With three wildfires burning in the front range as I write this and thousands evacuated, it is crucial to know the number one mistake that is made in a wildfire disaster. Do you know what the significance of the picture of the government facility above? Being a lender in Colorado for the last 25 years, we have seen first hand what happens in a wildfire when property is lost. Unfortunately in every single case of a loss there has been on tragic mistake that is easily preventable. What do you need to do now.
Significance of the picture above
I took the picture of the US forest service office in Idaho Springs. Note the forest service is more often than not one of the leads on major wildfires so it is a bit hypocritical that they preach about wildfire preparedness and yet they are woefully unprepared with trees not only too close to their building, but they are touching it. This is a recipe for disaster!
Number one mistake: Underinsurance
Having been through a number of fires, I have seen this issue on almost every property. About two out of every three homes in America are underinsured. The average underinsurance amount is about 22%, though some homes are underinsured by 60% or more. We saw this firsthand with the Marshall fire and pretty much every natural disaster in Colorado. Why are so many properties underinsured? How can you determine if you are underinsured? What do you need to do now?
What is rebuild cost?
It is important to define rebuild cost. The home replacement cost is how much it would take to rebuild your home with similar materials if it’s damaged or destroyed. Note, even if you built your home recently, the rebuild costs are likely substantially higher than what you originally paid to build.
When you shop for insurance, you will need to specify replacement cost coverage for your commercial or residential property.
What is replacement cost, Market Value, and Assessed value
The replacement cost is different than the market value and assessed value. Here are definitions of each one:
- Replacement cost: This is the cost to rebuild the property as it sits today excluding land value.
- Market Value: This is the amount someone would be willing to pay to buy the property as it sits today. For example, if you listed your house, this is the price someone would pay to buy it.
- Assessed value: This can be radically different than market value and rebuild cost. For example in Colorado, assessments are done in every odd year so for 2023 assessments, they are using sales from 2020 to June 2022. As we all know a lot can change in over a year so this number is likely not an accurate gauge of market value.
How is the replacement cost impacted by market value?
Although replacement cost and market value are two different items, market value does influence replacement cost. For example if you own a property in an area with rapidly increasing values, one of the drivers could be build costs.
Let’s say you own a property in a Ski town, lots in your neighborhood are going for 500k and there are still lots available. Property values have doubled over the last several years in many ski towns. More than likely this means your rebuild costs have gone up substantially.
If rebuild costs stayed constant it would be cheaper for someone to buy a lot and build a house as opposed to buying a completed house. For example if a lot costs 500k and the cost to build is 600/ft, that means to rebuild a 4k foot house would be 2.4m and to build a new one (add in the land costs) would be around 3m. If you look around the neighborhood and most houses are now selling for 3m that means rebuild costs have increased (assume you paid 2m for your 4k foot house a few years back).
Although the market value does not per se increase rebuild costs, a steep run up in values is likely an indication that rebuild costs have also increased substantially.
Why are so many more Colorado property owners underinsured?
Colorado real estate throughout the state has seen historic rises in values. This is occurring on both residential and commercial real estate. As mentioned above, this historic rise in values is not the driver of higher rebuild costs, but a strong indicator that rebuild costs have increased substantially. So what is driving rebuild costs higher in Colorado?
- Building supply costs: Whether it is lumber, roofing shingles, light fixtures, wood flooring, every major building material is up substantially. As raw material costs increase so does the cost to rebuild a property.
- Labor costs: Along with higher material costs, labor costs have skyrocketed. Just as McDonalds is paying more for workers, builders have substantially increased wages to hire/retain workers. These costs are passed through to building costs.
- Building regulations: As efficiency standards have increased substantially so have building costs. Take for example in Denver, there are new regulations to achieve net zero buildings. To meet these standards, there are substantially increased costs for windows, doors, HVAC, insulation, ventilation, etc… all of which add into higher rebuild costs.
What happens if you are under insured?
If you are substantially under insured and there is catastrophic event, you will not receive the funds necessary to fully rebuild the property. For example, if you had a property insured at 1m, but the rebuild costs are 2m, you essentially lost 1m since you were underinsured. The insurance company will only be obligated to pay you the max under the policy regardless of your actual loss. We are seeing this with thousands of property owners in the Marshall fire that cannot afford to rebuild due to the huge increases in costs.
I saw this firsthand with a fire in black forest, a borrower had insured the structure for 100k (that was our loan amount). I let him know that he was considerably under insured, but he wanted to take the risk. A wildfire destroyed his house, the rebuild cost was around 400k. After our mortgage was paid, the borrower had nothing other than a lot with a totally burned house.
Although I used an example of residential property, commercial property owners have the same risks of being underinsured and the risk is growing throughout the front range.
What should you do now to ensure you are properly insured?
- Talk with your insurance agent: you should put in a call to your insurance agent, many have tools to estimate the rebuild costs by zip code, also make sure to note of any updates/improvements. Depending on your home value, the insurance company might send an inspector to your house to verify.
- Look at market values in your area: If market values have increased substantially, more than likely your rebuild cost needs to also increase substantially as labor and material costs have changed and in many cases building regs have changed.
- Talk with a contractor: if you know a contractor, they can typically tell you what the average cost to build is per foot. Multiply this by your square footage to get a rough estimate. For example, if your house is 4k feet and the cost to build is 400; that means your rebuild cost is around 1.6m
- Get an appraisal: You can order an appraisal to determine the market value of your house along with the rebuild costs. I just got one on my house when I refinanced. I will use this to double check I have ample coverage.
Fires are preventable
It is unfortunate that 80% of all wildfires are human caused and many are sparked by campfires, fireworks, etc… The crazy part is that even with 3 huge fires in the front range there are still not fire bans in many counties. My county in the mountains still allows open campfires even with red flag warnings in place.
In Colorado fire bans are implemented by the county sheriff and based on moisture content of various fuels (grasses, trees, etc..). Unfortunately in real life there is a huge flaw in this methodology.
To prevent many wildfires, the state of Colorado should put in place a statewide fire ban based on resource allocation. Hickenlooper has done this in the past during fire seasons. For example, just because Breckenridge is not as dry as let’s say Boulder County, if a fire were to start in Breckenridge right now it would be catastrophic as all the air resources are being used elsewhere. Fires are a statewide issue due to resource allocation and the state needs to take the lead.
Here is what one of the fire managers in Boulder said: “It is a struggle across the entire western United States to get resources right now,” Johnson said Tuesday. “There are huge fires burning in California and Oregon, even out of the country. And so we are working every angle we can to get structure protection engines up here to help protect homes, to get hand crews up here to start carving lines around the fire.”
Why doesn’t Colorado use the lack of resources as the trigger for fire bans to ensure that fire managers can focus on the existing fires as opposed to new ones that could start from a campfire? If someone has a line to Governor Polis or the legislature, please forward this on and maybe it will get some attention!
Summary
Wildfires have already started in Colorado this season. Even with the wet snow year, we are on track for a disastrous fire season. Unfortunately, I would guess that most property owners in Colorado are at risk of major financial loss should a disaster ever affect their property. The crazy part is that it is simple to address the risk of underinsurance.
Property owners in Colorado are more at risk than many other areas due to very high building costs including new building regulations which have contributed to skyrocketing values. With wildfire season upon us and a number already burning throughout the state, now is the time to prepare. Do not get complacent with the average snowpack this winter as conditions have changed on a dime. Furthermore, with the recent huge run ups in values, it is more likely than not that you are underinsured. Take a minute to ensure you are properly insured (pun intended) so that you do not become one of the statistics if disaster happens.
Everyone who lives in Colorado should be concerned about the wildfires throughout the state because at the end of the day there are limited resources available which means others could be affected. Furthermore, as wildfires increase so do insurance premiums as well as a reduction in carriers in the state which should concern any property owner.
Additional reading/resources
- https://coloradohardmoney.com/holy-smokes-two-major-wildfires-in-colorado-5-steps-to-protect-your-real-estate/
- https://www.nationwide.com/lc/resources/home/articles/underinsurance
- https://www.coloradorealtors.com/projectwildfire/
We are a Colorado Private/ Hard Money Lender funding in cash!
If you were forwarded this message, please subscribe to our newsletter
I need your help! Do not worry, I’m not asking you to wire money to your long-lost cousin that is going to give you a million dollars if you just send them your bank account! I do need your help though, please like and share our articles on linked in, twitter, facebook, and other social media. I would greatly appreciate it.
Written by Glen Weinberg, Owner Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine, The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
Fairview is the recognized leader in Colorado Hard Money and Colorado private lending focusing on residential investment properties and commercial properties both in Denver and throughout the state. We are the Colorado experts having closed thousands of loans throughout the state.
When you call you will speak directly to the decision makers and get an honest answer quickly. They are recognized in the industry as the leader in hard money lending with no upfront fees or any other games. Learn more about Hard Money Lending through our free Hard Money Guide. To get started on a loan all we need is our simple one page application (no upfront fees or other games)
Tags: Hard Money Lender, Private lender, Denver hard money, Denver Colorado hard money lender, Colorado hard money, Colorado private lender, Denver private lender, Colorado ski lender, Colorado real estate trends, Colorado real estate prices, Private real estate loans, Hard money loans, Private real estate mortgage, Hard money mortgage lender