...when you don't have an appraisal.

We took a property as abundance of caution and don't have an appraisal on it. Turns out it is in a flood zone, so we need to get coverage.

What are some ways to determine value without ordering an appraisal?

I read in the Fed FAQs where you can use a Hazard policy to determine RCV. So, would I just ask the borrower to supply a copy of their hazard policy on the property and then get flood insurance for the same amount?

Yes, using the hazard policy to determine value would work. In the past we have also used tax appraisals, though if I can get something better like the hazard insurance, I usually do.

I have thought about the tax value as reported on the county website, but they are usually about 70 to 80% of the actual value of properties.

Does anyone know if it is acceptable to "gross up" the tax value to determine the amount of Flood Insurance?

In these situations, you use your best judgement. Grossing up is certainly better than using the tax value...just remember to not include the land!

When using the hazard policy, consider what might not be included, such as a concrete foundation, as it won't be included in their estimates.

If your bank usues a software, such as Marshall and Swift, you can do your own internal cost estimates, but if not...then you are pretty much left with your 'best judgement'.

You could also speak with your insurance company that you force place insurance with...they may be willing to assist in these unusal instances.

Thanks, great suggestions!

(I am going to have to help with procedures, as we had none in place)

Neither tax value, nor market value are related to insurable value. Underinsurance can result in inadequate limits for major losses or significant coinsurance penalties for partial losses.

You should never use the cost approach section of a real estate appraisal for an insurable value estimate.
The cost approach is a value based on new construction, but insurable value should be based on reconstruction, or in rare cases (historical homes) based on reproduction.

The Marshall & Swift MVS books (and/or Swiftestimator or Commercial Estimator aka CE7) are commonly used by real estate appraisers: these are all new construction based tools.

Marshall & Swift/Boeckh (different division of same company) sells different tools for insurance underwriting and claims based on reconstruction costs.
You can get your agent to run RCT (residential) or BVS (commercial/Ag), or you can access the same tool at accucoverage.com. Other options for insurance include e2Value, 360value(ISO), and Bluebook. Avoid "free" on-line calculators, these are all new construction and not appropriate for insurance.

Hazard insurance often needs a different value than the main property policy. Foundations would be excluded from Flood coverage but should be covered for other perils.

Be cautious if you see the terms "replacement cost new"(aka RCN), "certified", "licensed", "USPAP compliant". These terms all relate to market value estimates and create a false sense of credibility relative to competence for insurable value estimates.

Relying on the limits the seller had on one or more of their policies would not be prudent. Far too often property owners don't keep values current, especially if they've been trying to dispose of the property. Similarly don't rely on seller insurance costs for your expense projections: costs may be artificially low due to limited coverages and/or suppressed values.

Interesting, as your advice goes absolutely contrary to the 2007 NFIP Mandatory Purchase of Flood Insurance Guidance.


Quote:
Page 27
(2) Calculating Coverage
To meet compliance requirements, the
amount of flood insurance must at least be,
but is not limited to, the lowest of:
• The outstanding principal balance of the
loan(s); or
• The maximum amount of coverage
available under the NFIP for the
particular type of building; or
• The full insurable value of the building
and/or its contents, which is the same as
100-percent replacement cost value
(RCV). (Unlike the practice in other
lines of property insurance, building
RCVs under the NFIP do not include
market values or the value of the land.)

To protect collateral interests, a lender
should consider whether its collateral is
adequately insured against flood damage. A
sound flood insurance risk management
approach follows the insurance industry
practice of insuring buildings to full RCV.


Glossary page GLS 10

Replacement Cost Value (RCV). The cost
to replace property with the same kind of
material and construction without deduction
for depreciation.

Related Thread:

http://www.bankersonline.com/forum/ubbthreads.php?ubb=showflat&Number=1532808#Post1532808

DD Reds,

The 100% RCV for insurance is the estimated cost to rebuild.

The cost approach in a real estate appraisal is a new construction cost estimate. Not the same.

http://www.kellyagency.com/attachments/108_msb-reconstruction-vs-new-and-market.pdf

Marshal and Swift is a building cost estimator and sells their services for a profit according to a Google search. Their opinions have no regulatory authority.

From 339

§ 339.3 Requirement to purchase flood insurance where available.

(a) In general. A bank shall not make, increase, extend, or renew any designated loan unless the building or mobile home and any personal property securing the loan is covered by flood insurance for the term of the loan. The amount of insurance must be at least equal to the lesser of the outstanding principal balance of the designated loan or the maximum limit of coverage available for the particular type of property under the Act. Flood insurance coverage under the Act is limited to the overall value of the property securing the designated loan minus the value of the land on which the property is located.

Until the FAQs or the Agencies come out with an absolute formula I will continue as is. It has met or exceeded every regulatory exam I have had in the past 10 years.

Satisfying minimum lender requirements too often don't adequately protect the borrower.

This is one of the issues at the core of the underinsurance problem we see after every catastrophe.

Hopefully more states will follow California's lead is stepping up to the insurance to value issue.

Cheers

I don't disagree with that statement at all, however most homeowners won't think twice to spend $1000 a year for homeowners insurance when their home only has about a 1% chance of being damaged by fire over the next 30 years. But they will scream bloody murder if you require flood insurance with a $700 premium and their property has a 25% chance of flooding.



I would suspect this statistic to be related to the example the property is valued at $200,000 but the loan balance is only $100,000 therefore the bank is only going to require the $100,000 minimum coverage required by the regulation. Or the value of the property is in excess of $250,000 and it is only insured for the maximum $250,000 available through the NFIP or again the balance is much lower and that's the minimum coverage required.

The NFIP is about protecting the government, not the borrowers or the lenders. Until the NFIP changes the requirement all lenders are only going to require the minimum coverage that complies with the NFIP or their state law.

Just like a flood the lenders take the path of least resistance.