Insurance can make a huge difference in a real estate market. We don’t often think much about this, but it’s something to watch in areas of California where we’re seeing insurers pull out of the market in light of disastrous fires. This is a big deal, so let’s talk about it.
Today I’m doing a Q&A with Eric Carlson who manages two Lyon Real Estate offices in Placerville and Cameron Park. I was talking with Eric about this recently and figured it would make for a helpful blog post. After all, this is a dynamic affecting real people right now.
Ryan: What’s happening with insurance costs in El Dorado County?
Eric: With all the recent wildfires in California over the past few years, and especially the Paradise and Malibu fires, insurance companies are rapidly pulling out of areas like El Dorado County with their fire insurance, or even their full coverage. In most cases they will still insure the structure and contents, but for the vast majority it’s really hard to get the fire insurance component.
Ryan: El Dorado County is a 2+ hour drive from the Town of Paradise, but what happened there is affecting the local market?
Ryan: Why does fire insurance even matter for real estate?
Eric: Lenders won’t close on a property without fire insurance. It’s something they tend to require.
Ryan: How are buyers getting insurance if big companies are backing out?
Eric: It’s now very common that buyers (and even some existing homeowners that got cancelled) have to go with the California Fair Plan for their fire insurance. This type of insurance is basically a last-resort policy available in California that is often used when someone has not been able to obtain insurance. Fun fact about the Fair Plan… It has already been announced they are raising their fee 10% to 20% on April 1st.
Ryan: What type of rates have you seen your clients quoted lately?
Eric: For insurance companies that are still insuring, it’s super high. We’ve had some quotes come back for like $8,000, $14,000, and even $20,000 for the year. And that’s just for the fire insurance component… It doesn’t include all the other additional insurance for the structure, contents, etc. For now, it seems that a “typical” home, like a 3-ish bed, 2-ish bath home of 2,000 square feet or less, on 2-10 acres will pay about $4,000 per year for the California Fair Plan.
Ryan: What effect have you seen in the market due to these changes?
Eric: Additional insurance costs have scared away some buyers from buying in our rural area. Buyers have actually said that to my agents. They don’t want to pay an additional $300 to $400 per month for not-so-stellar fire insurance. Other buyers have put a hold on the rural property search/move until the insurance companies decide what the long-term plan is. As you know, added costs to a purchase can lessen desirability and/or affordability. And now there is that feeling of it being a “risky purchase” if a fire like the one in Paradise were to come through our part of El Dorado County. We actually had one seller credit the buyer about $25,000 so the buyer could get two years of insurance.
Ryan: Are you seeing this throughout El Dorado County?
Eric: We don’t see this happening in El Dorado Hills. But it starts in Cameron Park/Shingle Springs and carries up to Pollock Pines, and from Georgetown down to Somerset. Strangely, most of Grizzly Flats is not impacted. I’m told because of a great fire station there that can take care of the immediate town. But as some of our buyers are finding out, it applies to all homes in California on multiple acres with brush, slopes, dense foliage, trees, dry grass, etc. It’s not just our county; it’s all counties like us.
Ryan: Any closing advice for buyers right now?
Eric: Yes, I have three things: 1) Consult a few insurance agents to get a handful of quotes so you can compare rates; 2) If you can, try to use a local insurance agent in the county you’re buying in. Locals tend to be more in tune to what is going on with issues in your county and can better serve you; and 3) Talk to those insurance agents very early on in your home hunt. They can give you some general estimates while you’re searching (they’ll need a specific address to give an accurate quote), but as soon as you make an offer on a home and get into contract, immediately get specific quotes for insurance for that property. Don’t wait until your inspection contingency period is almost over. Both you and your lender will want to know those insurance costs of your future home as soon as possible.
Ryan: Thanks so much Eric. This was very helpful. You killed it.
1) It’s NOT just about supply & demand: New laws, taxes, regulations, and changing business dynamics can affect prices and affordability in a market. It’s never just about supply and demand.
2) Different factors in different locations: The market isn’t the same everywhere, so it’s key to understand what factors are affecting a local area.
3) Uncertainty in the market: There is an element of uncertainty right now with changing insurance costs. This is definitely something that can constrain prices over time because it gets much more expensive to own property.
Market Update Video: In case it’s useful, here’s a market update video. It’s about ten minutes and I walk through some of the bigger trends right now with prices, sales volume, and momentum. My goal is to help explain what’s happening and give some different ways to look at the market. Enjoy.
Question: How have you seen insurance issues affect a market? Also, if you live in an area with increased costs, please share your story.