With FEMA’s announcement that it plans to suspend flood insurance policy renewals and new applications in Indianapolis, it’s important to discuss why flood zones* matter and how to protect yourself when buying real estate. An ALTA/ACSM Survey should disclose whether the property is located in a flood zone and its zone classification. In addition, FEMA maintains the Flood Map Service Center that can be used to determine if a property is in a flood zone and its zone classification. If an improvement on the property is located in a flood zone, any federally regulated lender will require you to purchase flood insurance before you get a mortgage. Why did Congress enact this requirement? If your home is located in flood zone A or AE (a typical category for Indiana homes located in a flood zone), your property has a 1% chance of flooding every year. Over the course of thirty years (a typical residential mortgage), the chance of a flood event is 30%. Over the long-run, flood insurance in these zones makes economic sense to protect the collateral.
Even if the property is located in a flood zone, don’t expect to automatically rely on federally subsidized flood insurance policies. Barring an injunction or a settlement, FEMA will suspend flood insurance policy approvals in Marion County until local government fixes the errors in its revised Flood Protection Ordinance. In addition, other areas of the country have been redlined entirely from obtaining federal flood insurance (e.g. structures built in area that has been previously designated a Coastal Barrier Resources Act Zone). Accordingly, homeowners in these areas will be required to purchase private flood insurance which is generally more expensive. Because of the added expense, the market value of property located in privately-insured flood zones is typically lower than the market value in publically-insured flood zones.
Luckily, there are several ways a prospective real estate purchaser can protect themselves. First, require the seller to deliver a recently dated ALTA/ACSM Survey that includes a flood zone certification. Ask specifically for an ALTA/ASCM Survey (not a boundary or location survey). Payment for survey expenses is subject to negotiation between the buyer and the seller, but expect it to cost around $2,500 in Indiana. Second, the Purchase Agreement should state that closing is contingent on the property not being located in a flood zone. With this provision, the buyer should be able to terminate the purchase agreement if it turns out that the property is located in a flood zone. In the alternative, negotiate a better deal in exchange for not terminating the purchase agreement. Third, the buyer should diligently obtain flood insurance quotes from FEMA and private insurers to determine the financial burden of being located in a flood zone. Finally, assess how flooding will impact your use of the property.
Indianapolis residents are fortunate that most parcels lie outside of a flood zone. Residents in other areas of the country aren’t as lucky—good luck trying to find a beach house in a non-flood zone. However, with proper planning and guidance from an experienced real estate lawyer, you can objectively evaluate the benefits and drawbacks of real estate located in a flood zone. This article is not intended to be a definitive discussion regarding the complexities of the issues discussed above. To continue a discussion of the issues presented in this article, please contact Justin Leverton (firstname.lastname@example.org), or any of our attorney’s here. It would be our pleasure to assist you.
*For purposes of this Article, the term “flood zone” refers to Special Flood Hazard Areas (an area defined on a Flood Insurance Rate Map with an associated risk of flooding)