House Flippers: What Insurance?

House flipping is a complex and risky process, and insurance is essential to protect yourself and your property. A standard homeowner's insurance policy will not cover you, as house flipping is considered a high-risk activity by insurance companies. Instead, you will need to purchase special types of insurance, including a dwelling policy, a builder's risk policy, and a general liability umbrella policy. These policies will protect you from physical damage to the property, bodily injury, and other liabilities that may occur during the renovation process. The cost of insurance for house flipping can vary depending on factors such as the geographical location, the value of the property, and the level and type of coverage chosen. It is recommended to consult with insurance providers early in the process to ensure adequate coverage.

Why you need insurance for house flipping

House flipping is a complex and risky business. It involves a significant investment of time and money, and there are many things that can go wrong. Therefore, it is essential to have insurance to protect your investment and give you peace of mind. Here are some reasons why you need insurance for house flipping:

Protect Your Investment

House flipping is a risky business, and there are many things that can go wrong. Your house could burn down, a contractor could get injured, your property could be vandalised, or building materials could be stolen. Insurance will protect you financially in these situations and give you peace of mind.

Special Insurance for House Flipping

Traditional homeowner's insurance policies do not cover house flipping. This is because house flipping is considered a "high-risk" activity by insurance companies. House flippers typically buy distressed properties that require significant renovations and will sit vacant for months while the work is being completed. As such, you will need a special type of insurance designed specifically for house flippers.

Types of Insurance for House Flipping

There are three main types of insurance that house flippers should consider:

• Dwelling Policy: This type of insurance is designed to cover vacant properties under renovation from physical damage such as fire, water damage, and vandalism.
• Builder's Risk Policy: This type of insurance covers direct physical damage to the property during the construction process, including damage to materials, equipment, and fixtures.
• General Liability Umbrella Policy: This type of insurance covers bodily injury that occurs on the property, such as slip and fall accidents or wrongful death.

Customisable Coverage

The amount of coverage you need will depend on your specific project. You can work with your insurance provider to customise a policy that meets your needs and protects your investment.

Protect Yourself from Liability

In addition to the risks mentioned above, there are also legal risks associated with house flipping. For example, if a realtor, inspector, or neighbour trips over building materials or slips and falls on your property, they can pursue you for damages. General liability insurance can help cover you in these situations.

Types of insurance coverage needed

House flipping is a complex and risky process, and it is essential to have the right insurance coverage in place to protect yourself and your property. Traditional homeowner's insurance policies do not cover house flipping, and it is considered a "high-risk" activity by insurance providers. Here are the types of insurance coverage you will need for your house-flipping projects:

Dwelling Policy:

A dwelling policy is specifically designed for vacant properties undergoing renovation or those that are on the market for sale or looking for a tenant. It covers physical damage to the property, including fire, water damage, and vandalism. Vacant properties are considered higher risk by insurers as they are more prone to theft, arson, and water damage. It is important to ensure your dwelling policy covers both the vacant building and the renovation value.

Builder's Risk Policy:

A builder's risk policy is necessary when you are undertaking structural renovations to the property. It covers direct physical damage to the property during the construction process, including damage to building materials, fixtures, and equipment owned by the insured. Some dwelling policies do not cover renovation materials, so it is recommended to add a "Builder's Risk Rider" to your policy. This type of insurance is typically more affordable for house flippers and is ideal for those just starting in the business.

General Liability Umbrella Policy:

This policy covers bodily injury that occurs on the property, such as slip and fall accidents or wrongful death. It is important to note that this coverage does not extend to contractors or workers you hire. General liability insurance can be purchased separately or as part of your policy and will contribute to legal fees and medical treatment costs.

Vacant Home Insurance:

Once your renovation is complete, if the house remains vacant while on the market or before moving in, you will need vacant home insurance. This type of insurance covers the structure of an empty house and is typically more expensive than standard homeowner's insurance. Vacant homes are more susceptible to vandalism, gas leaks, broken pipes, and other issues that can cause significant damage if undetected.

Special Form Coverage:

When it comes to the level of coverage, you have two main options: Basic Form and Special Form. Basic Form covers only the causes of loss listed in the policy, while Special Form covers all causes of loss except those specifically listed as exclusions. Special Form Coverage is generally recommended as it provides broader protection, and the burden of proof is on the insurance carrier to prove that a loss is caused by a specified exclusion. Some common exclusions to Special Form Coverage include sewer and drain backup, earthquakes, floods, and intentional damage.

Replacement Cost Value:

When determining the amount of insurance coverage you need, it is crucial to consider the replacement cost value. This value is based on the amount of money it would take to replace or rebuild the damaged or destroyed home with a similar one in today's market. It is important to note that the replacement cost value includes only the value of the home itself, not the value of the land.

How much insurance coverage is needed

When flipping a house, it is important to have adequate insurance coverage to protect yourself and your property from various risks and liabilities. Here are some key considerations to determine the amount of insurance coverage you need:

• Property Value: Obtain enough coverage to secure the amount you paid for the property, excluding the value of the land, and the amount invested in renovations. In the event of a total loss, you will need sufficient coverage to either rebuild the property or sell the lot to another investor.
• Risk Assessment: Conduct a thorough risk assessment to identify potential hazards and vulnerabilities associated with the property. Consider factors such as the property's condition, location, neighbourhood safety, market trends, zoning laws, compliance requirements, and natural disaster risks.
• Special Form Coverage: Opt for Special Form Coverage to protect against all causes of loss except those specifically listed as exclusions in the policy. Be aware of common exclusions such as sewer and drain backup, earthquake, flood, and intentional damage. While more comprehensive, this option may be more costly.
• Basic Form Coverage: Choose Basic Form Coverage if you want to save on premiums. However, this option only covers the causes of loss listed in the policy, excluding all other causes. Keep in mind that common perils like theft, weight of ice, sleet, snow, and water damage may not be included.
• Replacement Cost Value vs. Actual Cash Value: Consider whether you want replacement cost value coverage or actual cash value coverage. Replacement cost value covers the amount needed to replace the damaged or destroyed home with a similar one in today's market, excluding the value of the land. Actual cash value takes into account depreciation and may leave you with insufficient funds to completely rebuild.
• Liability Coverage: Ensure you have adequate liability coverage in case of bodily injury or property damage claims. This is especially important if you have contractors or workers on-site. General Liability Umbrella policies can provide coverage for accidents or injuries that occur during the renovation process.
• Builder's Risk Policy: If you're undertaking structural renovations, consider a Builder's Risk Policy, which covers direct physical damage to the property and may include materials, equipment, and fixtures used in the renovation.
• Geographical Location: The cost of insurance can vary depending on your geographical location. Properties in high-risk areas, such as those prone to natural disasters or with higher crime rates, may require additional coverage.
• Number of Properties: If you're flipping multiple houses per year, consider finding an insurance provider that can cover all your properties under one schedule and one monthly payment.
• Consultation with Experts: Consult with insurance professionals who specialise in real estate investment to determine the appropriate level of coverage for your specific needs. They can guide you through the different options and help you avoid being underinsured or overinsured.

How much insurance costs

The cost of insurance for house flippers depends on several factors, including the value of the property, the geographical location, and the amount and level of coverage required.

House flipping insurance is typically more expensive than standard homeowner's insurance, with policies ranging from $1,000 to $4,000 per year. The cost of dwelling insurance is usually around 0.5% to 1% of the property value per month. A general liability umbrella policy is also quite affordable, with $1 million worth of coverage costing only a few hundred dollars.

There are two main types of insurance coverage: Basic Form and Special Form. Basic Form coverage includes only the causes of loss listed in the policy, while Special Form covers all causes of loss except those specifically excluded. Basic Form coverage can save you 25-30% but does not include theft, weight of ice, sleet, snow, or water damage. Special Form coverage includes these perils but is more expensive.

The cost of insurance for house flippers can also depend on whether you choose a customizable policy provider or a traditional insurance company. Customizable policy providers like NREIG offer tailored coverage for each stage of a flip, from vacant properties to fully renovated homes. Traditional insurance companies like State Farm and Allstate offer less flexible coverage that may not include renovation-specific risks.

Overall, the cost of insurance for house flippers can vary widely depending on the specific needs and requirements of the property and the investor.

When to get insurance for house flipping

House flipping is a time-sensitive business, and it's important to have the right insurance in place to protect your investment. Here are some key points to consider when deciding when to get insurance for your house flipping project:

• Start Early: It's advisable to start exploring insurance options as early as possible. Don't wait until the last minute to contact insurance providers. As soon as you have the property under contract, reach out to insurers to get quotes and choose the best coverage for your needs. This will ensure that you're not rushed into making a decision and that you have adequate protection in place from the beginning.
• Understand the Risks: House flipping involves a variety of risks, including fire, theft, vandalism, and injuries to workers. These risks can result in significant financial losses if they are not properly insured against. Understanding these risks will help you assess the need for timely insurance coverage.
• Vacant Properties: Traditional homeowner's insurance policies typically do not cover vacant properties, which is often the case during the renovation phase of a house flip. Vacant homes are more susceptible to vandalism, theft, and water damage. Therefore, it's crucial to have a specific insurance policy in place to cover these risks as soon as the property is vacant.
• Renovation and Construction: During the renovation or construction phase, you will need a builder's risk policy or a dwelling policy to cover any physical damage to the property. This type of insurance protects the structure of the house and any materials on-site. It is important to have this coverage in place before starting any construction work.
• Liability Coverage: If someone gets injured on your property during the renovation, you may be held liable. General liability insurance will protect you from financial losses due to workplace accidents and cover medical and legal fees. It's important to have this coverage in place before allowing anyone onto the property to ensure you are protected from potential lawsuits.
• Post-Construction: Once the construction is complete, you may need a vacant home policy if the house will be sitting empty while on the market or before moving in. This type of insurance covers the structure of an empty house and protects against vandalism and other damages.
• Peace of Mind: Having insurance in place provides peace of mind throughout the house flipping process. Knowing that you are protected against potential disasters and liabilities allows you to focus on the project and make decisions with greater confidence.

In summary, it is crucial to obtain insurance for your house flipping project as early as possible. By starting early, you can ensure that you have the necessary coverage in place to protect your investment, mitigate risks, and provide peace of mind during the renovation and construction phases. Remember that different stages of the project may require different types of insurance policies, so work closely with your insurance provider to ensure continuous coverage.

Frequently asked questions