Special Insurance Considerations for Vacant Properties

by on April 28, 2014Jason Van Steenwyk

Much as we’d all love to sell a flipped property within a week of putting it on the market, we all know it doesn’t always happen that way. Indeed, it probably shouldn’t: A big part of the engine that drives flipping profits – at least in the flippin insider way of thinking, is to find sellers who are in a hurry to sell, without being in such a hurry yourself.

Real estate flippers may need special insurance coverage if they're working on a home that may be vacant for some timeAnd so you may well find yourself with a property that’s just going to take some time to get ready. It could be because of extensive renovations, or because your contractor just can’t get to it, or it could be because you don’t have all the money needed on hand and can’t get or don’t want a bridge loan.

In any case, sooner or later, you’re going to have a vacant home on your hands for a while. And you’re going to need to insure it.

Warning: Insuring a vacant home is not the same as insuring a home that has people in it. Insurance companies don’t look at the risk the same way.

Vacant vs. Unoccupied

First of all, insurers draw a distinction between an “unoccupied” home and a “vacant” home. In an unoccupied home, the normal occupants are away for a while, but are expected to return. Meanwhile, there are belongings there, and often someone is keeping up the property, so it’s not obviously unoccupied to the casual observer.

A vacant home is a home where substantially all the furniture and other elements of daily living have been removed. Anyone peeking through a window can tell that no one is living there. These homes invite vagrants, vandals, and thieves that go after copper plumbing, roof fixtures, appliances, and other items of potential value.

Flippers need to be aware of the difference, and when they need to get specialty coverage to protect themselves against loss due to a vacant home.

Coverage Differences

Homeowners insurance policies are usually written to a standard form, and under that form, glass breakage and vandalism are not covered on homes that are vacant for more than 60 days.

Furthermore, most homeowners insurance carriers do not want vacant homes in their risk pool, and if they get wind that your property is sitting vacant, they are quite likely simply to cancel their policy. That’s going to force you to the specialty vacancy insurance market. This is usually quite a bit pricier – perhaps 4 to 5 times pricier – than standard home insurance policies. So you want to do what you can to keep the home from falling into the legal definition of “vacant.”

One idea: Let a trusted friend or family member house-sit the property inexpensively.

Another technique: Keep some cheap spare furniture in storage. When you have a property you expect will be sitting idle for a while, move in a basic living room set, a dinette set, and a bed. Case law has defined a vacant property as one that doesn’t have enough furniture for someone to live there in reasonable comfort.

If you can’t be bothered with it, rent some furniture (this can be an expensive habit, over time), or even have a home staging company do it for you. This could potentially increase the value of a home, if done well.

In some areas, if the home is exceptionally nice, you can even get a designer to use the place as a model home to show off, though this is unusual. (My spidey-sense tells me this is a possibility with very small homes and spaces, especially in gentrifying areas, because there’s an emerging design movement specifically for this market.)

Warning: If you have a standard homeowners insurance policy on a house, and you file a claim, but investigators find out that the home was actually vacant at the time – with all the furniture gone, etc., your homeowners insurance company could deny the claim.

{ 3 comments… read them below or add one }

Carrie November 24, 2014 at 4:08 pm

Very good material here. Our real estate investment podcast, Creating Wealth, could definitely use this advice on our show with other real estate experts. There is so much to be said about covering yourself and making sure your grounds are secured, let alone securing a deal as an investor. Thanks again for the tips and expertise!

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Jack Wingate April 28, 2014 at 1:16 pm

Jason

Much of what you said is valid (to a point)…having said that, you started the article talking about “flipping”. Careful consideration must be paid by the flipper when it comes to the policy form used to cover the property. If he/she is trying to derive coverage from a Homeowner’s Policy (HO Form), the main part of any HO Form is that the property be OWNER OCCUPIED. If that criteria isn’t met, there will be NO COVERAGE.

Having done my share of insurance for “flippers”, the insurance industry has come a little way over the past few years. Yes, the coverage will not be cheap! However, there are carriers that will let you do policies on a short term basis (3 mos, 6 mos, etc).

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Jason Van Steenwyk April 29, 2014 at 11:37 am

Hello, Jack, and thank you for your response.

Yes, this column, the Flippin Insider, is specifically devoted to flipping, so nearly everything in the Flippin’ Insider uses the flipper as the point of reference, at least to begin with. However, looking at it now, the blog entry isn’t LABELED ‘Flippin’ Insider’ to someone who logs in through the front page! So yes, thanks for pointing it out – this isn’t just a flipper issue. This is for anyone who has a property expected to go vacant for 60 days or longer (Or perhaps shorter, depending on the language of your homeowners or landlord’s insurance policy in place prior to the property going vacant.)

The principles of insuring a vacant dwelling apply equally to the flipper and the buy and hold renter alike. In both cases, to protect one’s investment, you do need to find specialty insurance coverage and put it in place during periods of vacancy. And you are correct, the standard HO homeowners insurance forms don’t do the trick. (This is where it’s nice to have an insurance broker who’s been around the block once or twice. Your rookie nephew in his first three weeks at State Farm might not even know about this stuff!)

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