How to get the right insurance for flipping a house
Turning a quick profit entices many people to consider house flipping, which involves buying a house or property with the intention of selling it and making money in the process. Television shows like A&E's "Flip This House" make house flipping look easy.
In reality, it's not always the case, especially when it comes to insuring the house you plan to flip.
"You're in need of more than the standard homeowner's policy," says Bill Gatewood, director of personal lines at Burns & Wilcox, a wholesale and underwriting manager in Chicago.
Here's what you need to know about finding the right home insurance for your house flipping project.
How to get home insurance when you flip a house
Whether the home in question was purchased brand-new or is in need of remodeling, it's best to call your insurer before you make a decision to purchase the home or sign any paperwork, Gatewood says.
"People often get caught up in the investment part and don't call their insurer soon enough. They think they'll just pick up the phone and have a new policy within 10 minutes. It's doesn't happen that way."
Not all insurers want to write insurance policies for house flippers, Gatewood says.
For one reason, it's not uncommon for 10 or more people to get in on a flipping investment, Gatewood says. "Insurance companies are all about analyzing risk, so they'd be hesitant to gamble on a bunch of people they don't know."
Investment properties requiring renovation also present additional risks for your insurer due to builders coming and going as well as the threat of vandalism and theft. Copper plumbing theft is common, for example.
In addition, home investors often want to purchase insurance a business structure policy under an LLC a limited liability company). An LLC protects your personal assets and is popular among home investors and flippers, but this also makes you an unappealing risk. Couples who want to protect their assets sometimes use an LLC for protection if they invest in several properties. "If the LLC includes only a husband and wife you won't likely run into problems. But otherwise insurance companies typically don't want to provide business liability," Gatewood says.
Find out whether your insurer is willing to cover you before you make a decision.
What's the difference between a home and dwelling policy?
Many new flippers are underinsured, says Dave Seymour, one of the hosts of the TV show, Flipping Boston. "We are always sure to cover the amount of cost to replace the building and the amount of material we put into it."
In order to do this, you'll need a dwelling policy, not a standard home insurance policy, Gatewood says. Dwelling policies cover only a home's physical structure, where homeowner's insurance includes coverage for the contents of your home as well. Dwelling policies are only needed when renting out to another party.
Expect a dwelling policy to cost you 25 to 40 percent more than a homeowner's policy. "Unlike a typical homeowner's policy, a dwelling policy may be more expensive, but you also have options," Gatewood says.
A standard homeowner's policy typically includes:
- Coverage for dwelling your main house).
- Cover for other structures such as attached garage).
- Contents of the home.
- Loss of use for a hotel if you're unable to live in your home).
- Personal liability.
- Medical expenses.
A dwelling policy, on the other hand, requires you to build the policy based on your needs; you can pick and choose your coverage. For example, you likely won't need as much coverage, if any, for the contents of the home as you would for the home in which you live.
You would, however, want to include coverage for building materials such as tile, which would be lying around during the construction process. "If materials such as tiles are stolen from the home the cost would not be covered in your traditional homeowner's policy for the home you live in)," Gatewood says.
As your investment project progresses, your insurance needs also change. "A common rookie mistake is not getting unoccupied insurance vacant house coverage) if no work is happening," Seymour says, who tells of an investor who didn't have vacant home coverage and lost money when vandals burned his house down.
Use only licensed contractors
House flipping presents a number of potential liabilities that a normal homeowner would not consider, says Tom Firestine, managing principle at Calculated Risk Advisors, LLC, Chicago. "If third party contractors are on site they could sue the owner for any injuries on the job; investors should verify that all contractors hold valid workers compensation policies."
Insurers want to know the people working on your home are licensed. Most will not issue you a policy if an unlicensed but helpful friend, relative or you yourself are doing the renovations.
Many times the type of policy will change during the lifetime of the investment house, Gatewood says. When construction finishes, the new home may need a vacant home policy and then if the home is rented, it may need a dwelling policy. It's the responsibility of the investment property owner to speak with their insurer throughout the process and know the insurance requirements of the building at any given time."Each has different coverage implications and liability implications and you don't want to get caught with the wrong insurance if there's a lawsuit," he adds.
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