may have been painful, but they covered our a$$. If I had convinced them to let us buy the property without having the flood insurance first, as allowed by law, we would be paying an insane amount of money each year for flood insurance, and been left with an unmarketable property.
Lesson No. 4: FEMA lies.
Their information on the web is misleading at best, bait and switch at worst. Not only is a flood insurance premium not necessarily transferable at sale, but we also discovered by talking to people who've experience this, it can be reviewed and changed when you refinance a property as well. One owner I spoke with told me that her rate went up from $300 to over $3,000 when she refinanced. Because it was reviewed at that time, even if she canceled the refi it would still go up. She refied her residence instead and pulled out cash to pay off the vacation home, which would realistically only flood if you saw Noah's Ark on the horizon. They are now self-insured, and owners of an unmarketable property.
So all in all, we profited mightily from this $1500 5 month lesson. We are not that seller who is stuck with a nearly unmarketable property, which will either have to be bought for cash and kept forever, or sold to someone insane enough to pay over $10,000 for insurance for this property, which they will then have issues selling. I'm sure that makes qualifying for that loan very difficult.
Do not assume that only vacation properties are subject to this issue. There are huge numbers of residential properties in the Midwest that are flooded at this time.
Lesson No. 5: If you are planning to sell, ask your insurance agent when the flood plains changed in your area, or if there are plans to change them. Find out what the flood policy would be for your place on transfer of ownership. It's better to be prepared on this. If there are plans for the flood plain to be re-evaluated, consider selling now, or refinancing if you plan to stay.
We have not given up on our search, but are now looking at how close to the 100 year flood plain the house is. We are looking higher on the hill for sure.
Lesson No. 6: If you can't fight city hall, you sure as heck can't fight FEMA.
At one point, we requested help from the office of the Senator for the area the property was in. This Congressional Inquiry got us in touch with someone from FEMA who flat out told us not to expect to understand the logic of the flood insurance process. Fema has their regs, which they follow rigorously, and it may not make sense for every property. In theory, one can contest FEMA's findings, but based on our experience I wouldn't hold out much hope, and certainly wouldn't take on this property's liability with that hope.
This post is already way too long, and believe it or not, a very brief summary of our process. There may be gaps of understanding because of the condensed version, so please ask away if you have questions.