I have heard that for most House-Flippers the butterflies never go away.
You know- the butterflies in the stomach that they get…
The moment they get a property under contract—whether it’s the first house or the one thousand and first (though I think it moves steadily from sick butterflies to excited butterflies with experience)- they never go away.
The fact of the matter is though, getting the property under contract starts a race—from loans to inspections to wiring instructions and escrow requirements, the next 10-14 days are crazy.
And one of the most forgotten, yet most important details in this process is also probably the least talked about—the insurance.
Especially on their first deal or two, an investor typically “remembers” (finds out they need) insurance when escrow asks about it roughly 3-5 days (if their lucky) before closing.
Then, again, the butterflies, the light headedness and some of that nausea tend to return.
But, have no fear; what follows below is an excerpt from my e-book “The Complete Insurance Guide To Real Estate Investing” that The Better Tomorrow Group has helped me to compile.
Keep this info handy for when your next deal is under contract—it will save you time, money and headaches as you race to the close of escrow.
“The Flipper’s Policy” is a variation on the standard commercial package policy (in this case, a Builder’s Risk Policy)—a combined package of Property Coverage and Liability Coverage and is specifically designed to allow unlimited vacancy as well as full scope of rehab (though not a tear down and rebuild).
The reason why this is a unique risk is because it is a property that is vacant for an unknown amount of time with an unknown amount of work to be done to complete the project (though as investors, we always hope the answer to those: are as little as possible).
Property Coverage—the Building Property itself—“If you flipped the house upside down and shook it, all the stuff that would NOT fall out.”
That includes your cabinets, sinks, tubs, floors, walls…etc.
Property Coverage premium price and value is based on the replacement cost (cost to rebuild) of the property, not the price you paid to buy it or the price you are going sell it for.
Contents Coverage—for “the stuff that would fall out if you flipped the property over and shook it” Like equipment, the fridge, furniture…etc.
In most cases, the base policy does NOT include, (but can have added) what is called “Contents Coverage”.
Liability Coverage—(almost) always offered at a limit of $1million/$2million.
Meaning: 1million of coverage per occurrence and 2 million of coverage total for the policy period no matter how many occurrences.
It can be raised to 2million/4million.
Or an umbrella can be for whatever value you want.
Features to look out for in a Flipper’s Policy—
If the policy is not covering your contractor:
You will want/need proof (and a copy of that proof) that your contractor is properly licensed and insured.
But, if it is a small job and you are not using a GC or contractor, you can add an endorsement that allows you to cover uninsured workers on your policy for an extra premium.
You will also want to (or at least your lenders will want you to) add any mortgagees to a policy as the “loss-payee” which means if the property burns down and your policy pays out, they get paid back not you.
The Policy Structure:
In my experience, the best type of policy will operate like this:
Instead of one policy per property, completely independent from each other (meaning more paperwork and cost for you as an investor) you will want:
A company that offers a single master policy that allows you to add and remove your various properties as you buy and sell them—meaning less paperwork and less cost for you.
Premiums are almost always offered on an annual basis:
$1200/year=$100/month. And as flippers, doing a 3 month project, there is a significant difference between budgeting for $300 on insurance and $1200 for insurance.
Make sure your policy is “Pro-Rated,” which means that you only pay for the coverage while you own the property.
But, most policies require at least 25% to be paid, meaning you will pay for 3 months worth of coverage minimum.
*Pro-rating to the day is far superior. It means you pay only up to the day you sell the property.
Pro-rating for the month means even if you are only a day into your 4th month when its sold you still pay for the entire month.
So, what did you think?
When it’s all broken down, it’s pretty easy to grasp.
Unfortunately, insurance is forgotten until its needed, and if it wasn’t done right, it can result in the failure to protect you from a devastating loss.
My goal, as a partner with The Better Tomorrow Group, is to help you educate yourself against the negligence that is unfortunately all to common when it comes to this type of insurance.
To learn more about how to keep your properties covered and what to do with other investment types, download the free e-book here:
If you have any specific questions don’t hesitate to reach out to me, I am always happy to help.
Parker J Cox
Cell: (831) 435-9021
Office: (619) 667-2880
Parker is an independent insurance agent in San Diego Ca who specializes in providing insurance for Real Estate Investors all over the country and their unique products.