’Flipping’ Real Estate Agents Double Exposed to Risk
The prevalence of house flipping (buying and reselling a home for profit) has risen across the U.S. Recent reports have found that in many American cities, flipping is back above the record levels set in 2005, two years prior to the mortgage market collapse.
One reason for this renewed interest in flipping could be attributed to the amount of qualified buyers reentering and new purchasers looking for homes. In fact, with more millennials purchasing homes, employment levels increasing, and the expectation that price appreciation will slow this year, many housing experts believe that 2016 could be a banner year for residential real estate sales.
“During the recession, real estate agents with the capital to purchase, renovate and hold property for when the market turned made investments in residential property. Capitalizing on the favorable real estate market today, realtors are beginning to put those investments up for sale,” said Nicole Greene, Brokerage Manager, Professional Center of Excellence at Burns & Wilcox. “Realtors managing the sale of their investment homes open themselves up to a whole new set of risks that they need to consider when looking at insurance policies.”
According to Greene, insurance brokers and agents working with property-owning realtors who are covered by a standard Errors and Omissions (E&O) policy should also consider that these clients are assuming the risks of a builder when selling a property that they purchased and renovated.
“From faulty construction to mold abatement and removal, house-flipping real estate agents must be aware of the double-exposure assumed when dealing with agent-owned property,” said Michael Muglia, Underwriter, Professional Center of Excellence at Burns & Wilcox. “In addition, not all areas of the country have the same types of risks and insurance brokers should understand what additional coverages should be included in customized Errors & Omissions policies.”
“For instance, in areas of the U.S. with mineral-rich soil, developers can choose to retain the rights to those resources and not include them in the sale of the property,” said Muglia. If the selling or purchasing agent fails to disclose mineral information at the time of sale, whether willfully or not, the homeowner could hold the real estate agent liable. With the right E&O policy, the costs associated with a lawsuit, from legal fees to image restoration through public relations, could be covered.
“Real estate agents represent clients who are making the largest emotional investment that an individual ever makes aside from marriage,” said Greene. As a result, home purchasers have a high set of expectations for their realtor and when those expectations are not met, real estate agents are often the first group that home owners hold liable.
“Property-owning realtors add complexity to how an E&O policy should be tailored,” said Greene. “If someone purchases a home from a real estate agent who has also renovated the property–the expectations placed upon the realtor by the client are compounded, creating a truly special risk situation. Insurance brokers and agents must be aware of the added risk and know how to tailor a policy to the unique needs of a house flipping real estate agent.”