In my early days in real estate, I started as a new home salesperson. One of the first communities that I was in had a section of lots that backed up to a creek. However, they were a good 30-40′ above the creek, sitting on a hill. Because of the proximity to the creek, however, they were tagged as zone “AE”, which required flood insurance.
We were able to obtain an elevation certificate in order to show that these properties were not affected by the zone because of their elevation, and removed them from the requirement to have flood insurance.
Understanding Floodplains
Just because your property was not deemed within a flood hazard zone, it may not remain that way. FEMA is required to update the floodplain maps every 5 years as a mandate from Congress. In high hazard areas, this may be followed – but a lack of adequate funding has caused many of FEMA’s community maps to not be updated for 20-30 years. FEMA uses historical data to review these hazards, without any forward-facing predictions, which can cause surprise issues.
But don’t worry! The National Flood Insurance Program is there to insure anyone affected by the flood plains that FEMA has in place, as outdated as they may be. Unfortunately, the premiums generated by the NFIP have not been sufficient to cover payout for the damages over the last 20 years. Congress raised the NFIP’s borrowing limit several times, until the claim payouts caused the program to hit its debt ceiling limit – $30.425 Billion – in 2017. Subsequently, Congress cancelled $16B in debt owed by the NFIP, leaving the American people to absorb that cost.
For the real estate investor, it is wise to carefully consider any proximity to a floodplain, and weigh whether the risk presents a long-term effect on their value.
Floodplain Types
Floodplain designations land in these basic categories:
FEMA’s High-Risk Flood Zones
These are the zones that begin with the letters “A” or “V”. Property owners located in A or V zones are required to purchase flood insurance if they have a mortgage from a federally-backed or federally-regulated lender.
- “A” without other letters indicates that no Base Flood Elevations have been established
- “AE” indicated that Base Flood Elevations and areas of study have been established
FEMA’s Low and Moderate-Risk Flood Zones
These zones are outside the SFHA. They begin with the letters “X”, “B”, or “C”. Flood insurance is not required within these zones. However, these zones could still have a significant flood risk, as more than 20% of NFIP claims historically are made by policyholders in an X, B, or C zone.
- “B” is an area of moderate risk (being replaced with shaded X)
- “C” is an area of minimal risk (also identified by an unshaded X)
When an update to a FEMA map does occur, and you believe your property is not accurately portrayed, you may submit a Letter of Map Amendment with updated and detailed survey or mapping information that you believe to be accurate. FEMA may use this to change the mapping for your property, which may change your flood hazard zone.
Ways to Counter the Effects of Floodplains on Properties
1. Reduce the Risk of Flooding
While actually being in a designated zone can be a big concern, the savvy investor knows it is the actual cost of the flooding that will influence your property’s long-term value. FEMA data shows that approximately 20% of their claims paid out are for people who carried flood insurance but were not in a designated flood zone. So, regardless of your actual zone designation (which could change in the future), assess your actual risk.
- For instance, if you are 200′ from a river and at a low elevation, can you bring in fill and create a natural rain garden barrier to protect your property?
- Alternatively, can you elevate the property’s foundation to remove the future risk? If you are in a floodplain, elevate the property above the Base Flood Elevation (BFE) and, for added benefit, include at least 1′ of “freeboard” – which is extra space between the BFE and the first floor of the structure.
2. Manage the Cost of Insurance
It’s risky, no way around it. The examples above may not only protect the physical property, but also can protect the property from the rising cost of property insurance. Even in the case of the National Flood Insurance Program, prices are rising in such a way that the program would be broke and out of business if not for Congress bailing it out and cancelling debt. Unless there is a political appetite for continued bailouts, the cost of the NFIP will continue to climb just like all insurance costs.
To reduce your costs, consider these tips:
- Elevating Utilities: Put water heaters, HVAC, electrical panels, etc. on higher levels of the building to remove them from possible damage in case of flooding
- Install Flood Openings: These are ways that water can flow in and out through your foundation, without damaging it
- Fill in Basements: Filling your basements and crawlspaces allows water to flow away from the building, rather than under (and then up into) it
- Elevation: Just as above, elevating the structure above the Base Flood Elevation will help
- Change the Topography: Bringing in fill soil to change the topography and create barriers between your property and the water source can help to protect against flooding
3. Be Proactive About Appreciation Value
Have you ever purchased a property where a tragedy had taken place, like a homicide or a devastating fire? Having this stigma associated with a property can cause a large loss in future value, due to the perception of the property in the market.
A similar effect can happen for properties in a possible flood-affected area: the buyers may “know the area” and have a perception that a property in that region is within a floodplain, and that negatively affects the future value of the asset.
To change your property’s perception for future buyers, try this:
- Save all data from flood management and abatement work to show
- Provide data on how mitigating flood risks as mentioned above can reduce future risk
- Provide elevation certificates if available
Conclusion
For savvy investors, there can be significant benefits to improving sites in flood-affected areas, resulting in profits that many look past at the initial turn. However, not proactively managing your flood risk may hold a heavy penalty, so be proactive about protecting your property. Doing so will protect both your current cash flow and your property’s future value.
Many investors throughout Central PA have profited from real estate investment deals that we have advised them on when they mitigated potential hazards. Contact us today for a strategy call to begin growing your long-term assets.
Sources
https://www.fema.gov/flood-maps/change-your-flood-zone
https://www.nrdc.org/bio/joel-scata/femas-outdated-and-backward-looking-flood-maps
