When selling or buying a property in or near a flood zone, all parties associated with that purchase will have questions, concerns and mandates. These parties are the buyers, sellers, real estate agents, insurance providers, and lending officers. For you, the real estate agent representing the buyer or seller, we have compiled a list of the most common FAQs you should know in order to reduce your risk of a real estate lawsuit.
Q: In a flood zone, what should be disclosed to potential buyers? A: While laws are different in each state, common law in the United States mandates that the seller of any real property is required to disclose all facts that are material, that affect price paid and desirability by a potential buyer. This being said, prudence dictates that the seller disclose in writing that the listed parcel is on a flood zone to all potential buyers before close of escrow. There is no penalty under the law for over-disclosing matters pertaining to a listed property. The seller needs to ask himself or herself the question, “If I was the buyer, would I want to know if the listed property was in a flood zone?” When in doubt, always disclose in writing.
Q: Who provides the report in the disclosures, and how much detail is the seller responsible for? A: If the property being sold has flooded in the past, the sellers will need to disclose this water damage in writing prior to close. When the buyers learn that the home they’re purchasing is at risk for flood, they will need to determine what type of flood zone they’re in, whether flood insurance is mandatory, and if it’s something they want to buy even if it’s not mandatory. They’ll also need to inform their mortgage lender, if the lender is not yet aware of the flood zone risk, as it may affect the terms of the loan.
Q: What is the National Flood Insurance Program? A: The National Flood Insurance Program (NFIP) is a national program that allows participating communities to purchase flood insurance from the federal government. Buyers can obtain flood insurance from other insurance companies, but NFIP ensures that all buyers have at least one coverage option with their policy. Regulations regarding the NFIP are subject to change. For more information about the NFIP and to stay abreast of any changes that may impact you or your clients, visit https://www.fema.gov/national-flood-insurance-program.
Q: Where do buyers’ agents check for the most current local flood zone mapping? A: FEMA has been working with local, federal, state, and tribal organizations to compile a map that predicts areas of land that are subject to flooding. The goal of Risk Map is to not only identify the areas that may flood, but to also work with communities to help reduce their risk of a flood by initiating floodplain management regulations.
Q: Where do buyers’ agents check for laws about flood zones pertaining to real estate property sales? A: The most reliable way to access flood maps that will be used by lenders and insurance providers is the FEMA Flood Find website. With this site you have two options: choose the Current FEMA Flood Map tab to do a quick search with an address to see if the property in question is in or near a flood zone. For a more detailed and accurate map, you can choose the second tab, Preliminary Flood Maps, which will lead you to State and then County maps that show the detailed Flood Zone Report. This information can be used by the buyers to assess risk and then be sent directly to the insurance company of their choosing to obtain flood insurance.
Apps like Flood Zone Maps and FloodSearch can also report this data to agents on their smartphones or tablets.
Q: What is the difference between a low-risk and high-risk flood zone area? A: There are actually three main categories of flood risk, according to FEMA, with multiple subcategories. The main three groups are:
Moderate to Low Risk Areas
High Risk Areas
High Risk – Coastal
These categories and their subcategories are sorted into their own risk categories based on historical flood data, proximity to levees, annual rainfall, average flood depths, and likelihood of a storm. Lenders and insurance providers will use this information to assess insurance requirements for a property.
Q: Does the seller have to provide flood insurance or is it the buyer’s responsibility? Does a buyer need to have flood insurance in place in order to close with a lender? A: The seller does not have to provide flood insurance to the buyers. The buyers, however, must have flood insurance in place prior to close. In some instances, the buyer may also be required to pay an entire year’s worth of flood insurance premiums prior to close.
Q: Will some lenders not lend for homes in a flood area? A: Many lenders will still offer loans for a home in a flood area, but the contingencies on purchasing a home in certain flood areas may include these provisions:
Mandatory purchase of flood insurance either from the National Flood Insurance Program (NFIP) if they qualify or from a private agency
Homeowner must pay one year’s worth of premium payments at closing
Q: If a property is purchased while not in a flood zone, but then the government later includes it in a flood zone, does that impact the property value? A: Yes. If a home is suddenly included in a floodplain, the value of that home will decrease. A new assessment on the property will need to be conducted after it is included in the floodplain and placed in a certain risk zone (a low risk zone versus a high risk zone may affect the value differently).
Q: What if a property borders a flood zone but isn’t in it? Should the proximity to the flood zone be disclosed? A: While not ‘required’, it is highly recommended. If you are the buyer’s agent and know that the home is close to, but not yet included in, a flood zone, you should discuss this with your clients in order to avoid potential liability down the road. The risk is that if your buyers purchase the property and then six months later discover the property is now included in a floodplain (and that their insurance will go up while their home value goes down), they may come after you claiming that you should have known that and communicated it to them prior to purchase. Once again, it’s always better to over-disclose this type of known information in a real estate transaction than to under-disclose.
Information for this article was sourced on April 13, 2017. You should review the current legal requirements of your state regarding this topic, as information is subject to change over time.
This blog/website is made available by CRES Insurance Services for educational purposes to give you general information and understanding of legal risks and insurance options, not to provide specific legal advice. This blog/website should not be used as a substitute for competent legal advice from a licensed professional attorney in your state. Claims examples are for illustrative purposes only. Read your policy for a complete description of what is covered and excluded.
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