By Christopher Kazor
The State of Florida’s Smoke and Mirrors. Got to love the Florida Governor, he is trying the impossible; that is make every homeowner happy with what they are paying for their insurance premium. “The Gov” and his merry band of legislators concocted a plan that was nothing more than a pacifier to the citizens of Florida. It is a dangerous plan a house of cards that literally will be destroyed by the winds. In this plan instead of encouraging companies to write insurance using actuarially “sound” rates and build large reserves, the citizens will pay for losses by being charged “Assessments”.
The citizenry of Florida have been fed this load of crap because it makes them feel good. No one has really explained what an assessment really is and will happen if the Governor’s “BET” goes bad and we have more than one cataclysmic hurricane.
If this were to happen “EVERY” property policyholder (renter, homeowner or commercial policy holder ) will have to pay a huge assessment, which will be added on to next years premium. In other words if this was to occur you would not get your insurance for the next year until you paid THAT YEAR’S premium PLUS assessment.
HOW MUCH?
How bad? The assessment will be based on the amount of money that will be paid out from the hurricanes. One study conducted by Towers Perrin estimates the assessment to pay off bonds to bail out the state could range from $1,700 to $14,000 per policy. Floridians in return get an average saving of $265 on their 2007 property insurance rates, again only a feel good post election pacifier.
THE EVIL INSURANCE EMPIRE
The press and hapless radio talk show hosts who have no clue on what the industry is all about have demonized the insurance companies. The industry has suddenly been characterized as racketeers and thugs. Agents have become uncaring moneygrubbers who are making excess profits on the backs of the citizenry.
Since my experience in the industry is now spanning 4 decades as I remember this rhetoric is nothing new. In the late 70’s and through out the 1980’s the regulators were beating their drums and legislating limit on how much money a carrier could make and had even mandated a repayment of premium that was “over charged”.
It seems that companies were fortifying their reserve requirement and investing profits in such evil endeavors such as building, office complexes, hospitals, to build the value of there entity. In addition many of theses stock and mutual companies were “giving” back in the forms of dividends. I even remember hearing the same talk show hosts complain about the insurance rates then. Yea we are old.
HISTORY – AUGUST 24, 1992
At this time I was working for a property/casualty company who had a net value of $6,000,000,000. It was a very calm hurricane season and yes, Florida insurance companies were defending their rates that, incidentally, at that time were among the lowest in the United States. We got word that “Andrew” was coming. “Andrew” starts with an “A” our first storm of the season in August? The rest as they say was history. I was extremely proud of the company I worked for, they fulfilled their promise and paid out well over $4,000,000,000 rumor was the company was selling building to pay claims. And why were they able to do that because they were allowed to charge an actuarially “sound” rate and fulfilled their promise. For those who don’t remember here is a short excerpt from Wikipedia:
Andrew produced a 17 ft (5.2 m) storm surge near the landfall point in Florida.
Andrew was responsible for 23 deaths in the United States and three more in the Bahamas. The hurricane caused $26.5 billion (1992 USD) in damage in the United States, of which $1 billion occurred in Louisiana and the rest in south Florida. Unlike most hurricanes, the vast majority of the damage in Florida was due to the winds. The agricultural loss in Florida was $1.04 billion alone. Damage in the Bahamas was estimated at $250 million.[15][9]
In Dade County 90% of homes had major roof damage. 117,000 were destroyed or had major damage.
THE FUTURE
In a word “Bleak”. The Governor of Florida has taken an enormous bet, one I hope he wins but also believe it is doubtful he will. His plan is nothing more that a casino bet. The real solution would be painful now but in the long run would prevent devastating financial consequences for the state of Florida. Invite all qualified insurers into the state and charge without regulation the premium that reflects a rate that is actuarially “sound” based on losses of the last 30 years. At first the rates will be astronomically high and folks would have to get use to high deductibles but in a few years Adam Smith’s “invisible hand” will move the rates to a true level and companies on a collective bases take the risk not the citizens of Florida. But before I leave I leave you with another note from Wikipedia, the cost in 2005 dollars hurricane losses.
Rank Hurricane Season Cost (2005 USD)
1 Katrina 2005 $81.2 billion
2 Andrew 1992 $44.9 billion
3 Wilma 2005 $20.6 billion
4 Charley 2004 $15.4 billion
5 Ivan 2004 $14.6 billion
Citizens of the State of Florida Welcome to the insurance industry.
NEXT ARTICLE FROM KAZOR - Insurance is socialist
Christopher P. Kazor is president of Nusurance Insurance agency http://www.nusurance.com He has been active in the insurance industry since 1978 and has been licensed as an insurance agent, adjuster, and insurance instructor. For more information call Christopher Kazor at 813 514 6982.
[ 5 comments ] ( 35 views ) | [ 0 trackbacks ] | permalink | related link |
( 3.2 / 20 )Buckle your seat belts folks the Florida Real Estate market is about to take another hit. Many of my colleagues are and as expected eternally optimistic about the Florida Market but as a consultant we must be more objective.
We base our theory on the following premise; property values all depend on “Rents”. Whether we are talking about commercial or residential property the true value of property goes back to RENT. How much on an open and free market will the property bring in rent.
All appraisers are mandated to use three methods in establishing a value of Real Estate, The Comparison sales method, The Depreciation approach and finally income capitalization approach. After doing all three methods the appraisers must “reconcile” the three calculations to establish the value.
Most all of us know the Comparison method, this is what a real estate professional will do to establish a listing value for your property. So if my neighbor’s house, which is identical to mine, sold for $250,000 then mine MUST be worth at least that.
Well, maybe!
Private home sales are driven by a lot more than just price, emotion, the neighborhood, the amenities offered by the area, location to malls, transportation just to name a few but, how much can any home command for rent really is the true test.
What if you get transferred and cannot find a buyer how much can you get in rent?
Rent will drive value. Using the “Income Capitalization” method of appraisal the value is based on the following
How much can the property bring in rents (PGI= Potential Gross Income) Say If you had to rent your home it would bring $1,500 per month Subtract any vacancy or collection losses. Ok so you had a good year the property rented immediately and none of your tenants checks bounced now you have an EGI (effect Gross Income) of $18,000 per year. But you need to subtract your taxes, insurance and other operating expenses Note your mortgage payment is not a factor in this calculation your result is your NOI , Net operating income Ok lets say your taxes are $2,500 and your insurance is $1,200 with a few other miscellaneous expense of $500, your NOI now is $13,800.
Take this number and divide it by the current cap rate. The current capitalization rate is established by evaluating other investments, currently it is about 8%. Take your NOI and divide it by the Cap Rate. 13800/. 08 = $172,500
The value of the property based on Income Cap is $172,500. The problem you paid $250,000. OK in order to cover your mortgage you only need about $1,000 a month you may be able to survive.
Value Drivers
The two factors that drive value are NOI, Net operating income and interest rates. First let’s look at interest. Interest rates run converse to value. Using the NOI of the above let’s see what happens if interest rates climb to 10.5%. 13800/. 105 = $131,428. The property has not changed, the neighborhood has not changed only interest rate and we see a drop in $41,000 + of value.
The next factor is yet more devastating since the impact is noticeable to the owner immediately that is the loss in NOI. Again let’s look at the property value a home now held for rent. You paid $250,000 what is now the value? The neighborhood is great and you have found a person to take a 3 year “Gross lease” at $2,000 per month, assuming the above no collection losses our EGI is $24,000 per year. Now lets take a look at our operating expense. Ok $3,000 for taxes (opps you lost your homestead exemption you had when you were living there) and $1,200 for insurance + $500 for miscellaneous :
PGI $24,000
No Collection losses
EGI $24,000
Less:
Tax 3,000
Insurance 1,500
Misc 500
NOI $19,000 / Cap rate 8%
19000/.08 = $237,500
But you say, “Hey I don’t care, because I was able to put down 10% it looks like I am ahead of the game because my mortgage is only $ 1,496.93 a Month. (30 Years for an Interest Rate of 7.000 % on a Loan Amount of $ 225,000.00) “ With $5000 in other expenses you are at $1913.59 per month and YOU ARE in the black about $86 per month and with your depreciation of about $4,900 per year all is well.
All is well but it is Florida and you receive a noticed from your insurance carrier you are being cancelled your new insurance now is $6,000 per year and the taxes have risen to $3,800 and where are you now?
Mortgage $1,496.93
Insurance 500.00
Taxes 316.00
Misc. 50.00
Out going $2,362.00
In the red $362 per month or $4344 per year
With your depreciation you are just about even.
But your property value?
Insurance now drives values.
Like it or not the insurance Market in Florida has a devastating effect on the value of property? Except for depreciation there is no real reason to make an investment leap in The Florida property market.
I wish I could say relief is in sight but I can’t. The biggest property insurer, “Citizens Property Insurance”, operated by the state of Florida is about $2,700,000,000 (that is 2.7 BILLION) in the red right now. In this light I can only see increases in insurance rates.
What to do?
We are all impacted some of us more than others. The above illustration is not a made up case rather a real example of a property in my neighborhood that I was interested in but was purchased, fortunately for me, by someone else.
Remember this too shall pass and we will have a robust real estate market again but in the mean time
Investors :
· Invest in vacation properties. – although the increase of $300 per month may preclude someone from renting a property in a long term lease, increases in taxes and insurance can be included in weekly vacation rates. A vacationer will just pay an extra $80 per week and not think much of it.
· Lock in mortgage rates – those of you riding the adjustable rate, stop now.
· If possible buy down your mortgage – give yourself a buffer
· If you have significant equity in the property try to get a credit line against it. _ Don’t use it just hold it for an emergency.
· Do not insure personal property at all. This does not work for Condo rentals since the Loss of RENTS, which you dearly need, is tied to your contents. If this is the case DO NOT take replacement cost valuation this will save you a few dollars.
· Max out your property deductibles – a 10% wind deductible may sound like a lot but will save you money . Remember uncovered casualty losses can be deductible.
· Look at lesser forms, folks I can not believe I am suggesting this but Instead of the best landlord policy (known as the DP3) look at the DP2. If the property is newer 1 – 7 years look at the DP 1 (actual cash value adjustments)
· If you are going to acquire property in Florida , go north and center state – buy where that is no one now, trust us you will not be lonely for long.
Real Estate Professionals :
· Don’t despair – Learn who to sell Foreclosed property
· Learn to sell investment properties
· Turn your focus north and center
· Market Vacation properties
I wish I could close with a definite time things would turn around but I will say Florida is Florida and it is desirable our market will turn around.
Christopher Kazor, CIC, is the founder of Florida home insurance and Florida car insurance agency, Nusurance Corp. Christopher Kazor has been in the insurance and real estate business for over 30 years and was recently featured in Independent Agent Magazine. To learn more visit http://www.nusurance.com.
By: Christopher Kazor
[ 1 comment ] ( 8 views ) | [ 0 trackbacks ] | permalink | related link |
( 2.9 / 198 )Back
Calendar
