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Message from Jim

In our August newsletter, we mentioned the concept of “Moral Hazard”, a situation in which a person takes more risks because someone else bears the burden of the cost. While typically used in reference to economics and insurance, this concept actually starts early with children gaining comfort that a loving parent will not let their offspring fall too far, and unfortunately, develops into a perceived safety net throughout their adult lives.

Subsidized flood insurance premiums create a similar concept when evaluating actual flood risk. With the Digital Flood Insurance Rate Maps slowly becoming the Effective Map for counties throughout the country, this new mapping platform will be very advantageous to users who remain respectful of its limitations. Many do not know that the program uses four methods to construct flood maps: detailed studies, limited studies, automated approximate analysis, and the re-delineation of existing information which covers a wide range of map accuracy. Since a map can only be as accurate as the underlying data, even when using today’s most current technology, each user should always understand that perceived risk as depicted on the flood map, and actual risk based on nature’s fury will always be two types of risk regardless of map accuracy. Elevations will aid in the more accurate identification of perceived risk, but natural events will never see a flood map line.

Why is this important? A reduced flood insurance premium and believing that a flood map identifies actual risk will always cause much strain with the program. Though the phasing out of subsidized premiums is slowly being addressed with flood insurance policy reform, there will still be program inefficiency due to the existence of continuous coverage, as coastal development and sea level rise continues. Logic should tell us all that the last thing we should be doing as a society is move closer to the flooding source, but that is exactly what is occurring. Per NOAA’s State of the Coast webpage, between 1970 and 2010, a population increase of 39% (34.8 million) has occurred in the United States Shoreline County population. Moving closer to the flooding source as the flooding source moves closer to people and infrastructure solidifies future problems.

The concept of comparing perceived risk to actual risk can also be used with real estate value. Amazingly, in an analysis comparing the effect of California Hazard Disclosure Law on property values, the average floodplain property sold for only 4.3% less than a comparable property not in a flood zone (Troy, 2003), while an actual flood event rather than flood hazard disclosure has a greater effect on property values (Yeo, 2003). In Oregon, actual damage contributed to significant value decreases of 19%-26% for flood affected houses, but floodplain regulation enforcement did not show an effect on residential land value (Muckleston, 1983). These numbers clearly indicate that regulation and real estate disclosure are essential components for program success.

Change is a choice and at some point, each of us, from homeowners and consultants to politicians, must think of how the risks we take for ourselves affect others. Pro-active change often includes many options; reactive change offers far fewer. Program modifications for future success must include weaknesses created with the concept of “Moral Hazard”.

Education

3 CEUs for Maine Real Estate Licensees and Appraisers

Please join us next week for "Land Surveying, Flood Zones, and Real Estate"!

Date: October 13, 2015, 9:00 AM - 12:00 PM
Instructor: Jim Nadeau
Sponsor: Beyond the Boundary, the Educational Component of Nadeau Land Surveys
Location: Husson University, 340 County Road, Westbrook, ME, Room 105
CE Credits: 3 Clock Hours - Maine Real Estate Commission and Maine Board of Real Estate Appraisers
Fee: $35
Seating Capacity: 40

Please note this course is NOT offered by Husson University, all inquiries should be directed to Nikki Oteyza at Beyond the Boundary

CLICK HERE TO LEARN MORE AND REGISTER FOR THIS COURSE!

New Jersey Association of Floodplain Managers Annual Conference

On October 22nd, Jim Nadeau will be traveling to New Jersey to present "Flood Risk Perception and the Impact on Real Estate" at the NJAFM's 11th Annual Conference. This is a new presentation we have designed for this event, and hope to expand it to our other audiences. Do you have any experiences you would like to share? Good or bad, we want to know how real estate professionals are approaching and resolving flood-related issues.

How has flood insurance or flood hazard disclosure impacted your real estate transactions? Send us a message and let us know.

Approximate areas lost to rising sea levels since the last ice age, highlighted in red. Vincent Gaffney, Univ. of Birmingham, UK.

Resources

The U.S. Geological Survey recently published the Sea-Level Rise Modeling Handbook: A Resource Guide for Coastal Land Managers, Engineers, and Scientists. This handbook is a guide for understanding the dynamics and impacts of sea-level rise on coastal ecosystems. Download it from the USGS website.

Business Insider shared an animated video showing what the earth could look like if all the ice melted, based on a predicted rise of around 216 feet. Very interesting, and scary. Check it out!

Flood Fact:

Elevation Certificates help insurers properly rate a building.

Many factors are considered when determining a flood insurance premium, such as age of building and flood zone, but without elevation data, insurers could potentially default to using a "worst-case scenario" rating for a standard flood insurance policy. The major measurement that comes into play when rating a policy is the elevation of the lowest floor. This could be a basement, crawlspace, or living space, depending on building construction and use. Rating is based on where that elevation falls in relation to the Base Flood Elevation. The lower the floor, the higher the premium.

Note: FEMA's Elevation Certificate form (OMB No, 1660-0008) expired July 31, 2015, but will continue to be accepted until the new one is published. Typically there is a transitional period after the new publication where both forms will be accepted. We will keep you posted!

knowledge-isnt-power-until-it-is-applied

A New Feature in our Newsletter...Real-World Examples!

October Flood Example

We recently performed an Elevation Certificate for a client who was purchasing a property which horizontally scaled in a Special Flood Hazard Area per the current Flood Insurance Rate Map (FIRM) for that community. The home is located on a peninsula between the ocean and a river inlet, and they knew flood insurance would be a requirement, but wanted to be proactive and get a more accurate rating based on elevation prior to closing.

Based on the elevation data collected, they were not eligible for Letter of Map Amendment Removal because the lowest adjacent grade outside of the building was below the published Base Flood Elevation. But since they had elevation data to provide their insurance agent, they were able to reduce their annual premium nearly $1,400.

Who's Problem Is It Anyway?

We are often asked, "Who should be responsible for paying for an Elevation Certificate (EC): the seller or the buyer?" It's a logical question and it depends on the situation. If the seller was not paying flood insurance and had no need to get an EC, they may not understand the benefit and be unwilling to pay for it. But if an EC exists and makes it easier for buyers to finance with actuarial rates or provides data that supports a Letter of Map Amendment to remove a flood insurance requirement, then it will improve selling power. As well, if a buyer is interested in a property that presents any level of flood risk, it is in their best interest to have elevation data collected to reduce premiums, and have on hand for any future improvements. Is it a cost that could be split between the buyer and seller? It doesn't hurt to ask!

In the News

Amid Drought, Thousands of Californians Cancel Their Flood Insurance

by Phillip Reese, The Sacramento Bee, September 4, 2015
"The number of federal flood insurance policies active in California has fallen by 30,000 or 12 percent, since the drought began in 2012, according to data from the National Flood Insurance Program. ...As strange as it sounds, California could see extensive flooding this year. A strong El Niño weather pattern is expected that could bring heavy rains." Read more!

Take home points to consider:
* Just because an area has been experiencing a drought does not mean it will stay that way. Drought-ridden soil is compact and dry and does not absorb water well. So when a heavy rain falls, extreme flooding is more likely to occur.
* Homeowners insurance doesn't cover floods, and most flood insurance policies require a 30-day waiting period before coverage takes effect. Cancelling a policy due to a drought is very risky.

What exactly is El Niño?

The term El Niño refers to the large-scale ocean-atmosphere climate interaction linked to periodic warming in sea surface temperatures across the central and east-central Equatorial Pacific. For North America this means, "warmer-than-average temperatures over western and central Canada, and over the western and northern United States. Wetter-than-average conditions are likely over portions of the U.S. Gulf Coast and Florida, while drier-than-average conditions can be expected in the Ohio Valley and the Pacific Northwest." And remember, warmer does not necessarily mean drier. Warmer waters add fuel to tropical storms and hurricanes. ~National Ocean Service, NOAA

Flooding in St. Louis, Missouri, 1993. Photo from the St. Louis Post-Dispatch.

On this day...in 1993

The Great Flood of 1993, which flooded an area of over 30,000 square miles along the Mississippi and Missouri Rivers, lasted from April until October. The 7th day of October is said to be when the Mississippi River finally dropped below flood stage in St. Louis, after having been flooded for 103 days. Other areas along the Mississippi reported to be flooded for more than 200 days.

October Flood Funny

Atlantic Ocean Excited to Move Into Beautiful Beachfront Mansion Soon

The Onion, Vol 51 Issue 37, September 14, 2015
Admitting it has had its eye on the property for quite some time, the Atlantic Ocean confirmed Monday that it was looking forward to moving into a beautiful beachfront mansion in the near future. “For the longest time it seemed like this place was completely out of reach for me, but I’ve come a long way in the past few years, and now it’s looking more and more like a real possibility,” said the body of water, which confided that, after having admired the building’s impressive exterior and grounds for so long, it was thrilled at the prospect of finally going inside and exploring all eight bedrooms and 7,500 square feet of living area. Read more!