The Power of a Full House: Investors, Beware of Vacant Home Insurance Prices

The Power of a Full House: Investors, Beware of Vacant Home Insurance Prices

By Justin Stoltzfus.

March 2, 2014

There are a number of wild cards in traditional real estate investment, and one of them is an issue that will hit anyone who has to deal with a property that's on the market for any length of time.

Lots of property owners who vacate a home, or purchase it without renting it out, will be surprised to know that they need to purchase a specific kind of insurance called "vacant home insurance" for the properties -- and they'll likely be amazed, in a bad way, at the prices attached to these specialized insurance products.

The realities of vacant home insurance
Those who go shopping for a policy for a vacant property will often see the cost of insuring the same building double or even triple. Insurance professionals cite risks such as vandalism, fire risk, and liability injuries, where unauthorized visitors may get hurt horsing around on a lawn or in a house, but it's likely that this is only part of the equation that pushes vacant property premiums so high.

A major part of price protection for insurance shoppers is competition. But in the vacant home insurance market, there is less of this competition, because some companies won't touch these types of policies. In researching this article, for example, State Farm representatives in a Virginia city told us they would in no case insure a particular property as a vacant home.

You can find more examples of this kind of vacant property price gouging from reports like this one at RISMedia, which details the radical price differences of vacant home policies and points out that a large share of properties are now unoccupied, because of the specifics of today's housing market.

Tips for investors
Some of those who acquire an empty property feel as if they can just leave the existing insurance in place, but they need to understand that any claim will be fiercely contested by the insurance company because "coverage was not accurate." This Bankrate article underscores this point with the slogan "silence is not golden," while possibly under-reporting the price differences that investors and others can expect when finding a vacant home policy or vacant home endorsement.

One tack that investors can take involves calling a real estate company or agent, to figure out whether any policy provisions are offered at a discount. Sometimes, a real estate broker has ways of finding lower-priced options for a customer as part of the "package deal" that property sale and transfer is.

Another strategy is to fill a property in creative ways. A significant portion of those who are dedicated to "flipping" properties or buying fixer-uppers will allow one or all of the individuals doing the trades work to live in the home while it is being worked on. Contractors get free or reduced rent -- and the investor gets to purchase traditional competitive non-vacant home insurance. While this necessitates a good deal of trust between the parties involved, it's not an uncommon strategy for locals who really want to invest in local real estate properties.

Using REITs
Another possibility for real estate investors is to put money into real estate investment trusts, or REIT funds, instead of individual properties. This allows risk-averse investors to avoid both vacant home insurance, and a whole raft of other problems attached to conventional real estate investment. Investment properties require a lot of capital upfront, and a significant strategy for maintaining those properties, along with an endgame for getting capital gains out of them in any given housing market.

By contrast, REIT products are made to offer investors more reasonable levels of investment and contribution, along with a managed plan for benefiting from rising home prices.

The bottom line is that real estate investors need to look at all of their options, and all of their liabilities, including the high prices that they may need to pay for just keeping a vacant property insured. Without this kind of due diligence, those investing for retirement or other purposes can find a lot of their gains eaten up by different kinds of unanticipated costs.