E&S expertise and relationships are key to accessing opportunities in the busy rental property market
The recession’s effects continue to linger in the homeowners market, even as the overall economy slowly but surely rebounds. The percentage of homeowners in the U.S. has fallen to 65 percent, down from 69 percent in 2006.
Meanwhile, the number of home vacancies has increased as property owners are forced to walk away from their mortgage obligations. Although national vacancy rates are declining with an improving economy, rates have still not dropped to pre-recession levels. According to census data, national vacancy rates in the fourth quarter of 2014 were 7% for rental housing, down from more than 11% in 2009, and 1.9% for owner-occupied housing, down from just under 3%. All of which point to a strong opportunity for brokers and agents.
The range of values for vacant homes is wide, ranging anywhere from $50,000 to well over $1 million. Brokers and agents who have the wherewithal to address such far-ranging coverage needs stand to flourish in this bustling segment of the real estate market.
Market Opportunity Meets Underwriting Concern
In some cases, vacant properties have become secondary rental properties as individual investors seek to capitalize on bargain-basement foreclosures. Additionally, former homeowners have become renters, helping push up occupancy rates in both single- and multi-family rental units.
“The multi-family rental business is booming,” says Adam DeSanctis, economic issues media manager at the National Association of Realtors. “We continue to see low, single-digit vacancy rates among those rental properties.”
These developments have shifted the insurance market. “A few years ago, the rate of vacant properties we were being asked to insure had skyrocketed from bank foreclosures or spec properties remaining unsold. Now, we are insuring houses that have become occupied as rental properties,” says Donna Dodd, vice president, personal insurance, Burns & Wilcox, Farmington Hills, Mich.
Both vacant properties and secondary rentals require insurance coverage, which is often written in the excess and surplus market on either dwelling fire or modified homeowners forms. Those forms are used to protect one-to-four-unit dwellings that are unoccupied, occupied by someone other than the owner, or used as residential investment property.
“Because with both vacancies and secondary rentals you have a situation where the homeowner doesn’t live in the property, the pride of ownership may not be there,” Dodd explains. “That has typically made those types of properties unattractive to the standard homeowners insurance marketplace and pushed them toward the excess and surplus market.”
Vacant homes in particular are often viewed as a less attractive risk than rentals because small problems can go undiscovered for long periods of time and turn into big problems. It is very difficult, for example, to place water and sewer backup coverage on a vacancy, although it is routinely available for a rental.
The situation becomes more complex when a property owner occupies the premises part of the time, such as with a vacation home.
“It is becoming increasingly common for individual investors to buy foreclosures or other property in coastal or other vacation destinations for their own use, then to attempt to defer some of the costs of owning the property through short-term rental agreements,” Dodd says.
The dwelling fire policy traditionally covered the building, a limited amount of contents, premises-only liability, and added loss of rental income that was typically not part of a standard homeowners form. However, owners of short-term rentals may need additional coverage and require the flexibility of the excess and surplus market.
“We are able to provide higher buildings and contents limits on those properties,” she notes. “We can also obtain broader coverage than just the basic perils that are typically included.”
E&S Entry Points
The largest losses suffered by vacant properties and secondary rentals come from fire, burglary and malicious mischief. However, in the excess and surplus marketplace, capacity remains favorable and rates have held steady for these properties.
“The excess and surplus market is accepting of tough risks, whether properties are in a high protection class or in areas that are coastal or prone to catastrophe,” Dodd says. The excess market is also much more willing to accept short-term rentals and tends not to apply credit scoring guidelines or other limitations of the standard market.
“We write a lot of dwelling fire and modified homeowners policies, as well as construction and renovation risks, in the excess and surplus market,” she continues. “In that market, it’s important to know your carriers, your underwriters and your operating territory. Burns & Wilcox has offices with a local presence throughout the United States. This local presence gives us the ability to know the specific needs and requirements of various states and any unique exposures different areas present.”
Market partnerships are important because vacant properties and secondary rentals are often a chance opportunity for retail agents.
“Typically the brokers and agents we work with have mainstream carriers and main street business. One day, a homeowners client comes in because they bought a condo out of state and they want to rent it out part-time,” Dodd says. “When situations like that arise, they need someone to turn to with the expertise to protect that client properly, and that’s what we do.”