What really happens after a fire or other catastrophic loss? 5 tips to minimize economic loss from the event.
I flip on the news and see a major wildfire raging through Southern Colorado, airplanes are immediately in the air and hundreds of firefighters are on the ground but nothing can stop 90 mile per hour winds and bone dry conditions. Hundreds of homes are lost in less than an hour and three people have lost their lives.
As the summer temperatures climb wildfire season has begun to flare up throughout the country with active fires in NM, CA, CO and others. Living and working in the Colorado mountains, I’ve unfortunately had the experience of seeing a wildfire off the deck of my house and being evacuated with moments to spare (see prior blog post). Last summer we had two loans in Colorado that were impacted by a major wildfire and were totally lost as a result. Fortunately all that was lost was property and the owners got out safely. The experience turned into a financial disaster for one borrower; learn why and how to avoid the same mistakes. 5 tips for every property owner to help mitigate the loss from a natural disaster.
So what really happens after the embers have cooled and there is a loss? How does the lender factor into the payout? Are you prepared if this were to happen to you? Read More
In a major wildfire in Colorado we had a total loss on a property in the black forest area of Colorado. We had made a 90k loan on a small cabin. The borrower insured the property to 90k. One would assume everything should be okay on a loss?
1) Are you properly insured? In the last major wildfire in Colorado, the insurance group in Colorado found that 80% of homeowners who filed a claim were not fully insured. Most people insured their house when they bought the property and have not revisited their coverage to take into account changes in the market, improvements to the house, etc… I wrote a prior blog to help guide you through this process: Are you properly insured? Tax value, market value, replacement cost what is the difference
2) What happens after the loss? After the loss a claim is filed by the borrower. The insurance adjuster comes out to survey the damage and goes through a worksheet on the loss. If the house is a total loss (in our case we had a loan on a property in black forest Colorado where nothing was left), they determine the claim amount; this amount is capped by your policy. For example in our case, the insurance company paid out 90k (see below on how this is paid out). Unfortunately this was a financial disaster for the borrower since the rebuild cost to bring the property up to current codes was almost 200k.
3) What does your mortgage company have to do on the claim? When a borrower receives a mortgage on a property, the mortgage company to secure their interest is added as an additional insured. So any loss is typically paid out jointly to the insurance company and the mortgage company. In the case above the borrower did not have the additional 110k in funds to rebuild the property; the 90k came to us as the lender and the loan was paid off. Also it is important to read your loan documents to see what the lender will do in a total loss situation, many times they will demand a full payoff of their mortgage.
4) What happened to our borrower? Due to the borrower being underinsured, he successfully lost substantial equity in the house. The borrower was left with a vacant lot that was not very desirable and of little value. When we closed the loan the property was worth around 175k
5) How can you avoid the same situation? Being underinsured can easily occur, markets can change rapidly and also improvements to the property are made. After going through the experience with our borrower, I took three steps to ensure I was properly insured.
- I got a worksheet from my agent and I went room by room detailing the finishes in each room; for example we have hardwoods throughout the house along with new cabinets, fireplace, etc… none of this was factored into the prior rebuild cost. In my case after going through the exercise our rebuild cost was double what the insurance agency had originally suggested
- Get an appraisal, if there is a total loss and you decide not to rebuild (or are not allowed to rebuild as in the case of some wildfires where the area is deemed too high risk, etc..). An appraisal will help you reach a settlement with the insurance company since you have a before snapshot of value (I got a copy of an appraisal a couple years ago when I refinanced the house
- I took my iphone, walked around the house and talked about each room (example hardwood floors, rock fireplace, new windows, china cabinet, etc…) so you at least have some inventory of the household goods part (I know that you “should” do a whole house inventory but who is going to go through and count the number of shirts they have, forks, etc… just not practical in my mind)