Construction Renovation: Property Flips and Insurance

The number of U.S. single family home sales attributed to flipping is on the decline but that isn’t deterring investors.

Despite the percentage of flipped homes shrinking to 3.7 percent of the total homes sold, the profits from flipping a house are up to 30 percent, according to a recent report by RealtyTrac.

The share of flipped house sales was down from 4.1 percent in the fourth quarter of 2013 and down from 6.5 percent in the first quarter of 2013.

The average sales price of single family homes flipped in the first quarter was $55,574 higher than the average original purchase price, according to the “Q1 2014 U.S. Home Flipping Report.” That gross profit provided flippers with an unadjusted ROI (return on investment) of 30 percent of the average original purchase price. The average gross profit per flip a year ago was $51,805 for an unadjusted ROI of 28 percent.

“Slowing home price appreciation early this year in many of the most popular flipping markets put some investors in danger of flying too close to the sun,” said Daren Blomquist, vice president at RealtyTrac.

“But investors appear to have recalibrated their flipping strategy, accounting for the slower home price appreciation even if that means fewer flips.”

Insurance Interest

The insurance market has taken note of the flipping activity, says Dena Martin, vice president of commercial lines for Los Angeles based Anderson & Murison, an independent property/casualty wholesale firm. Martin has seen quite a few construction markets interested in property renovation and flips.

“Renovation and property flipping was an extremely popular trend prior to the financial crisis,” she said. “After the crisis, we saw policies that were strictly for vacant properties and no renovation. Now we are starting to see renovations coming back and our carriers are excited by it.”

Even in the upscale market, renovations appear to be up, says Jake Morin, program manager for ProSight Specialty Insurance.

“I’m seeing a lot more renovation going on,” Morin says. “We have a luxury homebuilders program and luxury remodelers program. We are starting to see the luxury remodelers program become more active than the home builders.”

Morin attributes some of that growth to the number of baby roomers retiring and moving to better tax advantage states. That trend is creating a lot of opportunities in the construction renovation market.

When it comes to providing the right insurance protection for property renovators, it’s important to understand the person behind the project, says Bill Brecht, president and owner of Brecht & Associates, a Grapevine, Texas-based a managing general agency.

There are all kinds of people that take on property renovations and flips, he says. “There’s the little contractors, they do four or five houses a year and they might have just contractors insurance and take on all the other risks. They work on the project and buy an annual contractors policy.”

Then there’s the contractor and investor that is looking at property flipping as big business, he says. They may be flipping 10, 20, or 100 flips a year.

Unlike the days of the 1980s where financing to buy properties was much easier to secure, Brecht says today most people can’t flip houses on a large scale unless they have a lot of money and look at it as an investment opportunity. “They have to pay a pretty good price up front,” he says.

Brecht says while the total number of property flips is lower in today’s market, the value of the flip is much higher. “Some are pretty high property values now, $500,000 just to buy. Then they do a remodel and sell it for a couple of million.”

Brecht says he still sees remodels and flips of smaller houses but not at the same level as they used to be.

Flips for Rentals

Robert Kelly, producer and vice president for Arroyo Insurance Services, an independent retail agency based in California, stumbled upon a prospective client that renovated and flipped about 50 properties per year. The prospect needed an insurance market that would allow him to do up to 100 flips per year, maybe more, covered by a master insurance program.

Kelly, who has been in the industry just eight years, on both the carrier and retail agency sides of the business, put out “some feelers” with his agency’s markets.

“Right now, he has about 15 homes in his inventory being worked on. The average amount of time for each purchase/flip is four months, some more, some less,” Kelly said. The goal: Get one policy that can cover property and general liability on all of the prospect’s house-flipping operations as opposed to buying insurance one-by-one.

On average, the prospect revealed to Kelly that the current insurance program costs between $300 to $700 per house, or about $15,000 to $25,000 in premium per year. Roughly 95 percent of the renovated properties are in the Las Vegas area and after the remodeling is complete most sell for about $100,000 to $200,000.

After some initial searching, Kelly found most of his current market contacts didn’t have an option available. “One program told me that the values weren’t big enough,” Kelly said. “Another said they could write the property but not the liability.”

Kelly turned to and posted a note on the site’s public forum. “Our overall assumption is that there are lots of investors out there doing the same thing, so there should be a program/market for this,” he wrote.

At least one person wrote back. That was Kenneth Kukral, vice president of special risks for International Excess Alliance, who said he might have a market.

According to Kukral, his firm’s MVP-Scheduled Dwelling Program, a program developed for residential property owners, investors, renovators and property managers, seemed like a good fit. “We have a product but it’s geared toward the owner, landlord and tenant type of exposure,” he said. “It’s really an investor product.” The program is ideal for investors and contractors looking to buy houses and small habitational properties where they can be rehabbed and turned into rental properties.

“We can do 10 to 500 properties on a schedule through a monthly reporting form,” he says. “It’s not a true builder’s risk so it’s not going to pick up your supplies that are sitting out there. There may be builder’s risk solutions that would be better solutions if the contractor’s going to have a lot of stuff laying around where he’s worried more about theft exposures.” This is just one solution for renovators seeking to build real estate inventory, he says.

The program is backed on American Modern Insurance Group non-admitted paper and allows for one of six different valuations. “It allows you to write with coinsurance, either on ACV, replacement cost or an agreed amount basis. Or it also allows you to write on a ‘no-co’ basis also on an agreed amount, replacement cost or ACV.”

The program is open to property renovators doing primarily cosmetic rehabs such as kitchen replacements or new drywall, but not structural renovations such as moving walls or major build-outs, explained Bryan Gulley, International XS Program Managers. The paper depends on the state, but it’s all part of the American Modern Insurance Group.

The program is national and is available for single family units to a small six-unit apartment building but Gulley says 80 percent of the program is currently single or two family dwellings. “We are even able to entertain some mixed use structures.”

Find the Right Market

A good majority of Anderson & Murison’s carriers seem to have an interest in property renovators right now, Martin says, but the type of renovation is a factor.

The first thing carriers want to know is what phase of renovation the project is in, she says. “That’s first and foremost. Some projects will be out if the project has already started.”

The length of vacancy of a property is also important. “Something that is more recently vacant is less of a risk than something that’s been vacant for years,” she says.

They’d also like to know whether the contractor is the owner-builder or if everything is subcontracted out to spread the risk. “Contractors can be a little more challenging for general liability for owner-builder because the carrier wants to spread that risk out a little bit.” Pricing is higher if the risk is not spread out, she adds.

Carriers also want to know simple things like how long the lights stay on or off? How often does somebody look in on the risk?

If there’s major renovation work being done, carriers want to know if there’s a licensed architect on the project.

The renovation market, while not booming, seems poised for more growth and profit – good signs for contractors and insurance experts serving this market.