Message from Jim

The “Elephant in the (Living) Room” is an English metaphorical idiom for an obvious truth that is either being ignored or going unaddressed. So, what exists in many real estate transactions as an obvious problem or difficult situation that many do not want to mention? My vote, the Flood Zone!

With the challenges presented by climate change and rising sea levels, biased media coverage, political agendas, and generally inferior knowledge about the National Flood Insurance Program, the “Elephant” must be firmly acknowledged as part of every real estate transaction. With education, fears will diminish and real estate values will be appropriately adjusted, resulting in improved accountability and awareness among consultants and homeowners. Remember, flood risk is two-fold: perceived risk based on the flood map, and actual risk based on Mother Nature. Flood will always bring higher emotion for everyone who believes only one type of risk exists.

Here in Maine, in Section V. General Information of the Seller’s Property Disclosure, it asks, “Is the house currently covered by a flood insurance policy?” We were very pleased to see a flood-related question appear on this form, but is this a good question alone, with no other supporting information? Let’s take a closer look at the flood evaluation process required by the program.

The “being in the flood zone” process starts with a horizontal flood determination (no elevations) from a national flood determination company, land surveyor, or appraiser rendering an opinion that the improvements being used for loan collateral scale in a Special Flood Hazard Area (Zone A or V) per FEMA’s Flood Insurance Rate Maps, meaning flood insurance would likely be required. Simple enough, right?

Unfortunately, it is not that simple. Even if scaled in a high-risk flood zone, a seller can answer “no” to this disclosure question if he or she purchased with cash, has no mortgage, has an outstanding federally backed mortgage of $5,000 or less, has a private mortgage, or in some situations, had portions of on-site improvements excluded from flood coverage due to acceptable loan to value ratios. Just because a flood insurance policy was not mandatory, does not mean the structure is not at risk.

In my opinion, seller disclosure should include a handful of questions that better address buyer or investor risk, and is worthy of having its own section in disclosure similar to water supply, waste water disposal, heating, and hazardous materials, since a flood’s ability to impact value and life safety are equal to or greater than any other components listed on disclosure. The National Association of Realtors should welcome this strategy, as it would create the bridge that best merges value and risk, a necessary process for the program to work effectively.

Not to be excluded, other stakeholders such as insurance agents, communities, land surveyors, engineers, lenders, appraisers, and architects should raise their awareness of flood to better serve our client base. The flood program is not without its faults, but in my opinion, works very well with intention to address risk on money borrowed to allow an applicant to purchase real estate as a primary residence, or as an investment. With record high carbon dioxide levels, climate change, erosion, development, and sea level rise, flood will continue to impact our lives. We can slow the impact by attacking this immense risk with education.