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HOMEOWNER INSURANCE COVERAGE NUMBERS

BEING MANIPULATED?

I recently received my homeowners renewal policy from State Farm Insurance. My coverage amount had increased to an amount that had my dwelling replacement cost at $130 per foot. This does not include the contents of the dwelling of personal property and remember this does not include the land. This is the cost to remove and re-build the dwelling. Now, I was quite shocked since this was a significant increase from the prior years coverage amounts. Since I am in the business of Real Estate Valuations, which includes my experience in the “ detailed “ cost addendum using quantity survey methods, I knew this was a grossly exaggerated number. I also new that the coverage or replacement number means a higher premium will be paid to the insurance company.

            I have been closely monitoring what local builders and contractors are doing in our market area. The amounts that I am witnessing builder’s build a similar type dwelling is from the low end of $65 per foot to a high end of $100 per foot. My dwelling is not near the upper end and is more towards the mid-lower end. The coverage amount is there to provide a cost of what the amounts are to remove and rebuild the dwelling. This meant that State Farm had overstated my insurance coverage on the low end of $63,000 to a high of $136,500. You don’t have to be rocket scientist to know that there is a very low demand for building supplies which means lower prices to build all around. Our prices have not gone up since the Real Estate market has been spiraling downwards.

            Armed with my information, I called my State Farm representative and questioned them about this significantly incorrect coverage amount. The initial response to me was, “that was what the computer told them”. It was a software program of State Farm in which data is inputted and the computer spits out a number. This meant that some insurance number wizard must had seen that premiums can be increased if the coverage amount can be increased while still leaving the rates alone. This seems like a good scam to me. I was not questioning the fee to insure that cost, I was questioning the beginning trigger number of the coverage amount. Anyway, I pressed the representative and found out that there are overall classifications that affect the coverage amounts. Well, no one ever volunteered that information to me when I originally purchased the coverage. They just took the initial appraisal that was performed for the mortgage and used the cost section, which is not an intended use of that appraisal. And there were no questions to me about the overall classification of the property. It appears as though this was a very convenient way to hide another way of increasing premiums in the following years of a purchase.

            The end result was that I was able to get my coverage amount within $50,000 of a reasonable number. However, I am very disappointed that with all the methods and databases that exist to create accuracy in cost valuations, they could not get closer to a reasonable coverage amount.  I want to urge you to take notice of your coverage amount. Contact your insurance company and find out how you can argue your coverage amounts with them. Some will take another appraisal for insurance purposes while others require a contractors estimate in following years, and in the case of mine, it was just clarifying the overall classification. After witnessing this significant and material misstatement of coverage I can only imagine what the overall general misstatements of Florida residents homeowners insurance really is. I hope someone in a higher position takes notice of this. 

BANKRUPTCY AND THE AFFECTS ON

THE REAL ESTATE MARKET

I have received quite a few emails regarding my prior post on our market conditions. One issue I addressed was how I believed that the proposed “Cram Down” bankruptcy changes would help our market immediately. This proposal allows for judges to reduce and modify a homeowners primary residences’ first mortgage. Currently only the unsecured second and additional unsecured mortgages can be modified.

I want to explain a little more to you on this topic. The primary reason for this being a good thing is because of BAD BPO’s. I have witnessed first hand along with other appraisers and realtors the following. A home is an REO and managed by an REO company or an REO department or the home is a short sale. What occurs is that the companies seeks a BPO from a realtor. They DO NOT always get an appraisal. I have seen first hand where the management company or REO department does not like the BPO and pressures the Realtor for a lower number or they go with the lower BPO in their negotiations and list price. We “appraisers” come in on the buy side and a majority of the time cannot find data to substantiate such low prices until the new one sells at a give away price. You can observe this yourself if you start looking at DOM. You will see a lot of DOM under 7 days. The low DOM is a very strong indication of materially low prices ( lets not address the supply side yet ). A low DOM in a Buyers market should not exist! What occurs next is the bank realizes an asset loss based on the sale price which was based on an inaccurate BPO. Now in regards to the “Cram Down” bankruptcy proposal, in the courts an “appraisal” will be utilized by the judges in determining the market value of the property. And what results will be a material difference in the losses booked by the banks, the homeowner keeps the house, and the house doesn’t go on the market putting downwards pressure on price. For example ( I am using actual numbers observed ), a BPO came in at $60,000, appraised value was $115,000 homeowner owed $205,000. The REO management company puts the house on the market for $60,000 and took $55,000 and was under contract within “1” business day. Whereas, had the homeowner been able to declare bankruptcy and had the mortgage been modified to $115,000, the losses would have not exceeded a predictable amount. Had the bankruptcy been available, the home would have not been on the market competing with other neighbors who are not in distress, and the losses would have been less severe. Onto the supply side, had the “Cram Down” Bankruptcy been available, there would be less homes on the market within an extreme short amount of time. This cram down bankruptcy has been in place before and nothing bad happened in the 90’s nor with the commercial side either, so I am a strong supporter of it and it’s ability to immediately quell this real estate mess. As always please send me your thoughts and opinions.

From the Appraisl Institute:

Wells Fargo/Rels Valuation Hit with “Skimming” Lawsuit