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?