Insuring Your Flip House

Flipping houses is a risky business, and it's important to have the right insurance in place to protect your investment. Traditional home insurance policies won't cover fix-and-flip properties, which are often deemed high-risk due to their vacant status and the nature of the renovation work. As such, it's crucial to get specialist insurance for your flip project, which can include a dwelling policy, builder's risk policy, and general liability umbrella policy. These policies will protect you from physical damage to the property, liability for accidents, and more. The cost of insurance for a fix-and-flip project will depend on various factors, such as the location and value of the property, and the level and type of coverage you choose.

Why you need insurance for flipping houses

Flipping houses is a risky business. While it can be rewarding, it's important to remember that it's not always glamorous. There are many potential pitfalls, and things can go wrong. As a real estate investor, you need to be aware of these risks and take steps to protect yourself and your investment.

The Risks of Flipping Houses

When you're flipping a house, you're assuming a certain level of risk. You're taking a distressed property off the market, with the goal of renovating and returning it to the market at a profit. This process is time-sensitive, and any delays can impact your bottom line. There are also financial risks, as you're investing a significant amount of money in the hope of making a return.

During the renovation process, your property is vulnerable to various perils, such as water damage, fires, vandalism, and theft. These risks are heightened because the property is vacant and often in a state of disrepair. Additionally, with multiple people coming and going, there is an increased risk of accidents and injuries.

Protection Against Risks

House flipping insurance provides coverage for these types of risks. It is designed specifically for fixer-upper houses, which standard homeowners insurance and landlord policies do not cover. Here are some key reasons why you need insurance when flipping houses:

• Protection Against Financial Losses: House flipping insurance offers financial protection in the event of damage, theft, or accidents. Without insurance, you could be left bearing the full cost of these incidents, which could be devastating for your investment.
• Coverage for Vacant Properties: Traditional insurance policies often exclude vacant homes, which are considered high-risk due to their increased vulnerability to vandalism, theft, fire, and water damage. House flipping insurance fills this gap in coverage.
• Liability Protection: If someone is injured on your property during the renovation or construction process, you could be held liable. House flipping insurance, including a general liability policy, can cover medical costs and legal fees associated with such incidents.
• Peace of Mind: With the right insurance in place, you can proceed with your house-flipping project with greater peace of mind, knowing that you're protected against potential financial losses and liabilities.

Types of House Flipping Insurance

There are several types of insurance coverage to consider when flipping houses:

• Dwelling Policy: This covers direct physical damage to a vacant property undergoing minor repairs or cosmetic renovations. It protects against risks such as fire, theft, and water damage.
• Builder's Risk Policy: This covers direct physical damage to the property during major structural renovations. It can also extend to cover materials, equipment, and fixtures used in the renovation.
• General Liability Policy: This provides coverage for bodily injuries that occur on the premises, such as slip and fall accidents or even wrongful death. It helps protect you from financial losses and legal fees associated with such incidents.

Cost of House Flipping Insurance

The cost of house flipping insurance can vary depending on various factors, including the location, the level and type of coverage, and the value of the property. On average, it can range from $1,000 to $4,000 per year, or between 0.5% to 1% of the property value per month.

In conclusion, insurance is a crucial aspect of flipping houses. By understanding the risks involved and obtaining the appropriate coverage, you can protect your investment, mitigate potential losses, and have peace of mind throughout the renovation and flipping process.

Types of insurance coverage

Flipping houses is a risky business and requires a special type of insurance coverage that a typical homeowner's insurance policy does not provide. Traditional insurance providers view house flipping as 'high risk' and are not designed to protect vacant or rehab properties. Therefore, it is important to consider the following types of insurance coverage:

Dwelling Policy

A dwelling policy is meant for vacant properties undergoing a cosmetic uplift or renovation. It protects against direct and physical damage to the property, including vandalism, water damage, and arson. Vacant or renovated properties are considered higher risk as they are more prone to such issues.

Builder's Risk Policy

A builder's risk policy provides coverage for structural renovations, including direct physical damage to the property during the construction process. It may also cover materials, fixtures, and equipment used in the renovation, if owned by the insured. Some dwelling policies do not cover renovation or materials, so it is important to consider adding a 'builder's risk rider' to your policy.

General Liability Umbrella Policy

A general liability policy provides coverage for bodily injury or damages that occur on the property during the renovation process, such as accidents or death. However, it is important to note that this policy does not typically cover hired general contractors or workers on the property.

Special Form Coverage

Special form coverage provides protection for all causes of loss, except those specifically listed as exclusions in the policy. Exclusions may include sewer and drain backup, earthquakes, floods, and intentional damage. While this option may be more expensive, it provides more comprehensive coverage.

Basic Form Coverage

Basic form coverage includes protection for the causes of loss listed in the policy, while all other causes are excluded. This option may save you money, but it is important to carefully consider the exclusions, such as theft, weight of ice, sleet, snow, and water damage.

LLC Protection

While not strictly an insurance policy, it is recommended that flippers deal with financing through an LLC (Limited Liability Company). This protects your personal assets and ensures you are not personally liable if something goes wrong with the property.

It is important to consult with a reliable insurance provider to discuss your specific needs and determine the appropriate coverage for your house-flipping projects.

How much insurance coverage you need

The amount of insurance coverage you need for flipping a house depends on several factors, and it's important to ensure you have adequate protection for your investment. Here are some key considerations to help you determine the appropriate level of insurance coverage:

Property Value and Renovation Costs:

At a minimum, you should obtain enough insurance coverage to cover the amount you paid for the property (excluding the value of the land) and the costs of any renovations or improvements you plan to make. This ensures that in the event of a total loss, you have the financial means to either rebuild the property or sell the lot to another investor.

Type of Coverage:

There are two main types of insurance coverage to choose from: Basic Form and Special Form. Basic Form covers only the specific causes of loss listed in the policy, while Special Form covers all causes of loss except those specifically excluded. Special Form coverage tends to be more comprehensive but may be more expensive. Consider the risks you want to insure against and choose the type of coverage that best suits your needs.

Replacement Cost Value vs. Actual Cash Value:

• When determining how much insurance coverage you need, consider whether you want a policy that provides Replacement Cost Value or Actual Cash Value in the event of a claim. Replacement Cost Value covers the cost of replacing or repairing your property with similar materials, without deducting for depreciation. This ensures you have the financial means to restore your property to its previous condition.
• On the other hand, Actual Cash Value takes depreciation into account and may not provide enough funds to completely rebuild or repair your property. While Actual Cash Value policies may be cheaper, they could leave you in a difficult position if you need to recoup significant losses.

Liability and Risk Exposure:

Consider the potential risks and liabilities associated with your house-flipping project. For example, if you are undertaking significant structural renovations, you may want a Builder's Risk Policy to cover any damage to the property during construction. If there are multiple contractors and subcontractors working on-site, you may also want General Liability Insurance to protect against potential lawsuits and claims arising from accidents or injuries.

Additional Coverages:

Depending on your specific needs, you may want to consider additional insurance coverages such as Umbrella Insurance, Title Insurance, and Business Interruption Insurance. Umbrella Insurance provides extra protection if your primary coverage limits are exceeded. Title Insurance ensures a smooth transfer of ownership by covering any title-related issues. Business Interruption Insurance compensates for lost income if your project is disrupted due to covered damages or perils.

Remember, it's crucial to consult with professional insurance providers who specialise in house-flipping insurance to ensure you have the appropriate level of coverage for your specific needs. They can help you navigate the complexities of insurance and provide tailored advice based on your project.

The cost of insurance

Dwelling insurance policies are designed for vacant properties undergoing renovations and typically cost more because they are considered a higher risk for vandalism, water damage, and arson. A builder's risk policy is necessary for structural renovations and covers physical damage to the property and, in some cases, materials. General liability insurance covers bodily injury to people working on the project or anyone else injured on the property during the renovation. It's important to note that general liability insurance does not usually cover hired general contractors or workers.

When considering the cost of insurance for a fix and flip property, it's essential to factor in the potential risks and losses that could occur without adequate coverage. Vandalism, natural disasters, theft, and injuries are all possibilities that could result in significant financial burdens. Therefore, while insurance adds to the overall cost of the project, it provides crucial protection and peace of mind.

It's recommended to consult with insurance providers as soon as you have a property under contract to ensure you obtain the necessary coverage and understand the associated costs.

When to get insurance

The time to get insurance for your house flipping project is as soon as you get the property under contract. Don't wait until the last minute to start contacting insurance providers. As soon as you take possession of the property, it becomes your financial responsibility, so you'll want to be prepared in case disaster strikes on day one of ownership.

You should reach out to multiple insurance providers to get quotes on insurance coverage and select the best provider for your business. Keep in mind that flipping houses requires a special type of insurance coverage that a typical homeowner's insurance policy does not provide. Traditional insurance providers view house flipping as "high risk" and are not designed to protect vacant properties or properties needing rehab.

• Protection from Perils: Your house could be vulnerable to various risks during construction, such as water damage, fires, theft, or vandalism.
• Liability Coverage: Flipping houses involves multiple contractors and subcontractors. General liability insurance protects you from lawsuits and claims arising from bodily injury or property damage on the site.
• Peace of Mind: Insurance provides peace of mind, allowing you to focus on the renovation and flipping process without constant worry about potential disasters.
• Financial Stability: In the event of unforeseen circumstances, such as natural disasters or accidents, insurance can help maintain your financial stability by covering losses and providing compensation.

Frequently asked questions