Severe weather events are occurring with increased frequency, and scientists link some of them to climate change. The financial impacts of floods, wildfires, hurricanes, tornadoes, and deadly winter storms have been devastating to many homeowners.
Increased flooding is threatening to make some coastal areas uninhabitable. A Stanford University study of property records estimates that homes located in floodplains are overvalued by $43.8 billion because buyers aren’t factoring in the cost of insurance.
The Department of Housing and Urban Development has repossessed homes in floodplains and resold them without disclosing flood risk to buyers, according to a recent NPR investigation.
Factoring in a home’s vulnerability to flooding is part of any smart investor’s due diligence. The Federal Housing Finance Agency (FHFA), which regulates Fannie Mae and Freddie Mac, said in January that those organizations should take into account financial risks posed by climate change.
When calculating the cost of an investment property in a flood zone, investors need to factor in the cost of insurance. Just as it is worthwhile to invest in catastrophe insurance, investors need to plan for flood insurance if they are considering a property vulnerable to rising waters.
What is the definition of a flood zone?
According to the Flood Insurance Rate Map published by the Federal Emergency Management Association (FEMA), a floodplain, or Special Flood Hazard Area (SFHA) in technical terms, is an area that has at least a 1 percent chance of reaching or exceeding base flood elevations in any given year, or of flooding beyond 6 inches.
Different grades of flood zones correspond to different risk levels. In Texas, flood insurance costs an average of $634 per year, based on NFIP rates. The rates vary depending on where the house is built, its elevation, how it was built, and whether it is a primary or secondary residence.
The maximum amount of coverage for a home structure available from NFIP flood insurance plans is $250,000 for the structure and $100,000 for the contents.
In North Carolina, flood insurance costs an average of $718 per year, based on NFIP rates. In Florida, flood insurance costs range between $190 to over $2,000 per year based on NFIP rates, depending on how close a property is to the coast.
Homeowners insurance does not cover flooding.
How to find out if a property is in a flood zone
For investors considering buying a property, there are resources to find out if it is in a flood zone. Listing agents are generally required to include that information as well.
While there are a few tools out there, the most user-friendly is FloodFactor, which was developed by the First Street Foundation. Just type in an address and the site will generate a report disclosing the property’s flood risk over a period of up to 30 years, as well as the broader community’s flood risks.
Common sense suggests that if a property is far enough from the coast or a river, it probably does not have a flood risk.
But with catastrophic weather events on the rise, this is no longer a given. There was flooding on a historical scale across the U.S. in 2019, with communities across the country incurring $10.8 billion in damage from flash floods and storm-related flooding, according to research from Climate.gov.
A September report funded by the Mortgage Bankers Association warned of the potential for increasingly devastating natural disasters. This reality has already heavily taxed the National Flood Insurance Program (NFIP), which serves property owners, renters and businesses.
The fact that the NFIP is stretched so thin has caused many homeowners to default on their mortgages since their payouts don’t materialize, or the NFIP pays out an unsatisfactory sum in response to a claim. This was further confirmed by a March 2022 report issued by the U.S. Department of Housing and Urban Development, who revealed that "FHA insured at least 31,500 loans serviced during calendar year 2020 for properties in SFHA flood zones that did not maintain the required flood insurance coverage."
For example, one family in Escambia County, Florida purchased a property that has flooded six times since 1995. The NFIP has paid out every claim; however, they have never paid enough for the family to flood-proof their home, repeatedly leaving the property susceptible to flooding.
To date, the NFIP has paid out more than the property is worth.
According to the National Oceanic and Atmospheric Administration, losses for the 2018-19 hurricane seasons across the U.S. were an estimated $136 billion.
It is more difficult to calculate the flood figure, given that much of hurricane damage is intertwined with flooding. That said, flooding alone cost the U.S. $6.2 billion in 2019, according to NOAA, not factoring in secondary flooding from severe weather.
The cost of flood damage to the U.S. is predicted to increase by 61 percent in the next 30 years, according to a report from Reuters.
The pros and cons of investing in a flood zone
Given that climate impacts are worsening, and scientists project that flooding will increase in severity in the coming years, an investment property in a flood zone is a depreciating asset.
The time frame under which the asset depreciates depends on location, the desirability of the area, and the rate at which climate impacts increase.
Another potential disadvantage is that an investment property in a flood zone comes with an additional expense: flood insurance. An investor needs to factor in annual insurance payments, which could range from hundreds to thousands of dollars a year.
In the largest cities in Texas, insurance costs range between $400 a year to $1,100 a year.
It’s also important to weigh the reality of what would happen if the property floods, including the damage incurred, the losses, and the logistics of tending to the damage.
With all the risk, flood zones are often on coastlines and riverbanks, which are real estate hotspots. The short-term payoff could be worth the risk. Consider Charlotte, Tampa, and Houston, to name a few cities where home prices have risen dramatically and profits from rentals have been strong, despite weather-related disasters.
As with all investments, a potential buyer must assess their appetite for risk and act accordingly.