Housing & Mortgage
How to Avoid Overpaying For Homes Near the Water
Search flood-plain records first to avoid heartache later
Have you ever stood on a wind-swept beach, looked out at the endless expanse of blue and said to yourself: “This is where I want to spend the rest of my life.”
Each year, thousands of Americans act on that powerful feeling, buying homes near the water. And New Orleans; Galveston,Texas, or Miami may be the perfect place for you, but it’s better to know the risks before you buy.
Too many buyers follow their heart, not their head, a new study concludes.
A study from the National Bureau of Economic Research evaluated values of 3.8 million flood plain homes and concluded they were overvalued by a total of $34 billion, precisely because individual buyers often don’t take into account the risks.
By contrast, businesses are more cold-blooded and get an almost 7% discount on average when buying a house that in the future could be flooded, said the study.
Governments could alleviate the problem by mandating better disclosure of flood risks during home sales, the study found. Some states have no requirements at all. By contrast, low-lying Louisiana requires disclosing if a property has ever flooded, its flood zone classification, and if there are requirements to maintain flood insurance on it.
The study looked at states with similar tough disclosure rules and concluded flood plain properties there sold at an average discount of 4.1% from homes that weren’t in flood plains. That was nearly twice the national discount on flood plain properties.
“These findings point to an opportunity for both researchers and policymakers to identify and implement practices to ensure timely and effective communication of climate risk,” the study said.
If your state doesn’t mandate full disclosure, the onus is on you to find out about flood risks. Here are some things you can do:
Figure out if your home is in a flood plain. You can find free interactive flood plain maps at FEMA.gov. The maps will help you determine how deeply the property is inside a flood plain and what risks you face.
Determine if it has been flooded. Your insurance company should have information on this. Talking up a gabby neighbor (there is one on every block) can also be informative. If a property has been flooded, it’s important to understand how and why. Getting some water in the basement during a storm of the century is one thing. Perennially flooding every time it rains is another.
Does the entire block flood or just your house. If it’s just your house, there may be steps you can take to counter water problems if you go ahead with the purchase. Even so, get bids on the cost before you buy, to avoid surprises. You may be able to use the bids to squeeze a discount out of the seller.
Figure out if flood insurance is required. Even if it isn’t, people buying homes near a flood plain or in low-lying cities should buy it. Find out what flood insurance costs. If the cost has been going up in recent years, that’s a bad sign.
Brace yourself to walk away from a home you love. You may get in a bidding war with someone who doesn’t care about flood risk, and you’re simply going to look for another dream home that won’t turn into a nightmare down the road.
Global warming and rising seas have increased the penalties for not protecting yourself against flood risk. Major storms are happening more often, inundating communities that were traditionally dry. An explosion of construction along the seashore in recent decades only heightens the risks for buyers. The new study found there are some $700 billion worth of homes in flood plains.
“Our findings suggest that many of the 3.8 million flood plain homes in the U.S. are overvalued and that development in the flood plain likely exceeds what would be observed if asset prices fully reflected information about flood risk,” the study said.
It cited earlier research hammering home the same finding. In a survey of Colorado flood plain homeowners, only 8% found out about flood risk to the property before they made an offer, and 69% said they would have changed their offer had they known about flood risk and insurance prices beforehand. Another study found that a tough new law in California requiring disclosure of flood risk during real estate transactions increased flooding discounts.