Buyer Beware! Is That Flooded and Renovated Home Eligible For Flood Insurance?

So I've recently had the pleasure of representing a first-time homebuyer here in New Orleans. Once he was prequalified, we narrowed down his search to best fit his wants and needs, settling on certain section of "northwest" Gentilly including the Mirabeau Gardens, Oak Park, and Vista Park neighborhoods. Through the usual process of elimination, we settled on a house that was just nearing completion and after some consideration, made an offer, which was immediately accepted.

As most of us know, these neighborhoods were heavily impacted during Hurricane Katrina from the failure of the London Avenue Canal several blocks away. It's not unlike many blocks in the area. Of the 16 homes that line the street, 2 are renovated and being lived in, 2 are in the process of being renovated, 2 have been torn down, 9 are gutted (including 3 owned by the Road Home) with no signs of activity. And then there is our house.

We immediately scheduled a general home inspection for the next day. The home inspector was not able to check the operation of the central heat or the water heater as the gas supply was not on. Concerned, I called the listing agent to inquire if the home had all the appropriate building permits and subsequent inspections, to which she anwered "yes". Later that evening, I decided to do a quick check of the City of New Orleans' website which indicated that the home was listed with a 51.50% damage assessment from having been flooded. I decided to do a little more investigating.

The next morning, I made a trip down to City Hall to the Department of Safety and Permits. After a short wait, a clerk helped to determine that the damage assessment was indeed correct. And worse yet, that even though the property had undergone 2 mechanical and 2 eclectrical inspections, no building permit had ever been issued.

So here is the problem: since the house was rated as over 50% damaged, to meet FEMA guidelines, it must be elevated. In order for a home to receive a building permit, it must be below the 50% threshold or be elevated according to FEMA rules. In order for this home to be compliant to FEMA, it will need to have its damage assessment lowered and a building permit in place authorizing the renovations. The owner will also have to prove that he did not put in more than 50% of the pre-Katrina value of the home into the renovations, as required by FEMA as well.

What is the penalty to your buyer if these issues are not addressed? FEMA can come back at any time in the future, see that the home is listed as having been over 50% damaged from flooding and ask the owner for all of the documentation relating to its renovation. If the homeowner cannot produce a building permit and documents showing less than 50% damage, FEMA can (and probably will) DENY your client/homewowner flood insurance. And in this city, flood insurance is not a luxury.

FYI to all those realtors who are listing a home in flooded areas that has been renovated. Please be sure to ask for the appropriate documents from the seller including building permits and inspection reports. And to those realtors working with buyers who are thinking of purchasing one of these houses, make sure to ask for these items in your offer as contingencies.
Hopefully, these issues can be resolved to everyones satisfacton and we can move ahead to an Act-of-Sale. But if not, at least I know I will have prevented a client from making a potentially devastating mistake. I wonder how many others have already made this mistake and do not know it?

Calculating Your New Orleans (Orleans Parish) Property Tax Assessment

Property taxes in Orleans Parish are due in advance at the beginning of the tax year. Parish taxes are due January 31 and are delinquent February 1. Residential property is assessed at 10% of its appraised value, less a $7500.00 Homestead Exemption (if applicable). A property owner may only claim a homestead exemption for property that is the domicile of the owner and may not be used for rental or vacation property. From there, the millage rate that is set for the year is used to determine the final amount of property tax that is due.

Here is how to calculate your 2008 Orleans Parish Property Tax using the following example:

$100,000.00 Appraised Value
x 10%
__________
$10,000.00 Assessed Value
-7,500.00 Less Homestead Exemption
__________
$2,500.00 Taxable Value

$2,500.00
x .12844 Orleans Parish Millage Rate (2008)
__________
$ 321.10*

Note: All properties in Orleans Parish (with few exceptions) are subject to the Police and Fire millage, even if they qualify for Homestead Exemption.

To Calculate the Police and Fire Tax:

$7500.00
x .01047 Orleans Parish Police and Fire Millage (2008)
________
$78.52

TOTAL ANNUAL TAX DUE: $321.10 + $78.52 = $399.62

The 10 Questions a Borrower Should Ask a Lender

1. “What is the interest rate that you are offering on the loan?” Keep in mind that if the loan is an adjustable or a reset loan, they will want to know: the index, the margin, the initial rate period, the adjustment period, the adjustment period & life of loan caps, the conversion option details, and risk of negative amortization, if any.

2. “What are the discount points and loan origination fees on this loan?” Will these costs be paid out-of-pocket or added in to the loan amount?

3. “What are the anticipated closing costs on this loan?” Be sure to advise them that these estimated costs, of which the lender is required by law to provide a good faith estimate, are not necessarily all of the closing costs they will have to pay. Review other fees with your broker and a title/escrow representative. Advise your buyer to ask for the total cash amount that will be required - including their down payment and the closing costs.

4. “What is your lock-in period on rates and points and how long do you make this commitment?” Lock commitments do vary from lender to lender. You may want to advise them to find out if this commitment works both ways if rates and/or points should go down rather than up. They may want to ask the lender if they offer a “float-down” lock-in commitment and what fee they charge for it.

5. “Does this loan have any prepayment penalties and how much are they?” Most F.N.M.A./F.H.L.M.C. conforming loans, along with F.H.A. and V.A. loans, do not have prepayment penalties - but most second loans do. They may also want to find out for what period of time the lender is able to charge these fees.

6. “How much will the total monthly payment be on this loan and what will it include?” Advise them to find out the total monthly payment which will not only include the principal, interest, taxes and insurance, but also may include H.O.A. fees, mortgage insurance payments, and hazard insurance payments (for such incidences as floods, storms, wildfires, and earthquakes.) Emphasize the importance of feeling comfortable and confident with this financial obligation.

7. “What do you consider to be the most important factors in evaluating my credit worthiness?” While most lenders use F.I.C.O. scores as the method to evaluate their credit, many lenders also consider payment history, employment, judgments & liens, new credit trade lines, usage of existing credit and cash assets.

8. “What are the documents you will require me to sign to apply for and to close this loan?” The lender should be able to explain all of the documents that the borrower will have to sign through all phases of the loan process.

9. “What is your estimated time for processing this loan?” Generally, loans take anywhere from 30 to 45 days to process (except short sale transactions); however, some F.H.A. and V.A. loans take longer. Be sure to advise them to get a realistic estimate from the lender.

10. “What are some typical delays that we could encounter and how can we avoid them?” This is also a very important question and a quality lender will give a very direct answer.

Excerpt from article by George Smith and David Compton of the Sudden Success Team.