«

»

Feb 04

Floods, Insurance & Property investors.

Today I read a post from Neil Jenman.

Unfortunately I have to disagree with some of the idea’s which he seems to advocate. I agree with helping out mates & think there is a lot that we can do to help people but unfortunately I don’t agree with some of his statements.

Firstly investing is not about guaranteed returns. As an investor you have to weigh up risks vs return & if a property investor decides not to insure their property (or not have adequate insurance) why should taxpayers or others pay for it?

Neil seems to be advocating that property purchasers should be protected by regulations comparing laws protecting vehicle purchasers who buy cars that have been flooded (one can only assume they mean submerged under water) with a law “to protect the buyers of flood prone properties.” Who judges what flood prone is? How do you regulate this & police this? I can only assume it will start another micro-industry alongside property inspectors for “flood inspectors” or something & if you sell a house without a certificate giving odds of being flooded then you get hit (with something). Pity that the odds of this flood was supposedly 1 in 100 years which has now happened twice in 40 years, making it in my maths to be 2.5 in 100 years chance. Also, what if as a “flood inspector” I get it wrong? Am I then liable for false/misleading information?

What happened to “caveat emptor?” (Buyer beware)

He then says that people will ask “Why weren’t we warned?” I can only presume he means property purchasers are asking this question about the potential for their property to be flooded, as shown in his next statement. “Well, the simple reason is that there is no law which compels estate agents or property owners to warn prospective buyers or tenants that a property is in a flood area.”
I agree, there is no law which does that, nor should there be. If I want to purchase a property it is up to me to ascertain what state the property is in, whether it is suitable & what dangers exist to the property. This is pretty clear as there are inspectors who will look at a property for you to see if there is termite damage, damage to structures etc. Sure, it is harder to get information for but this information exists & may need to be provided as a friend is learning now as he tries to build a house in an area near Byron Bay which (surprise surprise) is possibly flood prone.

Neil then goes on to state “First, it’s going to be tough to find a buyer for their home and, second, they are going to find that the value of their home has plummeted.” He then follows up, whilst asking how do we help these people, by saying “these people should receive ‘loss of value’ compensation.”

Neil states that “people will be in dire financial straits through absolutely no fault of their own” yet as an investor they have complete choice where to purchase & now whether to sell or not. If the property is sold at a value below their debt then that is something they have to weigh up (again risk vs reward).

If it’s hard to sell a riverfront property that was once a McMansion so what? Some people may look at it as a bargain & purchase at a lower price. An item is only worth what people will pay for it & if a house was once worth $1m and it is now only $0.5m & an owner decides to sell then that means the risk (of further flood damage, prices dropping further) is greater than the reward (having a property).

If a stock investor purchases shares & then the share price of that business crumbles do we bail them out? Why not? They suffered pain & heartache & if they are leveraged then they may suffer a large financial loss.

Neil Jenman also stated that “the damage has also occurred to what we can’t see, the value of their properties.” I think a bank & a person receiving a $500,000 cheque for a house they bought previously for $850,000 can immediately “see” the difference. I suppose he is talking about the mud & refuse that is floating around & now lying on pavement waiting to be cleaned up.

Then, after a little more waffle I think he is starting to see home owners & investors as the same group. He says “Some of the most painful stories will be of those people who were not covered by flood insurance and whose homes are now ruined. They will need to completely rebuild.”
Yes, they may need to rebuild if they own their own home. If they are an investor they may need to rebuild so that their tenant has a home but if you are a renter, you just move to the next place or wait for your landlord to provide a suitable home.

He then really gets my back out by stating if you sell but are “now faced with a 30 per cent loss, these people should also be compensated.” Hold on a second. Did he really say this?? Why am I (as a taxpayer) having to compensate someone who made a poor investment decision?

I think if you invest you need to understand the risks verses the reward. Sure, it was supposedly a “once in 100 year” flood. As has been mentioned elsewhere in the media flooding like this has happened twice now in about 40 years, making flooding a possibility of up to 2.5 times every hundred years. I don’t know about other investors but I know that finding out about flood prone area’s etc is not particularly difficult & is part of the due diligence that an investor should make. They should also consider the possibility of rising sea levels (due to climate change) as well as bush-fires, earthquakes (any one remember Newcastle and the “I survived 5.5”?) etc. These are called “natural disasters” or “acts of God” in the insurance industry.

If a person is about to hand over upwards of $500,000 and 20 years of their life I think it should be up to them & their advisers to check for all known possibilities and weigh up the risk verses the reward. If the risk is too high then don’t purchase it. If the risks are high but manageable then insure against the risks. If you don’t know the risks then I don’t see why your stupidity is my fault.

Insurance is always a bet against yourself & things you cannot control. If an investor is too stupid to invest in insurance for their property then so be it. That is their risk (not having a property that will generate income) versus their reward (saving money).

Now insurance companies not honoring insurance because floods are not covered is a whole other issue….

Permanent link to this article: http://marcus.herstik.com/2011/floods-insurance-property-investors/