I received a call from one of two business partners last week. The partners bought a home that needed some TLC. Once they finish with the cosmetic work and updates, they are going to sell the home and home to hope to make a tidy profit on it. What the two partners needed is a home insurance policy that protects their investment while the work is being done and until the home is sold.
I’ve spoken with a number of individuals and groups who’ve pooled their money on a home they’ll flip. Usually the home has been neglected and needs minor repairs and updates prior to being put back on the market. In most cases, the work that’s needed includes new carpet, updating the tile or vinyl flooring, and paint. In a few cases, the kitchen and baths may have the cabinets and countertops replaced along with updated light fixtures and fans.
The issue is what kind of home insurance policy is needed to protect the home from its purchased state, throughout the renovation, and until it’s sold to a buyer who loves the updated home? A standard home policy can’t be written because most home insurance companies home won’t write a policy on a vacant home that’s being remodeled or that’s for sale. The reason is the amount of risk they are assuming on a home that’s vacant which is more susceptible to being burglarized or vandalized.
The type of insurance that’s needed is either a vacant remodel or builder’s risk policy. My recommendation as to which one is the better fit depends on two criteria; the extent of the renovation and how long they anticipate it will take to sell the home.
A builder’s risk policy is a better fit when dealing with an extensive remodel involving reconfiguring the interior layout or adding square footage, replacing the roof, updating the electrical or plumbing systems, and potentially gutting the kitchen and bathrooms. This level of work is larger in scope, will typically take 90 days or longer, and cost $20,000 or more. Builder’s risk policies are designed for major projects and can be written for six months to a year and are more affordable than a vacant remodel.
A vacant remodel policy is a good fit for projects with a smaller scope and cost. These are the cosmetic updates including paint, new carpet, updated countertops, etc. that can be done in 30 to 60 days before the home is placed back on the market to be resold. Vacant remodel policies are available for time periods ranging from 30 days to just under a year.
In either case, there are two items that should be considered to fully protect the owners.
- The policy needs to cover the replacement cost of the home including the value of the home as purchased, as well as the amount budgeted for the updates.
- It should also include liability coverage to protect the owner(s) and investor(s) in the event someone is hurt on the property.
The scope of the project for the home the partners had purchased was minimal. They are only doing a cosmetic update and anticipate reselling the home in a very short period of time. Based on that criteria (updates were underway), I recommended and wrote a vacant remodel policy to protect them for the anticipated amount of time at a price well within their budget. If you’re planning to flip a home, what updates will you do? Share your comments, questions, and experiences with me on my Google +, Facebook, or LinkedIn pages. I’d love to hear from you!