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A Comprehensive Guide to Home Insurance for Flipping Houses

By John Miceli

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Despite what the many shows on TV would have you believe, flipping houses isn’t always glamorous. Much of the work that goes into it – finding investors, gathering a trustworthy team, budgeting, and a healthy dose of paperwork – doesn’t make the final television cut. Nor should it. After all, the shows are meant to entertain.

Flipping a house is serious work that takes a significant investment of time and money. As a result, you should want insurance to protect your work in case of disaster. Let’s take a look at what the right insurance is for flipping houses – so you can prevent your project from becoming a flop.

House Flipping Insurance

House flipping is usually a time-sensitive business. Generally, the faster you get all the work done on the house and get it sold, the better. So, you’re probably eager to get to work right after you purchase your fixer-upper. This is why you must shop for the right insurance before you close.

If you have a homeowners insurance plan, it won’t protect the house you’re going to flip at all. The right insurance for flipping houses usually consists of at least two plans: a builder’s risk policy and liability insurance. After the construction is done, you might need a vacant home policy, too.

Why Homeowners Insurance Won’t Help When Flipping Houses

As we mentioned, your home insurance plan won’t cover a house you plan on flipping, and there are a few reasons why. Firstly, a common provision of homeowners insurance is that it must apply to a place you’re currently living. Since you don’t usually live in a house you’re flipping, this is a problem. 

Additionally, houses that need to be flipped aren’t in the best shape in the first place. Part of flipping a house is remodeling it. The dilapidated state of most flip homes causes their replacement cost to be well below their market value. Insurers usually won’t write homeowners insurance policies for homes that cost less to repair or replace than they would sell for because it’s not worth the cost to repair it if it gets damaged.

Also, homeowners insurance typically includes provisions that you likely won’t need when flipping a house, like personal property protection and loss of use coverage. The risks involved with house flipping require different coverage needs than a typical homeowners insurance policy. This is why you need a different plan, like builder’s risk insurance.

Builders Risk Coverage

Builder’s risk insurance is designed for homes undergoing construction because it protects the physical structure of the house. The most common disasters covered under a builder’s risk plan include fire and lightning damage, wind and hail damage, and theft and vandalism.

Some builder’s risk plans allow you to insure the equipment, building materials, and other items you’re going to install, too. It might be part of the policy or available as an add-on.

Builder’s risk coverage is usually more expensive than a standard homeowners insurance policy because of the large number of risks involved in construction. If an accident or disaster occurs, the likeliness of damage is much greater since the house isn’t completely built and there are often many people present working on it.

When getting builder’s risk coverage, it’s important to insure your property for its after-repair value. If the flip house is damaged during the renovation, you won’t want to be reimbursed for what the house cost initially. You’ll want to be paid for what it would’ve cost when you finished it.

What About General Liability Insurance?

A builder’s risk policy only covers the structure of the house and not people at all. This is where general liability insurance comes into play.

General liability insurance guards against financial losses from workplace accidents. If someone gets injured by a freak accident, your general liability insurance can have your back. It covers medical costs and legal fees.

What if a realtor, inspector, or neighbor comes to check out your property while it’s under construction and they trip over building materials, or slip and fall after a stair gives out? They can pursue you for damages, and your general liability insurance can help cover you.

Fortunately, general liability insurance is much cheaper than builder’s risk coverage. A plan can cost between $25 to $50 a month depending on how much coverage you get. 

A typical, recommended minimum amount of liability coverage is $1 million, but you may want to get more for a larger project. If you’re flipping houses as an owner of an LLC, general liability insurance is a necessity.

Vacant Home Insurance Explained

Once you’ve finished construction on your fixer-upper, the house might sit vacant for a while as you put it on the market or prepare to move in. If this happens, you’ll need a vacant home insurance plan to cover the property.

A vacant home insurance policy protects the structure of an empty house. It’s also usually more expensive than standard homeowners insurance, but you might not have a choice if the home sits empty for a while. Builder’s risk coverage no longer applies once construction is done, and a homeowners insurance policy can only be purchased for an occupied home. 

Empty houses are easier targets for vandalism. And, if disaster strikes, like a gas leak or a broken water pipe, the home is susceptible to a greater amount of damage since no one is there to see the issue promptly.

Why Some Insurers Won’t Cover House Flippers

Not every provider is willing to insure house flippers due to the increased risks. Oftentimes, a group of people goes in on a house-flipping project together so the cost for each is lower. The insurance company is hesitant to do business since there are several people involved in the insured property beyond just the policyholder.

You might be flipping a house under an LLC you’ve established, which means you’ll likely hire contractors and subcontractors. Having to deal with the potential effects of third parties deters some providers. There are just too many people involved for some companies to feel safe offering house flipping insurance.

Also, plenty of workers and other people are coming and going from the property constantly, like inspectors, builders, plumbers, electricians and more. The number of people and work they do are added variables that some companies don’t want to risk protecting.

For example, you may have licensed electricians and plumbers come by to do a lot of work but have your friend, who happens to be pretty handy, work on the walls and floors to save money on contractors. Providers can’t be sure that every person who comes to the site is licensed, bonded and insured, so they don’t want to take the risk of a problem arising amid all the work that goes into a house.

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