REAL ESTATE INSURANCE – WHAT TO KNOW BEFORE YOU START FLIPPING HOUSES
Buying and flipping houses has become an increasingly common way for people, or groups of people, to make some extra money. If one has the resources and the skill set, this can even be a very fruitful full-time endeavor. However, these properties are often not properly insured by their owners which can lead to some major issues in the event of a claim. You want to make sure the home you buy is properly covered while it is being worked on against fire and other perils as well as covering the cost of the materials used during the renovations. Many people in this position feel that because they will be selling the house, not living in it, that they do not need to worry about any extra insurance coverage. What could possibly happen right?
A number of different factors can impact which coverage you will need if you are buying and flipping a house. Some important details that can affect necessary coverages are as follows: Will you be occupying the house during renovation or will it be vacant? Will the house be purchased in a personal name or under a commercial entity? How long will it take to complete the renovation? What is the cost renovation?
If you are occupying the house during the renovations then you are able to cover the home with a homeowners Insurance policy. If the house will be vacant during the renovations you must obtain one policy to cover the liability and another policy to cover the vacant property and cost of the renovations. Some carriers will write this on a package policy, a “Vacant Property with Renovations” policy will cover the liability, the structure and costs associated with the renovations. Policy durations are often flexible (3 month, 6 month, 12 months) and can be purchased and extended based on the estimated length of the time the renovations take so you would decide on this based on how long the renovations will be going on and how long it takes you to sell the house. Once the renovations are complete, some carriers will switch the policy over to a package covering the liability and vacant structure. Other carriers will not cover both the liability and the vacant home so you will need to obtain the coverages from two separate companies.
Buying the house in a personal name vs. a commercial name can impact which insurance carriers will write coverage for you but the biggest difference between the two in regards to insurance is the potential third party action over/ labor law exposure that comes with doing construction in New York. If you purchase the house in your personal name and hire contractors to do the renovations on the home there is no Third Party Action Over/Labor Law exposure. The work is being contracted between the homeowner and the contractor and so you can obtain the coverages we already spoke about and be completely protected. However, if you purchase the house in a commercial name and hire contractors to do the work in New York, you will need a specific policy that covers Labor Law claims (See our NY Contractors – New York Labor Law blog for more on what this means). This policy can often be very costly when compared to your standard liability policy covering a home and since most people who are flipping houses are trying to keep costs low they often do not obtain these types of policies.
While it may not seem like a priority at the time of purchase because the priority is typically centered around being able to sell the property for a profit, carrying the proper insurance can make the difference between enjoying a nice pay day and being brought into a law suit that sends you into crippling debt.
If you have any questions about coverages or would like to speak further about potential quotes and policies please feel free to give our office a call. We are always happy to help in any way we can.