All posts by Greg Bunch

Potential problems with foreclosures

Buying a Foreclosed House – Part 2

Foreclosed homes can be a great deal, but they do have a multitude of potential problems.

As we discussed last time, buying a foreclosed house can be a great opportunity, but there are also potential issues with foreclosures, so caution is necessary.

First of all, the condition of foreclosed homes can vary tremendously. We’ve seen foreclosures which were spotlessly clean and move-in ready, others which were in horribly poor condition, and everything in between.

It is very important to understand that even a missing light fixture or switch plate, or a leaking faucet, is enough to cause a house to fail appraisal for most loans! FHA, Rural Development (RD) and VA loans all require appraisers to evaluate the condition of a house and make sure it meets minimum standards. They consider even small items like these to violate those standards, making financing very difficult or even impossible. There are renovation loans available, but they are few and hard to get. Conventional loans are much more tolerant of property condition, but not everybody qualifies for a conventional loan.

One of the problems with foreclosures is that when they do need repair, most lenders will not make any, nor will they allow anyone else to do so! Every once in a great while a lender will agree to do some repairs in order to get the house sold, but this is very rare. The owners of some foreclosures, such as HUD, are absolutely inflexible about not allowing any repairs. They would rather sit on the house and drop the price by thousands of dollars until it sells for cash, rather than spend a couple of hundred for a simple repair. It makes no sense, but that’s how it works, and is why so many foreclosures take a long time to sell.

Besides repairs, there can be other problematic issues with foreclosures. When a house goes through foreclosure, previous liens are canceled, and go away, with one exception: An IRS tax lien. The law gives IRS the ability to take possession of a house up to 120 days AFTER it is sold at sheriff sale, regardless of who owns it! We have encountered this situation before, and cautioned our clients about the IRS lien. They wisely did not buy the house.

Also, it has been our experience that lenders don’t do thorough title work when taking ownership of a property after the sheriff sale. We have seen foreclosures where title problems came up, one of which was severe enough to put a stop to a sale!

These are just a couple of examples of the issues which foreclosures can bring with them. We have dealt with these and many others, and also have gone out of our way to learn about more complexities of buying foreclosed properties. In addition, Danielle’s many years as a loan officer give us a deep understanding of the lender side. All this together means we bring far more to your corner than any other agent.

People have come to us after wasting weeks with other agents looking at foreclosures which were NOT even eligible for the type of loan they had! Such ill-informed house searching not only wastes your valuable time, but can also cost you money. You could spend hundreds of dollars on inspections, appraisal, etc. only to learn too late that you cannot finance the home! We examine things in great detail and well in advance, to prevent these sorts of nasty and expensive surprises.

A foreclosed house can indeed be a great deal. However, it is important to have us looking out for you, so the many pitfalls of foreclosures can be avoided.

Foreclosed house with notices on windows

Buying a Foreclosed House – Part 1

Foreclosed houses are those on which the former owner defaulted on their loan, and now belong to the lender which held the mortgage. To take ownership, a lender has to go through a long formal process known as foreclosure.

You may have noticed houses sitting vacant, with paper notices on their front doors or windows, such as the house pictured here. These are usually homes which are on their way toward foreclosure, though they are not available for sale yet. People use the term “foreclosure” often to mean such houses. However, prior to completing the foreclosure process, these are almost always tied up in a huge mess of legal and financial problems. A house in pre-foreclosure would have to be sold as a “short sale”, which is something completely different, and a nightmare we cover in another discussion.

To acquire title to a house whose owner has fallen behind on their payments, the lender must go through the foreclosure process. The sheriff serves a notice of seizure, which is when the paper notices are affixed to the house. An appraisal may be done by the lender. After a length of time which can vary widely, the property is scheduled for auction at sheriff sale. Prior to the sheriff sale, the sheriff must publicly advertise the property a prescribed number of times. If the owner does not come forth and pay off everything they owe, the property is then sold at the sheriff sale on the scheduled date.

While anyone can bid at a sheriff sale, the terms typically require at least a 10% payment on the spot with the balance due in 30 days. Also, no inspections other than maybe an exterior viewing are allowed prior to the sale. In addition, contrary to popular belief, homes are not simply sold there for pennies on the dollar. Keep in mind that the lender wants their money back! Lenders send a representative to each sheriff sale, with instructions to bid up to a certain amount, roughly the amount they are owed. If someone outbids them, then that person buys the house, and the lender gets paid; otherwise the lender is the high bidder and gets the house. Only then does it belong to them, and they put it up for sale as a foreclosure, usually listing it with a real estate firm.

If a lender was not owed very much on a house, then it could indeed be quite a bargain when it finally lists as a foreclosure. Maybe the former owner only financed a small amount, or paid the mortgage for many years, leaving a small balance. However, this is often not the case, so the pricing of foreclosures can differ greatly.

Always remember that there is no “magic” or “secret” way to find out about foreclosures. We see websites and other advertisements claiming that you can buy foreclosures for ridiculously low amounts. These are scams, and usually consist of stuff like: “Buy our investor kit for only $69.95 and you too can learn how to find foreclosures for dirt cheap!” This is utter nonsense.

Until a house has been completely through the foreclosure process, it is not for sale. Once foreclosed, it will show up on the market just like any other house. We keep a close watch for these, but more importantly, also have a deep understanding of the potential problems which can arise with foreclosed homes. Our knowledge, experience, and attention to detail helps our clients avoid such issues.

In part 2, we’ll look at some of those potential problems.

Flood map changes

Flood Insurance part 4 – Flood map changes, and how they can affect you

Flood insurance rate maps (FIRMs) are periodically updated. Those changes can dramatically affect your flood insurance rates.

Part 4 of a 4-part series: Part 1   Part 2   Part 3   Part 4

As you saw previously in our series on flood insurance, the flood zones as defined on the official Flood Insurance Rate Maps (FIRMs) are a huge factor in determining flood insurance rates. Be aware that FIRMs are periodically reviewed and updated. Doing this is a long and complex process, in which scientists study the elevation and topography of the land, the adjacent bodies of water, manmade developments, etc. All this produces (hopefully) a map which indicates the likelihood of flooding in any given area. Flood maps and flood zones are very controversial, because sometimes it seems that areas which have never flooded are considered high risk zones, and vice versa. Nevertheless, the federal flood maps are the official standard used.

Since these maps change periodically, that means the flood zone designation for a given location can also change. This can be a good or a bad thing. It is possible that a house which had been in a high risk zone is now located in zone X on the new map. More often, it seems that the opposite occurs. A house which may have been in flood zone X for years could suddenly fall into zone AE, meaning flood insurance would be required. This happened to our own house with the new Livingston Parish flood map which came out in April 2012. However, since we already had a policy in place, we are allowed to keep it and receive the preferred (low-risk) rate, at least until the government changes its mind.

The flood map shown here is for a portion of north Walker. White areas are flood zone X; blue areas are the high risk zones (AE) according to the 2001 flood map; red areas are the current high risk zones from the 2012 map. Note how some areas improved while others got added to the high risk zones.

When flood maps change, the base flood elevation (BFE) for a particular area can also change. If it is determined to be higher than it was before, that can have a massive impact on the cost of flood insurance. As we discussed in part 3, rates are determined by how high (or low) a house lies relative to the BFE. If a house was at +2, and the new map raises the BFE by 2.5’, the insurance would go from a few hundred dollars a year to a few thousand!

When a home is reclassified as being in a high risk flood zone, the lender will require the owner to purchase a flood insurance policy if there is not already one in place. Currently, they are allowing such homes (like ours) to either continue or purchase a policy at the preferred rate, as long as certain requirements are met. Click here for details. This is a special form of “grandfathering.”

Other types of grandfathering are currently allowed. Owners of houses built before a FIRM existed for that location can elect to pay a “pre-FIRM” rate instead of getting a flood elevation certificate and paying the standard rate based on that elevation. Houses which were built above grade at the time of construction (builders are not allowed to construct homes which lie below the base flood elevation) but whose elevations are later changed on new flood maps can also receive a grandfathered rate. Grandfathering is a good, sometimes absolutely necessary, choice for homes which otherwise would have very high standard rates.

Unfortunately, grandfathering has, at least for now, come to an end! The Biggert-Waters Act was signed into law and took effect in October 2013. The short version is that the federal government has discontinued all forms of grandfathering for flood insurance! No matter how high it would make the cost for the homeowner, they want all flood insurance policies to be based on standard rates and elevations. Many people are in an uproar about this. Homeowners in some areas are being told that their policies are soon going to cost tens of thousands of dollars per year! If fully implemented, this will be a catastrophic blow to a lot of homeowners, as it will make their homes unaffordable for themselves along with anyone who might want to buy them. This is an impending disaster.

In our opinion: With Biggert-Waters, the federal government is pulling the rug out from under hardworking American homeowners. We can understand them not wanting to keep paying out billions in flood claims on risky properties. However, we believe they should not have gotten into the insurance business in the first place! Now that they are though, they should honor the promises they made on existing homes. If they want to avoid insuring high-risk properties, they should do so from here on out, but NOT penalize homeowners who trusted them to provide the coverage they promised.

In conclusion:

  • ALWAYS CARRY FLOOD INSURANCE ON YOUR HOUSE, REGARDLESS OF FLOOD ZONE! WE CANNOT STRESS THIS ENOUGH.
  • If you are planning to buy a house, look CLOSELY at flood zones. We are extremely careful about this when working with our buyers, as it is a very important factor, especially today.
  • If you get a house under contract, be sure to ask your insurance agent to check it for any prior history of flooding. Past flood claims on a house may cause new claims to be denied!
  • Keep abreast of the Biggert-Waters Act, and the current efforts to modify or block it. Though it may not affect you right now, remember that flood maps change, and those changes, along with provisions of the Biggert-Waters Act, could someday apply to you.

2016 UPDATE

The uproar about Biggert-Waters, and its potential impact on housing, were so bad that Congress had to pass the Homeowner Flood Insurance Affordability Act (HFIAA) in 2014. This law rolled back much of Biggert-Waters, and perhaps most importantly, restored grandfathering. This means that a house properly built to the flood standards effective at the time of construction can remain rated by those standards (such as elevation and zone) even if the maps change. HFIAA also enforced accountability on the NFIP, and set an absolute cap on residential rate increases of 18% per year.

Here is an excellent summary of Biggert-Waters and HFIAA as presented by the National Association of Realtors.

NOTE: As we have stated many times, we believe carrying flood insurance is critical, even in X zones! As you saw, our former house in St. Bernard was completely flooded by Katrina. It was in an X zone, and we had elected to carry maximum flood coverage. For a cost of $317, we were saved from financial ruin. (That same policy today is only about $450.)

ANOTHER REASON TO CARRY FLOOD INSURANCE IS THAT IF IT LAPSES, THE PROTECTIONS OF HFIAA WILL NOT APPLY!

Many of the provisions for grandfathering etc. are only allowed when continuous coverage has been maintained. For example, if you were in an X zone without coverage, and a new map change rezones you into AE at a low elevation, your policy will be rated by the new standards. The fact that it was previously an X zone will not count at all!

We are a prime example. We bought our house in Walker in 2005. At the time, it was in an X zone, and we purchased maximum coverage which we have kept continuously in force. When the map changed in 2012, the line between X and AE now cuts through 1 room of our house, so technically we’re in zone AE now. However, because we have maintained continuous coverage, we still pay the X rate.

Following the 2016 flood, issues with regard to flood insurance are more important than ever! Be sure to subscribe in order to get our updates, both here and on Facebook as well.

Flood Insurance part 3 - How flood insurance rates are calculated

Flood Insurance part 3 – How flood insurance rates are calculated

Flood insurance rates are based on what flood zone you are in, and in some zones, also depend on the elevation of your house.

Part 3 of a 4-part series: Part 1   Part 2   Part 3   Part 4

First of all, keep in mind that flood insurance is provided by the National Flood Insurance Program (NFIP). No matter which insurance company writes the policy, the actual insurer is NFIP. (In other words, you and I, the American taxpayer.) As long as its coverage is the same, and is calculated correctly, the cost of a flood insurance policy will be identical no matter which company writes it. If one company claims they can “save you money” on your flood insurance, it’s because they are reducing the coverage. Be careful to check your new or existing policy for contents coverage! Remember that lenders only require that the HOUSE be insured, not your personal possessions within. Sometimes buyers were sold flood policies which only covered the house, only to realize after a disaster that their contents were uninsured. As you saw in part 1 of our flood insurance series, we lost our house and everything inside it. Contents coverage was a lifesaver.

When flood insurance is required, its cost is determined first by the flood zone in which the property is located. If it’s in a lower risk zone such as B, X500, C, or X, the rates are determined by a straightforward chart, based on coverage amounts. That chart is located here.

When located in a Special Flood Hazard Area (SFHA) such as zone A or AE, the cost is determined not only by the amount of coverage, but by the elevation of your house compared to the base flood elevation (BFE) for the immediate surroundings. In general, the higher your property is above the BFE, the lower your insurance rate. (For an explanation of the flood zone codes, BFE, etc, see part 2 of our series.)

To see how this works: Suppose the elevation of your house, which is calculated from the lowest floor surface of the living area, is 50.8’ above sea level, and the BFE is 50’. That makes your house 0.8’ above BFE. Rounded to the nearest foot, it would be considered a +1’ for insurance purposes. If the house were instead at 50.1’ above sea level, it would round to 50.0’, which a +0’, or even with BFE.

Anything lower than BFE causes the rates to skyrocket. This is understandable, because a house that lies below BFE is lower than the predicted level of the floodwaters should a flood occur. It is true that some houses which lie below BFE have never flooded, and may never flood. However, insurance is based upon risk probabilities, and that is what we must deal with. A couple of our clients had homes which fell below BFE due to map changes (more on that next time) and their flood insurance premiums rose to $3,000 – $4,000 per year! This is a huge financial burden for the homeowner, and an enormous obstacle for potential buyers.

Besides the cost and higher risk for a house which lies below base flood elevation, such homes are not eligible for financing with a USDA Rural Development (RD) loan. RD will finance houses located in a SFHA (“flood zone”) but NOT if they lie below grade.

The elevation of a house is determined by a surveyor. They measure the height of the lowest floor surface of the living area and compare it to the BFE for that location. The document generated is called a Flood Elevation Certificate. Be very wary of multi-level houses, homes with enclosed carports/garages, sunken living rooms, etc. Although they often measure from the top of the slab outside, surveyors are supposed to find and use the lowest spot to calculate the elevation. If they do so, such lower areas could make a HUGE difference in the flood insurance premium.

Next time we’ll talk about how maps can change, how to deal with those changes, and the Biggert-Waters Act, which is causing drastic effects on flood coverage for many homeowners.

Sample flood map

Flood Insurance part 2 – Flood zones and what they mean

The rates and requirements for flood insurance are determined by what flood zone you are in. We will explain the most common flood zone designations.

Part 2 of a 4-part series: Part 1   Part 2   Part 3   Part 4

Above is portion of the flood map for the city of Walker, LA. This was taken from the flood mapping site we use all the time, and which also appears on our Links page. While it may look complicated, this is fairly representative of a typical flood map. You can see sections which are clear (zone X), sections which are shaded with blue dots (zone AE), and sections which are shaded with gray dots (zone B). Each of these colors represents a different flood zone classification. As you can see, they follow the contours of the land, and can lie in close proximity to one another.

While there are many different flood zone classifications, we will deal with those which are most commonly encountered. (For a full tutorial on flood zones, click here.)

Flood zone A or AE: These designations are for areas of higher flood risk, which are considered to have a likelihood of flooding once every 100 years, thus an annual probability of 1%. These are what are commonly known as “flood zones”, because lenders require that properties in these zones have flood insurance. Officially they are called “Special Flood Hazard Areas”.

Flood zone B: This designation denotes areas considered to have a likelihood of flooding once every 500 years, thus an annual probability of 0.2%. I have also seen these areas referred to as zone X500.

Flood zone X or C: These are the best flood zone classifications. They represent areas considered to be subject to flooding less than once every 500 years.

Flood insurance is not required for properties located in zones B, X500, X, or C. However, as we discussed in part 1 of our series on flood insurance, it is possible for any location to experience a flood, so we firmly believe that flood insurance should always be carried. Outside of Special Flood Hazard Areas, the cost of flood insurance is very inexpensive. Our house, which was utterly destroyed by the floodwaters of Hurricane Katrina, was located in flood zone C! Thankfully, we had flood insurance.

Also on the sample map, within the AE zones, you can see gray wavy lines with a number on them. These indicate the approximate Base Flood Elevations (BFE). Think of the BFE as being the surface of the floodwaters if it were to flood. BFE is expressed as a height in feet above sea level. The exact BFE for a specific location is determined by a surveyor.

Base Flood Elevation is a crucial factor in calculating the cost of flood insurance for properties located in Special Flood Hazard Areas. In our next discussion, we will look at how flood insurance rates are determined.

Our house after Katrina

Flood Insurance part 1 – Why it’s so important

Flood insurance is required if you are in a higher-risk (flood) zone. However, you can flood no matter where you’re located, as we learned firsthand.

Part 1 of a 4-part series: Part 1   Part 2   Part 3   Part 4

The picture above shows the interior of our house after Hurricane Katrina. We lived in St. Bernard Parish at the time. The floodwaters were over 10′ deep, and our house was a single story, so it was a complete loss. Our furniture and belongings were virtually unrecognizable, looking as if they’d been thrown into a giant blender with mud, then scattered randomly around the house. Covering it all was a thick layer composed of fallen sheetrock from the ceiling and insulation from the attic.

Thankfully, we had evacuated about 2 days before the storm, taking our most valuable possessions with us. However, anything we couldn’t fit into our 2 cars remained, and suffered the fate you see here.

We were also grateful that we had a flood insurance policy in effect, with maximum coverage. When we’d bought the house in 2000, our wonderful insurance agent (who is STILL our insurance agent) informed us that it was located about 100′ inside flood zone C, which is a low risk (“no-flood”) zone. He told us how inexpensive flood insurance would be. Maximum flood coverage of $250,000 on the house, and $100,000 on the contents, would only cost us $317 a year. His advice saved us financially, as we chose to purchase that policy. It was still in place when disaster struck in 2005.

Even though almost 9 years have passed, that same policy only costs $414 annually today, an increase of less than $100. Remember, this is for a home located in a low risk (“no-flood”) zone, typically noted as zone B, C, or X. It’s a small price to pay for the peace of mind and the protection it provides. (Of course, flood insurance in higher risk zones does cost more. We will explain the differences in flood zones in part 2 of our series.) Click here to see the official rate chart.

I shudder to think of where we would be today if we had not had flood coverage. Even with that coverage, losing our house and everything in it was an experience we never want to go through again. That is one of the many great reasons we bought a house in Walker after the storm. We are now 65′ above sea level, and in flood zone X. However, we still carry maximum flood coverage, and happily pay that small premium when it comes due each year!

Unfortunately, many people did not receive the same great advice we did, advice which we always give to our clients. We learned about one family who bought a house in St. Bernard about 2 weeks before Katrina. (We did not know them at the time.) Their realtor and/or insurance agent and/or loan officer told them, “You’re in flood zone B! Why waste $200 a year for flood insurance you don’t need?” Soon afterwards, their house was utterly destroyed by the floodwaters from the hurricane.

Keep in mind though that it doesn’t take a hurricane to flood your house. A flood is considered rising water, no matter what the source is! If a pond overflows, or a water tank ruptures, or a reservoir breaks, and your house gets damaged by rising water, the damage will only be covered by flood insurance, NOT your homeowners policy.

Case in point: We were told of a lady who had built a nice, brand-new house somewhere in Mississippi. She was advised not to get flood insurance. Those giving her this (bad) advice said, “You’ll never flood here! It’s a no-flood zone! It has never flooded, so don’t worry about it!” Not long afterwards, another builder was clearing a lot down the street, and bulldozed the trees and mud into the ditch, blocking it. At some point later, a heavy summer thunderstorm sprang up, and her brand-new home was flooded to a depth of 18 inches! She lost all her furniture, had to rip out the bottom 3-4 feet of sheetrock and insulation, etc. The damage came to $40,000.00. When she tried to file a claim on her homeowners insurance, she learned that it did not apply, since this was caused by a flood. Since she lacked any flood insurance, her only recourse was to file suit against the builder. We do not know if she was successful, as that is a long and difficult process.

In summary, we believe that everyone should carry flood insurance on their home. Regardless of what the map says, or what zone you’re in, the fact is that your home can be flooded. If you live in a high-risk zone (A, AE, etc.) and have a mortgage, flood insurance is required by the lender. However, too many people, including realtors and loan officers, don’t stress the importance of flood insurance when you’re in a so-called “no-flood” zone. (According to Floodsmart.gov, the official site of the National Flood Insurance Program, people in these lower-risk areas file over 20% of claims and receive one-third of disaster assistance for flooding.) The cost of coverage is very low for such zones, and if you need it, as we did, the benefits can be lifesaving.

Flood insurance is crucial to home ownership, which is why we are devoting a multipart series of discussions about it. Next time, we will explain what the different flood zones mean, how they can change, and how they affect you.