The New Reality of Property Insurance

What You Should Know 

Q.  How can insurance availability/affordability affect the real estate transaction? 

A.  The affordability and availability of insurance affects both buyers and sellers.  Buyers will typically be obtaining mortgage financing to pay the purchase price of the property.  The lender will require that there be property insurance to cover their interest in the property.  If proof of insurance is not available at closing the lender will likely refuse to release the funds and therefore delay or even derail the transaction, either of which can impose both inconvenience and cost to both the buyer and seller.  Even in a “cash” transaction the buyer may be hesitant to complete a transaction where insurance is not available to cover the buyer’s equity in the property.

Q.  When should a buyer apply to obtain an insurance policy to cover the property being purchased?

A.  The interest of both buyers and the sellers now suggests that the buyers should begin their search for insurance no later than the time of the contract to purchase is signed.  This helps to assure a firm commitment for the issuance of a policy well in advance of the settlement of the transaction.  Waiting until the last days or even weeks before the closing can limit the opportunities of the buyers and sellers to address the affordability and availability issue and, if needed, to find alternatives for difficult to insure properties.  There have been many examples of transactions, which have been adversely affected in some manner because of problems associated with insurance availability/affordability.

Q.  What kinds of events/records can affect the ability to obtain insurance on a property being purchased? 

A.  A number of factors can affect the availability and cost of homeowner insurance on a property being purchased.  For example, they include:

a.   past claims filed on the property (up to previous five years)

b.   poor insurance score of the prospective purchaser

c.   past claims filed by the property purchaser on other properties

d.   physical characteristics of property (e.g., leaky roof, historical)

e.   characteristics of the property’s location (e.g., proximity to fire station, regional weather conditions) 

Q.  How does the insurance company know what claims have been filed in connection with the property? 

A.    Approximately 90% of all insurance companies contribute information regarding claims to an insurance industry database.  When underwriting a new policy the insurance company may obtain a report from this system from one of a couple different sources to determine the property’s claims history.  This report is most often identified as a comprehensive loss underwriting exchange report or a “CLUE Report.”  The report contains information regarding property claims filed in connection with a particular property and claims filed by a particular insured person.  For a fee the current owner of the property may obtain a copy of this report. A copy of the report is available to the property owner through companies such as ChoicePoint, Inc, either by writing to ChoicePoint, Inc. located in Alpharetta, Georgia, or by going to their website, choicetrust.com, and A-Plus, either by writing to A-Plus located in Jersey City, New Jersey or calling 800/709-8842.   

Q. Should I get a copy of the CLUE Report? 

A. While this decision is up to the property owner, it is important to understand the limitations of the report.  The report contains only raw information and how that information will affect the insurability of a property isn’t explained as a part of the report.  Moreover, not all insurance companies use the report and those that do use it don’t all use the information in the same way.  As a result having the report may not enable you to predict whether a particular company will insure the property. If you want information on how a CLUE Report or other similar report may affect your ability to obtain insurance contact your insurance agent. 

Q.  Are there factors unique to a buyer that can affect their ability to obtain insurance? 

A.  Yes, although not used by all insurance companies in determining eligibility for insurance, some companies do review the claims filed by the buyer on properties owned by the buyer during the preceding five years.  This is another aspect of the CLUE Report database that focuses upon the insured individual rather than the insured property. 

Another more controversial factor is the use of Insurance Scores.  Insurance Scores, which are formulas developed by insurance companies in an effort to predict the likelihood of an individual filing claims, are sometimes used to determine to whom or at what price an insurance policy will be issued.   

Insurance scores are not standardized within the insurance industry and both how they are calculated and how they are used is generally not known outside of individual insurance companies.  If you want additional information on how insurance scoring may affect your ability to obtain insurance contact your insurance agent.    

Q. Can an insurer rate my insurance risk based on my credit score? 

A.  No.  In Maryland, insurance companies are prohibited from using credit scores to determine a property owner’s insurance risk. 

Q.  If I have questions about insurance practices or the law, who should I contact? 

A. The Maryland Insurance Administration has a consumer complaint line for all forms of insurance.  In the case of homeowner’s insurance, you would contact the Consumer Complaints Department for Property and Casualty at 410-468-2341.

Transaction Checklist – Insurance Issues 

Ø      Discuss current insurance market conditions with your insurance agent and any problems you may have in obtaining insurance on the home you are purchasing, 

Ø      Review offer to purchase to identify insurance issues. 

Ø      Contact one or more insurance agents immediately following acceptance of purchase contract by both parties to begin process of obtaining necessary insurance. 

Ø      Obtain commitments to issue an insurance policy from an insurance company in writing and carefully review it with your attorney or insurance agent to determine scope of that commitment. 

Ø      Be aware of alternative insurance sources that may be available if a problem develops:

·        Know available sources of insurance (i.e., what other insurance companies are in market by calling different insurance agencies in the community)

·        Check with Seller’s current insurer to determine if that insurer will continue to insure property with new owner

·        Check with Buyer’s current insurer to determine if that insurer will continue to insure buyer in a new property

·        Alternative forms of coverage that may allow the transaction to proceed may be obtained by contacting the Maryland Joint Insurance Association 410-539-6808)

Prepared in part by the Risk Management Committee of the National Association of REALTORS®.

Reprinted with permission by the National Association of REALTORS®.

The Maryland Association of REALTORS®, 2594 Riva Road, Annapolis MD 21401-7406, www.mdrealtor.org; 410-841-6080  

No Slowing Seen In Housing Boom
Steady Sales, Rising Prices Forecast

The U.S. housing market shows no sign of a nationwide bubble and should remain strong for the next decade even if interest rates rise somewhat, according to an analysis from leading industry economists released yesterday.

There's no slowdown in sight for housing demand, according to the group of five economists who collaborated on the first 10-year projection offered by the Homeownership Alliance, a Washington-based association of 18 national housing organizations.

Instead, the report compiled by Fannie Mae, Freddie Mac, the Independent Community Bankers of America, the National Association of Home Builders and the National Association of Realtors offered the promise of a continuing boom driven by population growth, including immigration, and new jobs.

Among the 10-year predictions:

• Demand for new housing will remain steady at about 2 million units a year, with aging boomers, boomer babies and immigrants competing for places to live.
• The national homeownership rate will grow to as much as 72.4 percent from its 2003 record of more than 68 percent.
• Total home sales will average about 8.5 million per year, on par with recent record years.
• Home price increases should average 5 percent a year nationally through 2013, with price gains above 6 percent in areas where supply is tight, such as the Washington market.

"The American Dream is really alive and well, and over the next 10 years we see a very solid and bright future," said Paul Merski, chief economist for the Independent Community Bankers of America.

The rosy predictions came on the same day as a Commerce Department report that U.S. sales of new houses fell 11.8 percent in April, the biggest monthly drop in more than a decade. The government report raised some alarms yesterday that housing's golden glow over the past three years might be fading as mortgage rates climb and home prices soar.

But one of the economists who helped shape the 10-year alliance forecast downplayed the Commerce report, saying it offered a very limited picture of the market and reflected more that March's new-home sales numbers were boosted by good weather.

"The March bulge in home sales apparently was related to an unusual swing in weather conditions, and market fundamentals remain sound despite an increase in mortgage interest rates from their March lows," David F. Seiders, chief economist for the National Association of Home Builders, said in a press statement on the Commerce numbers. "We've been expecting sales to recede from the early-year pace, but we're forecasting an annual total of 1.113 million units, up about 2 percent from the record pace in 2003."

New-home sales in April dropped to a seasonally adjusted annualized rate of 1.093 million, from a record 1.239 million in March. Sales in the South, which includes the Washington area, declined the most, down 22 percent from March.

At the Homeownership Alliance conference, Seiders said there could be threats to the housing industry in the next 10 years if interest rates increase dramatically, a scenario he and his colleagues do not expect, or if Congress changes regulation of Fannie Mae and Freddie Mac, the two secondary mortgage market giants.

Seiders said interest rates were not factored into the alliance's 10-year forecast because "the most important factor [in housing growth] is population growth" and because the industry trusts that Federal Reserve Chairman Alan Greenspan "will be keeping the economy fairly close to potential growth and that the inflation side will not be allowed to go out of control."

The housing industry economists generally expect interest rates to stay below 7 percent this year and not reach 7.5 percent until 2006.

If rates were to move much higher, that could affect the decisions of people to buy or rent, but the overall demand for housing would not be affected, said David W. Berson, Fannie Mae's chief economist.

David A. Lereah, chief economist for the National Association of Realtors, said 36 metropolitan markets, including the Washington area, showed double-digit home price appreciation in the last quarter because of low inventory and high demand. Prices will not drop, said Lereah, unless "you have more supply than demand" and "a local concentrated loss of jobs."

(May)

Home Improvement Trends

From the bone-chilling cold climates of the North and Northeast, to the sun and moderate temperatures of the Southwest and West Coast, the trends of home improvement and interior design are strikingly similar.  

A survey of general contractors, painters, floor installers and interior designers in nine states (Arizona, California, Colorado, Illinois, Massachusetts, Minnesota, Texas, Virginia and Washington) was conducted recently to determine home improvement trends as they are happening -- not just as manufacturers are predicting.  

Some highlights of the survey are:

·         Most professional painters are painting interior walls shades of white. Homeowners' choices for exteriors are earth tones and taupe.

·         Homeowners are choosing hard, stone-like, solid surface materials for kitchen countertops. The second most popular choice is tile, although the trend seems to be moving away from tiles on countertops. The preference is for solid materials -- if not laminates, then such solid plastics as Corian and Wilsonart. Tile is usually installed on the backsplash.

·         Tile floors are the most popular choices of homeowners from Seattle to Virginia, according to the survey. A close second is laminate flooring that looks like wood. Home improvement specialists are seeing a gradual movement toward natural materials that come from sustainable resources that are affordable, recyclable and easy to maintain.

·         Large family rooms and sunrooms are popular today, along with such home extensions as exercise rooms, master suites, hearth-room kitchens, screened porches and elegant bathrooms.

The use of color in designing interiors can be highly effective in creating an appealing environment. Studies on color association have been conducted to learn how different colors affect people. Someone's choice of color for their home depends on many things -- trends, size of the room, lighting and childhood influences, for example.  

Red is the strongest of all colors. Raspberry reds express excitement, high energy, warmth and vibrancy. In fact, raspberry is a stimulating and active color that would also be appropriate for an entry hall. Warmer reds, also inviting, can provide an intimate atmosphere in a dining room.  

Experts point out there are many different shades and tints of colors, each with a distinctive personality. The experts advise that color selections be based on how you feel about a particular color. A room filled with bright lively colors may energize one person; another person may find the brighter hues exhausting.  

Interior designers are a great starting point for homeowners wanting to remodel or just to have a new look. They work with you to evaluate your needs and communicate these needs to the architect and the contractor. Also, interior designers help enhance a home environment through their understanding of design and space and their expertise in combining creativity with quality design.

(March)

IF YOU THOUGHT buying a home would be easier - and cheaper - this year, you may be in for a rude awakening.  

The spring home-buying season is just getting off the ground, but it already looks like home sales could set a record in 2004. Some 7.2 million homes changed hands last year, according to the National Association of Realtors. With interest rates lower than expected, Frank E. Nothaft, chief economist at mortgage-financing company Freddie Mac, yesterday predicted home sales will reach a record 7.3 million this year. 

In some of the Country's hottest real-estate markets, houses are again routinely attracting multiple offers and selling for far above the asking price. A three bedroom townhouse in Centerville, VA had an asking price of $285,000. There were 30 offers and the final selling price was $320,000, which was 12.3% above the asking price. 

Prices, too, are surging. Fiserv CSW, a research company, says home prices are expected to climb 7.4% this year, following a 7.5% rise in 2003. But gains could be far greater in the hottest markets, as buyers compete for a dwindling supply of homes. In Los Angeles, for example, prices are expected to climb some 15%. In such markets, the tight supply is leading to another round of multiple offers and bidding wars.

This isn't what many economists were predicting just a few months ago. "Myself and all the experts thought this would be a slower year," says Kenneth Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at the University of California at Berkeley. But with mortgage rates remaining below 6% far longer than expected, many real-estate offices are buzzing and some economists are revising their forecasts upward. 

And mortgage rates could go even lower. Yesterday, 10-year Treasurys - a key benchmark for mortgage rates - closed at just 3.72%. With sluggish job growth, there's little concern that inflation will rise anytime soon. That, in turn, should keep mortgage rates low. The average rate for a 30-year conforming fixed-rate mortgage fell yesterday to 5.40%, the lowest levels since early July, according to HSH Associates, financial publishers in Pompton Plains, N.J. 

Some markets are at a near frenzy. Virginia's Fairfax County and California's Orange County report particularly strong demand for starter and midprice homes. The number of listings in Orange County was down 65% in January over a year earlier. "There's about a week's supply of homes on the market," says Leslie Appleton-Young, chief economist of the California Association of Realtors. 

The situation isn't much different in other parts of the state. Overall, California has just a two-month supply of homes. That's well below the seven months of supply that has been the average in California for the past 10 years.

In Centreville, Va., outside Washington, D.C., a three-bedroom townhouse that went on the market in February, priced at $285,000, drew 30 offers and sold four days later for about $320,000. A fixerupper in Ridgefield, Conn., priced at $734,900, recently attracted seven offers the day after it came on the market, according to Nancy Ollinger of Neumann Real Estate. In Las Vegas, a four-bedroom house listed in January for $216,000 received 43 bids and sold for $265,000, says Lee Barrett, president of the Greater Las Vegas Association of Realtors. Such fevered bidding has shown up in many parts of the country over the past few years, but until recently seemed to be subsiding. 

Soaring prices aren't universal. Growth in home prices is expected to be below 5% in markets such as Atlanta, Cincinnati and Nashville, Tenn., according to Fiserv CSW, in part because of relatively high rates of new home construction. 

But in the hot markets, the competition for choice properties is so stiff that some real-estate agents are advising would-be buyers to write letters to sellers explaining why their offer should be accepted. Other brokers are counseling buyers not to make the purchase contingent on an appraisal or inspection. 

Kassy Kaiser, an agent with Re/Max Heritage Homes in San Diego, credits a personal letter that called the house "a forever home" and praised the home's "meticulous care" with helping her client win out over another bidder in a contest for a $529,000 home last week. 

Rachel Chavez, an insurance adjuster in Orange County, recently saw a four-bedroom home she coveted. By nine that evening, her broker, Chris Fry of Oaktree Realtors, was at the seller's door with an offer for $505,000. "As we were walking through, [the seller] was touching up the paint," recalls Ms. Chavez. 

Other bidders are including escalation clauses, agreeing to top other offers to a set limit. Or they're offering to let the seller stay in the house rent-free for a month or so after closing. 

Indeed, some Realtors are advising buyers to consider skipping inspection altogether. "If they're asking for one, they probably won't get [the house]," says Vicki Nellis, an agent for Re/Max Allegiance in the Washington suburb of Burke, Va. 

Realtors are working hard to drum up new listings by targeting homeowners who have been in their home for a long period or who might otherwise be interested in moving. Ron Phipps, a Realtor in Warwick, R.I., recently began sending out thick marketing packages to local homeowners, a move that doubled his inventory. "If you wait for listings to hit the multiple-listing service or the marketplace, or for a sign to go up, it's most likely they are going to be gone," says Maurice Veissi, president of Veissi & Associates in Miami. 

The prolonged drop in interest rates has been a mixed blessing for home buyers. Lower mortgage rates make homes more affordable. But low rates have also pushed housing prices up so much that homeowners in some markets can't afford to trade up, which means fewer lower-price homes are coming on the market. Also, many people have pulled cash out and remodeled, another reason there's a thin supply of homes on the market. Refinancing began slowing last year as rates climbed, but now it's kicking back up. 

When mortgage rates finally do move upward - as they almost surely will when employment rebounds - selling a home will get tougher. If rates rise sharply and stay up, home prices could actually fall in some markets. "The risk is rising," says Mr. Rosen of the University of California at Berkeley. "The higher prices go earlier, the more likely we are going to have a correction in 2005 and 2006." 

(February)

bronchick@legalwiz.com

(January)

Do you own a second home?

Are you one of the millions of U.S. residents who own more than one home, which you occupy part of each year? If that is your fortunate situation, you might be overlooking significant tax savings from your secondary home. Depending on your personal situation, you may be entitled to tax savings both while you own your second home and when you eventually sell it. 

KEEP CAREFUL TAX RECORDS FOR YOUR SECONDARY HOME. Just in case you need to prove to an IRS auditor how much time you actually occupied your vacation or second home, it's smart to keep all your tax records for it "forever." The best proof you actually lived in the home are your paid utility bills with your cancelled checks. If there's ever a question about your property tax and mortgage interest payments, your cancelled checks are the best proof. Both during ownership, and at the time of sale, there is no substitute for your carefully saved tax records. Without accurate records, you might even incur an IRS negligence penalty for failure to document your tax deductions. 

WHEN IS YOUR SECOND HOME YOUR PRIMARY RESIDENCE? The only time most of us think about which is our principal residence is when we decide to sell. However, if you own two (or more) residences which you occupy part of each year, determining your principal residence can become a taxing question.

 To qualify for these generous exemptions, the seller must have owned and occupied his/her principal residence an "aggregate" two of the five years at the time of sale. However, the home need not be the seller's principal residence at the time of sale. New IRS regulations, explained in Chapter 1, indicate the home where you spend the most time is your principal residence. Although not conclusive, additional evidence of "main home" principal residence occupancy includes utility bills, voter and automobile registration, business or retirement income, driver's license, place of income tax filings, and other indicia of primary residence while living there. 

SECONDARY HOME TAX BENEFITS DURING OWNERSHIP. Presuming you itemize your income tax deductions, the property taxes and mortgage interest paid on your secondary home are always tax deductible. But there can be extra tax benefits from your secondary home, depending on how much time you personally use it and if you rent it to others. There are four possible classifications:

 1—NO PERSONAL-USE TIME. If you didn't occupy your secondary residence during 2003, and it was rented or available for rent the entire year, then all your rental income must be reported on Schedule E of your income tax returns. This is also the place to deduct applicable expenses such as mortgage interest, property taxes, insurance, utilities, repairs and depreciation deductions from the rental income. In addition, you can deduct reasonable travel expenses to periodically inspect (but not occupy) your rental property (especially if it is in Hawaii!). 

But there's a catch. You must have "materially participated" in the rental property management. If you didn't materially participate in managing your rental property, such as being a limited partner owning less that a 10 percent interest or you put your resort property into a "rental pool," then your tax loss exceeding rental income is not tax deductible due to lack of material participation.

 If you didn't materially participate, don't panic. Although your rental property tax loss is not fully deductible against your other ordinary income, such as from your job, you can "suspend" your un-deducted loss for use in future tax years, usually when you sell the rental property. However, if you are a full-time "real estate professional," such as a real estate broker, then there is no limit to your qualified rental property tax loss deductions against ordinary income. Please see chapter 7 for more details.

 2—LESS THAN 14 DAYS ANNUAL RENTAL TIME. In this classification, if you rent your secondary (or primary) home to paying guests less than 14 days annually, regardless how much rent you received, that rent is yours to keep tax-free and it need not be reported to Uncle Sam. However, you can still deduct the mortgage interest, property taxes, and any uninsured casualty losses suffered (such as snow or rain damage) as itemized personal deductions.

 3—ANNUAL PERSONAL USE IS BELOW 15 DAYS OR 10 PERCENT OF THE RENTAL DAYS. In this very desirable classification, if your personal use is less than 15 days per year, or 10 percent of the rental days, which exceed 14 days annually, there is no limit to your tax loss deductions (except for the $25,000 annual passive activity loss limit explained above).

 EXAMPLE: Suppose you rented your secondary home to tenants for 120 days in 2003 and you personally occupied it only 10 days. Because your personal use was under 15 days or 10 percent of the rental days, you fall into this advantageous category. However, the IRS says Internal Revenue Code §183 applies and you must show a profit at least three out of every five years for your rental activity.

 4—ANNUAL PERSONAL USE EXCEEDS 14 DAYS OR 10 PERCENT OF THE RENTAL DAYS (IF RENTED OVER 14 DAYS PER YEAR). This classification is for owners who personally use their secondary property heavily but also rent it occasionally. Of course, mortgage interest and property taxes, as well as uninsured casualty losses, are always tax deductible. 

In this category, rental income and applicable deductible rental expenses should be reported on Schedule E of your tax returns. The correct order for deducting expenses is mortgage interest, property taxes; uninsured casualty loses, operating expenses, and depreciation. If the mortgage interest, property taxes, and uninsured casualty losses exceed the rent earned, any of these excess expenses should be deducted as itemized deductions on Schedule A. 

SUMMARY. Secondary or vacation homes are not great tax shelters during ownership. But they can provide modest tax deductions while the property, hopefully appreciates in market value. When selling a secondary home, if you can meet the "aggregate" principal residence ownership and occupancy tests for two of the five years before the sale, your sale will be tax-free up to $250,000 per qualified home seller. More details are available from your personal tax advisor.  

(December)

Have you thought about buying a house as an investment? With so many uncertainties in other investment vehicles, real estate could be the right place to park some of your $$ that are earning a low return in a bank. After you read this article, take a look at the Investor Information pages.