If you've purchased a fix-and-flip property and you are preparing to start renovations, you may be wondering what type of house flipping insurance is needed at different stages of your project.
While many novice house flippers believe that they are fully covered by just adding their new investment property to their personal homeowner's policy, it isn't as simple as that. To avoid making a costly mistake, it is critical to consult with your insurance agent regarding the best coverage options for a flip property. By doing your homework in this area of your house flipping business, you can avoid a potentially devastating loss if there is an accident, theft, vandalism, weather event, or other unforeseen threat to your property.
Below are three insurance-related considerations you should be knowledgeable about as you move forward with your house flip. Be sure to discuss with your agent these products that are available to address the unique risks for fix-and-flip properties:
House Flipping Insurance May Include Builder's Risk Insurance
A typical homeowner’s policy covers risk on an occupied home, but for a real estate investor who is rehabbing an unoccupied house to sell, a builder’s risk policy protects the property from specific types of loss that are uniquely associated with construction. If your fix-and-flip investment projects include a plan for ground-up construction, a builder's risk policy will cover risks throughout the construction phase—until the fix-and-flip project develops into a finished home.
A builder's risk policy can also include coverage for possible threats to your fix and flip investment project like damage to building materials, tools, and appliances—even if the damage occurs off-site. For example, there is "property in transit" coverage that protects materials as they travel from the supplier to your construction site.
Unoccupied vs. Vacant Home Insurance
Although they may sound identical, an “unoccupied” home is not the same as a “vacant” one. An unoccupied home is one that can be occupied -- that is, it is set up for occupancy. For example, the utilities are connected and there is furniture or there are personal effects inside. An unoccupied home is one in which the resident may be absent temporarily, but the house will be occupied in the near future. A vacant home is one that is not currently lived in, and there is no indication that an occupant will be living there any time soon.
Whether occupied or vacant, both of these home insurance products are specialty policies providing financial protection from risk for a home that is uninhabited at the time of the event that prompts the claim. It's important to be aware that a standard homeowner’s insurance policy typically does not cover fire, theft, vandalism, liability, or other claims on an unoccupied or vacant property.
For example, if there is a fire in an unoccupied or vacant home, a conventional homeowners policy likely would not cover it, but an insurance policy specifically written for an unoccupied or vacant home would. A vacant or unoccupied home insurance product can be acquired as a stand-alone policy or as an additional endorsement to your standard homeowner’s policy.
There are many reasons why an uninhabited home is considered a greater insurance risk than an occupied one. Vacant or unoccupied homes are much more vulnerable to theft and vandalism, lower emergency response times, and events such as burst pipes, roof damage, or faulty wiring going unnoticed. These are just a few examples of the increased risks associated with uninhabited homes. In theory, for example, a fire in a home where someone lives would likely be reported and extinguished more quickly than one where there is no one present to report the fire promptly.
Do You Need Unoccupied or Vacant Home Insurance?
Your insurance agent should be contacted to answer this question relative to your business goals and needs, but generally speaking, if your fix-and-flip property will be uninhabited for 30 days or more, an unoccupied or vacant home insurance policy is probably called for. This is an important policy to consider because, while terms may vary by policy, an insurance company will typically deny insurance claims that are made when a home is left unattended for more than 30 days.
It is important to note that determining whether your property is unoccupied or vacant will affect your insurance rates, so be sure to contact your insurance agent for a better understanding of your current insurance situation and your risk. It is quite possible that your insurer will identify a maximum length of time your fix-and-flip property can remain vacant or unoccupied and still be covered by your policy.
Just as you are likely working with a CPA who has a comprehensive knowledge of the specifics of house flipping taxes, in your company's house flipping business plan, you will want to address the costs associated with specific house flipping insurance that covers your risk.