Q. I was inquiring with my property manager about buying another investment home and renovating the kitchen and bathrooms in the rental house after the current tenant moved out, but she told me to be aware of my flood insurance requirements and the value of my improvements since the house was built in 1965. She said that since my house was in a VE flood zone, I should be aware of the flood insurance requirements? I’ve never heard about this so what does she mean?
A. To understand this, you need a little background information on this subject matter. FEMA (Federal Emergency Management Agency) recently re-did maps across the country to get a better handle on the current flood risk in neighborhoods. That established new Flood Insurance Rate Maps (FIRM) maps.
Areas of moderate to low risk are shown as zones labeled B, C, or X on a FIRM. High risk areas are shown as zones beginning with the letters A or V. Areas of undetermined risk are shown with the letter D.
The individual Counties then adopted the National Flood Insurance Program (NFIP) program on specific dates: Honolulu September 3, 1980, Maui June 1, 1981,
Kauai November 4, 1981, Hawaii Island May 3, 1982. New construction after these dates is considered “Post-FIRM” and any construction prior to these dates is considered “Pre-FIRM.” Pre-firm structures were built before detailed flood hazard data and flood elevations were provided to the community and usually before the community enacted comprehensive regulations on flood plain regulation.
Pre-FIRM buildings can be insured using “subsidized” rates. These rates are designed to help people afford flood insurance even though their buildings were not built with flood protection in mind. Post-FIRM structures on the other hand, must comply with the floodplain management requirements and the FIRM in effect at the time of construction. Nothing should be done to the structure to alter it so as to render it in violation of the regulations. Insurance rates for Post-FIRM buildings are dependent on the elevation of the lowest floor in relation to the Base Flood Elevation (BFE). The cost between Pre- and Post-FIRM insurance could be significant. You should also know that any substantial improvement (over 50% of the value of the structure) will require you to conform to Post-FIRM regulations and possibly incur major expenses that you weren’t planning on.
There are also County regulations on how many “cumulative” years of repairs the County will go back in calculating whether you hit 50% or more in value. To use your example of the home built in 1965 (Pre-FIRM), if the value of your structure is currently $150,000, your 50% threshold would be $75,000. For Honolulu, the cumulative guideline is 5 years, for Kauai and Maui, 10 years, for Hawaii Island, 3 years.
Thus, if you did your kitchen one year at a cost of $40,000, then the bathrooms next year at a cost of $10,000, then you decided to change the windows the third year at a cost of $30,000, you would be over the 50% threshold. You would now have to conform your home to current flood plain management regulations, which could require that your single level home built on the ground be raised to the BFE, which in this example is 8 feet off the ground.
Another case would be one where the current owner of a property you plan to purchase had Pre-FIRM flood insurance at the older rates at $2,235 per year. If you purchase the property and continue the flood insurance, you may be grandfathered into the older rate structure. If you didn’t take the flood insurance, and then later decided to or were required to by your lender, your new rates may be over $8,000 per year.
Knowing the flood zone, the age of the dwelling, and whether you should get an elevation certification to assess flood insurance rates and possible building requirements would be prudent when purchasing any home today.