How to Insure a Home Flip
In real estate language, flipping a home is slang for buying a home property, quickly rehabilitating it, and then selling the upgraded and updated home for a quick profit. Because the home is a work-in-progress, it’s important to maintain adequate insurance to cover any problems that may arise as a result of the construction. Home flippers should consider carrying more construction-related insurance coverage than just a simple homeowner’s policy provides.
Home Insurance Variables
A standard homeowner’s insurance policy covers damages and losses due to normal accidents. That’s fine for a family living in a home. But for a construction project like a home flip, homeowner’s insurance may not be adequate considering what will be happening with the property while it is under construction. While some homeowner policies can be upgraded to include construction work being done to remodel a home, most don’t cover issues like workers hurt on the property or potential problems with theft of a contractor’s construction equipment. This is where a supplemental policy or a policy designed for a construction project works much better than a regular homeowner’s policy.
Why Insurance is Important for Home Flippers
When a real estate investor decides to conduct a home flip, the object is to maximize profit by reducing the costs of construction. To accomplish the maximum profit possible, smart home flippers know that accidents and collateral issues can become big problems affecting the project’s profitability. When a construction worker is injured on the job, they are normally covered by a Workmen’s Compensation insurance policy provided by their employer. Unfortunately, some contractors don’t maintain worker’s comp policies, despite signs and advertising that says they do have proper insurances and bonding. House flippers have to perform due diligence for each of the contractors working on the project, but even then, a worker’s comp policy can lapse during the construction process without the flipper knowing. For this reason, home flippers need insurance coverage for:
- Injuries – Workers, contractors, and others can be injured on-site and require medical attention that the flipper will have to pay for in the event there is no worker’s comp policy in effect for the injured worker.
- Damages – Occasionally, machinery and equipment used on the construction project can damage roads and sidewalks, trees and plants, buildings, utility lines, and other items. Most contractors maintain liability insurance, however, in those cases where a contractor fails to maintain a liability policy, the home flipper will have to pay the bills for any damage done as a result of their project.
- Warranties – When home buyers negotiate for the purchase of a home, they want assurance the repairs and equipment included in the remodeling are covered by more than just a standard warranty. Home flippers can purchase insurance policies that cover expenses associated with failures due to poor construction or defective materials.
What Kind of Insurance Should Home Flippers Purchase?
There are several areas of potential liability that a home flipper should focus on to prevent unwanted losses on a construction project like flipping a house. The main areas of concern include:
- Builders Risk Policy – Insures the property against liabilities arising from construction including injuries, materials failures, and construction
- Dwelling Policy – This coverage includes the structure of the building but not any contents as the building is under construction and not occupied as a residence.
- Vacant Home Policy – Unoccupied residences can pose problems with leaking pipes, electrical issues, and other maladies that arise due to a lack of occupancy.
- Liability Policy – The property owner and investors are protected against injury claims that can be incurred during the construction cycle.
How Much Does an Insurance Policy for House Flipping Cost?
While some insurance policies offer additions to the main coverage at a small cost, in general, the cost of the additional insurance should be around one-half to one percent of the value of the project. For example, if a home being renovated will be worth $200,000, the insurance policy should cost around $100 to $200 per month for the construction period. Most home flippers will budget between $500 and $1,000 per home as the cost for adequate insurance coverage for the project.
Experienced Home Flippers Keep Their Projects Covered
When a construction worker is injured on the job, they are supposed to be covered by a Workmen’s Compensation insurance policy provided by their employer. Unfortunately, some contractors don’t maintain worker’s comp policies, despite advertising they have proper insurances and bonding. In these cases, house flippers have to perform due diligence for each of the contractors working on the project, but even then, in some cases, a worker’s comp policy can lapse during the construction process. The best idea is to reduce risk and maintain insurance coverage that will eliminate any potential liabilities or losses.