Tiny Homes: How agents, insurers are helping to lay a foundation for a growing insurance market

Despite big media hype that has included TV shows, magazines and blogs, the tiny home market is still small. Figures on its current size are hard to come by but the tiny home movement of people looking to downsize and simplify is passionate and promising enough to convince a few patient insurance carriers and agents to get in on the foundation in hopes they can help build it into something bigger.

The tiny home trend began to take hold a little more than a decade ago when early adopters of tiny home living began building do-it-yourself (DIY) units. Today the idea has moved beyond DIY to where some builders are specializing in tiny homes.

Generally speaking, tiny homes have living space of about 400 square feet or less and are built either on wheels or on a foundation.

The labor cost to build or buy a tiny home varies from zero for a self-build to a high of $80,000 or more with a luxury builder. In general, a truly tiny 20-foot house on wheels costs about $25,000 in materials and an additional $20,000 or more in labor.

Advocates see them as a way to live relatively low cost and debt-free. Other advantages they cite include: reduced carbon footprint, flexibility to move easily, off-grid capabilities, minimalist living, property tax exemption, rental income, guest house or vacation house, and the ability to build a custom home for less money and in a short amount of time.

While enthusiasm within tiny home circles runs high, as with other new ideas like home sharing, would-be tiny home owners and builders have run into the realities of building codes, zoning ordinances, community norms and insurance issues that have, at the least, slowed construction and sales.

Tiny home sales are so small they don’t register in the data collected by the National Association of Realtors (NAR). According to the trade group, common claims that more homebuyers are either flocking to McMansions in the suburbs or to tiny homes are unfounded. NAR data shows that since 2011, the median size of homes bought is 2,000 square feet.

“While many millennial renters living in urban areas have sacrificed space for proximity to jobs and entertainment, they’ve so far followed previous generations by fleeing to the suburbs for larger and more affordable homes when they’re ready to buy,” said Lawrence Yun, NAR chief economist. “It’ll be interesting to see in coming years if the typical home size shrinks as baby boomers downsize, and if there’s a shift towards more young buyers opting for less space to live closer to city centers. So far it hasn’t happened.”

But there remain some true believers.

Mike Schmidt is a business development director for the Tiny Home Industry Association and CEO of Ensemble Ventures, a Colorado Springs business development firm. Although he acknowledges that statistics are scarce, Schmidt firmly believes that tiny home buying and use are on their way up.

He points to the attendance at the second annual Tiny House Jamboree in Colorado Springs. In 2015, there were 43,000 people, 10 tiny house vendors and 50 commercial vendors there, Schmidt said. A year later in August 2016, the Jamboree jumped to 55,000 attendees, more than 50 tiny house vendors and more than 100 commercial vendors. “So, it’s growing leaps and bounds.”

As with any emerging industry, it has its share of challenges that have in some ways impeded growth and raised insurance concerns.

Some of the biggest issues involve building codes that have yet to be standardized and a variety of city and municipality zoning and ordinance regulations on where tiny homeowners can place their dwelling legally, according to Schmidt.

Some state and local governments remain unsure on whether to classify tiny houses as recreational vehicles (RVs), mobile homes or backyard cottages.

Another hurdle: some residents and local officials worry that having tiny homes in their neighborhoods will drive down property values.

According to Schmidt, there’s confusion over definitions between RVIA standards (Recreational Vehicle Industry Association) versus International Residential Codes (IRC), an internationally accepted building code that addresses the design and construction of one- and two-family dwellings and townhouses.

“There’s been some crossover between the two and how you apply insurance to this market is very interesting,” Schmidt said. “There are different types of tiny houses — how they are sited and built, how they are placed, whether they are on a trailer; a lot of things that are evolving and developing.”

Then there are other regulations that affect zoning codes for occupancy. Tiny homes that are classified as RVs might be at odds with HUD codes and permanent residency.

HUD “basically mandates and specifies that you can’t live in an RV more than 30 days at a time in a fixed location which has really hampered the (tiny home) industry significantly,” said Schmidt.

“We’ve spent a lot of time looking at single family homes building, and development lags in the country. There’s a serious need for affordable housing and tiny houses may have a role to play if we can get some of the conflicting zoning and ordinances cleaned up,” Schmidt said.

While regulations for tiny houses that are on wheels and thus often classified as RVs remain unregulated, standardization of rules for tiny houses on foundations is happening slowly. A recent addendum to the International Residential Code for tiny houses is seen by some as a step in this direction.

The IRC addendum gives architects, designers, builders, community developers and zoning officials “a means of recognizing tiny houses as an official form of permissible dwelling,” according to a tiny home blogger, Thom Stanton of the Housing Development Institute and GoTiny.com.

The change could provide an opportunity for tiny house advocates to introduce statutory and municipal adoption of the new tiny house appendix during regional code change meetings, Stanton wrote.

Insurance Industry Response

In addition to building codes and zoning issues, insurance has been a challenge.

But one independent agent has seized the opportunity to become a tiny home insurance expert.

Darrell Grenz, owner of the Darrell Grenz Insurance Agency in Portland, Ore., met one of the earliest adopters of the tiny home movement. Portland Alternative Dwellings’ Dee Williams moved into her tiny home in 2004 but didn’t have insurance to cover it. At that time, and up until about four years ago, the majority of tiny homes were largely uninsurable.

“I met Dee Williams and she talked about the frustration of not being able to find insurance,” Grenz said. “I started going to some of her workshops to learn about the tiny home industry and then one of my clients built a tiny home.”

That began Grenz’s journey down the tiny home insurance path. “It was almost like destiny,” Grenz said. “My office, located in North Portland, has become a hotbed for the tiny home movement.”

Grenz began calling his insurance carrier reps.

“Everyone was intrigued by tiny homes but all I got was a lot of ‘no’s.” No one was willing to tackle insuring the risk. Then Grenz reached out to a managing general agency who in turn contacted Lloyd’s of London. “They agreed to build a program and that was our first tiny homeowners package.”

His client Williams began spreading the word through her blog, www.padtinyhouses.com. “She was ecstatic and started telling people. Word spread and I started getting calls from all over the country,” said the agent. Now Grenz said he receives about 10 to 20 calls a day for tiny home coverage.

Most insurance agents do not understand the tiny home market, which is a matter that concerns Martin Burlingame, CEO of Commercial Insurance Group, based in Colorado Springs.

“The problem is that most insurance agents do not understand the differences on all these things (in tiny homes) and the tiny home movement, if it’s really a movement,” said Burlingame. “It’s a disaster for insurance because you have agents doing all kinds of crazy things.”

The biggest problem when it comes to insurance is whether the tiny home is a permanent residence or a rental property. Many tiny home enthusiasts have taken to the Airbnb-style home venture, Burlingame said.

The tiny home market is broken down into a few segments for insurance coverage purposes. First is a builder-built tiny home that’s mobile. Then there’s builder-built homes that are non-mobile. Lastly, are the DIY, or self-built tiny homes.

Burlingame’s managing general agency, through its tinyhome.insure website, offers an exclusive tiny home insurance program developed specifically for tiny homes. Premiums can range anywhere between $600 and $1,200 annually depending on the tiny home size and value, how it was built and where it is located.

“One problem is a lot these (tiny home) builders are building non-RVIA certified tiny homes,” said Burlingame. So, Burlingame’s firm created the program to treat the home as a dwelling. It includes a trip endorsement that allows the owner to relocate the home and it provides auto comprehensive and collision liability when the home is moved. The program is underwritten by United National Insurance Co., an American Reliable division.

Burlingame said the United National Insurance Co. program shies away from self-built tiny homes “from the ground up” but the underwriters will write shells that have been customized.

For tiny homes that do not fit into the United National program, Burlingame offers coverage through an inland marine company. With this program, he can write tiny homes that are self-built or non-self-built but can’t offer liability. “It’s written as an inland marine,” he said. He said the insured can always buy a general liability policy as well but the problem there is that general liability policies are area specific.

Burlingame said Progressive, Foremost, National General and American Modern will write tiny homes, but those markets tend to classify them as travel trailers.

Tiny Home Future

Right now, Burlingame works with about six or seven independent agents who specialize in tiny homes nationwide but still gets the sporadic one off account.

After two years, Burlingame’s tiny home insurance program has racked up about $5,000 in claims but only brought in around $400,000 to $500,000 in premium. “It’s not grown as fast as we want or as fast as the carrier wants it to,” he admits.

But he’s not deterred yet.

How the industry evolves over the next few years will be interesting to watch, he said. The evolution reminds him of another emerging market and product evolution: the legal marijuana industry.

“Being in Colorado, we dealt with marijuana coming in. It was a completely new product that nobody understood what to do with it,” he said. “The tiny home market is like that but the difference is a marijuana policy is $70,000 for a grow operation, while a tiny home policy is $650. That’s the problem.”

Even so he says it’s amazing to watch a completely new insurance product evolve with a much different and, in Burlingame’s view, a better risk clientele.