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there's no way to say "all other things being equal".
From a pure economics sense - which really doesn't apply to your personal home - the value would be:
Annual flood premium divided by 12 and what would that be in a mortgage? ie, if it's a $1200 premium, that's $100/mo is today about $16-18K.
You've got a pot of money, and it can go towards house value/cost or it can go to flood insurance.
But the 100 year is very different from the 500 year. 1% vs 0.2% is a big difference. And if it's waterfront (not a creek/stream that floods), then the property is worth a lot more than one at the bottom of a hill and a runoff area.
I hope this feedback isn't considered 'too direct' but home valuation is important as people make decisions based on this kind of stuff and any advice given must be clear and responsible.
The formula above is described as the "pure economic" view of the difference in value between a house in a flood zone and one that's not. This is pseudo economics and it does not work as described.
A "pure economic" view of the difference is based on the market values which must be derived by an appraisal/CMA. It's absolutely not derived as above. Unfortunately there is no simple percentage factor that can be applied, nor is there a neat little formula like this that can even be used as a loose guideline. Since this is not how you derive "pure economic" differences in value or any other type of difference in value, I have no idea what this valuation method is supposed to represent as related to the OP's question. Therefore, unless someone can re-explain it properly and in the right context, I suggest that it be disregarded to avoid confusing things.
All things being equal. For a home in a subdivision. Is there any rule an appraiser would use on setting value? How about the assessors? Obviously, there would be hurdles to getting a loan, but could that make for the potential to get a great deal as a cash buyer? What are your thoughts? And what about cases, where you weren't in a flood plain, but now are? I wonder if that has produced some jingle mail.
This question is really better suited for a local agent. Is it on a waterway where everything is in a flood plain? If so maybe no big deal. Is this got a creek where it could flood and you have to carry insurance? Maybe a big deal. I defer to your local local agents that know the area.
I hope this feedback isn't considered 'too direct' but home valuation is important as people make decisions based on this kind of stuff and any advice given must be clear and responsible.
The formula above is described as the "pure economic" view of the difference in value between a house in a flood zone and one that's not. This is pseudo economics and it does not work as described.
A "pure economic" view of the difference is based on the market values which must be derived by an appraisal/CMA. It's absolutely not derived as above. Unfortunately there is no simple percentage factor that can be applied, nor is there a neat little formula like this that can even be used as a loose guideline. Since this is not how you derive "pure economic" differences in value or any other type of difference in value, I have no idea what this valuation method is supposed to represent as related to the OP's question. Therefore, unless someone can re-explain it properly and in the right context, I suggest that it be disregarded to avoid confusing things.
in the spirit of communication and furthering the issue, I take no exception to this, as such.
How about "from a pure dollars and cents perspective"?
However you budget it - you have a certain $ figure to apply towards your housing cost. Typically, that's your payment - your principal, interest, taxes, and insurance. Sometimes the insurance portion would contain PMI. All of these affect what you can afford
A wise owner would go a step further, and assume they need a certain % of the building's value; this requires even further research than a simple "3% of your home's value" (which includes land value, which theoretically doesn't require repair).
You could, if you have flood insurance, budget in your deductible in some fashion - just as you might do the same for your regular homeowners insurance.
Regardless how you calculate it, you assign a pot of money to your housing cost. That pot of money will buy a certain $ value home.
When part of the pot has to go to an item like flood insurance, then's that less you can pay towards a loan. The mathematics I ran through ("Annual flood premium divided by 12 and what would that be in a mortgage? ie, if it's a $1200 premium, that's $100/mo is today about $16-18K.") is a guesstimate. it was based on a general current $pymnt/$1K borrowed, and not done based upon an amortization.
If that is still unclear to you, just let me know.
If you are in an area that is at sea level, Florida, Coastal East Coast, but not on the water, it doesn't matter one bit if you are in a 100 year or 500 year flood zone. It does not affect the value of the real estate because almost every home is in a flood zone of some sort.
in the spirit of communication and furthering the issue, I take no exception to this, as such.
How about "from a pure dollars and cents perspective"?
However you budget it - you have a certain $ figure to apply towards your housing cost. Typically, that's your payment - your principal, interest, taxes, and insurance. Sometimes the insurance portion would contain PMI. All of these affect what you can afford
A wise owner would go a step further, and assume they need a certain % of the building's value; this requires even further research than a simple "3% of your home's value" (which includes land value, which theoretically doesn't require repair).
You could, if you have flood insurance, budget in your deductible in some fashion - just as you might do the same for your regular homeowners insurance.
Regardless how you calculate it, you assign a pot of money to your housing cost. That pot of money will buy a certain $ value home.
When part of the pot has to go to an item like flood insurance, then's that less you can pay towards a loan. The mathematics I ran through ("Annual flood premium divided by 12 and what would that be in a mortgage? ie, if it's a $1200 premium, that's $100/mo is today about $16-18K.") is a guesstimate. it was based on a general current $pymnt/$1K borrowed, and not done based upon an amortization.
If that is still unclear to you, just let me know.
Exactly. I have personally seen flood premiums outrageously high on a $455K purchase price. They walked. The one on Treasure Island, was a 4 unit condo. When the buyer realized if any of his neighbors were delinquent with their HOA and the master policy had to be picked up, it was going to be no less than $24,000 a year...... that's $2000 per month. While as a lender, we can't count the what if this happens, the buyer certainly can (They walked). BoBromhal has it $100% right. When qualifying a borrower, if I am unaware of the flood status, I can seriously miscalculate a max loan. When we run them thru UW without a subject property, it's the max payment that is approved. If you start adding an extra payment for flood coverage, in many cases, as much as a car loan, not everyone...... actually, very few, can let that roll off their backs and qualify with ease. If for any reason your current insurer drops you and you go on force-placed, the premiums are doubled.
The FEMA flood maps are getting better, but far from easy to pull up every address and have a long way to go. Some jurisdictions, like Ocean City, MD have excellent flood maps. In fact, many of the coastal towns and cities have flood designations on their websites. But it's the homes next door, or in town, they are the ones that catch you off guard. I do not ask every borrower if the home they could be buying is in a flood zone, but even if I did, they wouldn't know. Again, some of the sellers deny any prior knowledge. A large percentage walk when the desired property is in a flood zone. The exception, of course, are those beach and lake homes, where it's expected. But you can't convince me when people walk, the values are not impacted.
If you are in an area that is at sea level, Florida, Coastal East Coast, but not on the water, it doesn't matter one bit if you are in a 100 year or 500 year flood zone. It does not affect the value of the real estate because almost every home is in a flood zone of some sort.
I forgot to mention that.... every home I have financed in the Sunshine State has been in a flood zone. And there, its expected.
in the spirit of communication and furthering the issue, I take no exception to this, as such.
How about "from a pure dollars and cents perspective"?
However you budget it - you have a certain $ figure to apply towards your housing cost. Typically, that's your payment - your principal, interest, taxes, and insurance. Sometimes the insurance portion would contain PMI. All of these affect what you can afford
A wise owner would go a step further, and assume they need a certain % of the building's value; this requires even further research than a simple "3% of your home's value" (which includes land value, which theoretically doesn't require repair).
You could, if you have flood insurance, budget in your deductible in some fashion - just as you might do the same for your regular homeowners insurance.
Regardless how you calculate it, you assign a pot of money to your housing cost. That pot of money will buy a certain $ value home.
When part of the pot has to go to an item like flood insurance, then's that less you can pay towards a loan. The mathematics I ran through ("Annual flood premium divided by 12 and what would that be in a mortgage? ie, if it's a $1200 premium, that's $100/mo is today about $16-18K.") is a guesstimate. it was based on a general current $pymnt/$1K borrowed, and not done based upon an amortization.
If that is still unclear to you, just let me know.
I agree with what you are saying in terms of budgeting from a homeowner's or buyer's perspective. It may not be perfect as you say but it's a guideline/guestimate for budgeting/affordability purposes.
I think we should be clear though that we are not talking about the value of the home when we talk about budgeting and affordability for a buyer or homeowner and it was valuation that the OP asked about. They are very different concepts and we need to make sure that people are not misled to confuse the two. Just like you, in no way, would try to use HOA fees to compute the valuation delta between homes in an HOA vs non-HOA. That would be the completely wrong approach to any discussion on home value.
I'm not saying that insurance cost does not influence the value of a home in a flood zone. However, there are too many other economic factors impacting demand and sensitivity to insurance costs also differs in buyers of a 200k home vs a $3m home. It can't be handled in a simple formula and that's the wrong approach to valuation - it can only mislead rather than help understand the value difference of being in a flood zone. That's why an appraisal/CMA is required when we are talking about valuation. Not the answer that the OP wants but the only real answer, unfortunately.
This is very different to what the OP asked but if the question was about how a consumer will afford flood insurance (no different from tax, other insurance, maintenance costs, HOA fees, etc), he must factor these in with the mortgage costs and you might use that formula or something similar to explain to a client that if he can afford a 300k house outside a flood zone, he might only be able to afford a 290k (or whatever) house in a flood zone due to greater insurance costs. Obviously this is specific to their mortgage costs, term, etc. Just as you might explain it the same way for a home in an HOA vs one with no HOA fees or for homes in two towns with very different tax rates. This delta in affordability in no way suggests anything about the delta in home values however, and the affordability exercise is completely meaningless in the context of the valuation (which was the OP's question).
Hopefully this makes the reason for my feedback clearer.
Exactly. I have personally seen flood premiums outrageously high on a $455K purchase price. They walked. The one on Treasure Island, was a 4 unit condo. When the buyer realized if any of his neighbors were delinquent with their HOA and the master policy had to be picked up, it was going to be no less than $24,000 a year...... that's $2000 per month. While as a lender, we can't count the what if this happens, the buyer certainly can (They walked). BoBromhal has it $100% right. When qualifying a borrower, if I am unaware of the flood status, I can seriously miscalculate a max loan. When we run them thru UW without a subject property, it's the max payment that is approved. If you start adding an extra payment for flood coverage, in many cases, as much as a car loan, not everyone...... actually, very few, can let that roll off their backs and qualify with ease. If for any reason your current insurer drops you and you go on force-placed, the premiums are doubled.
The FEMA flood maps are getting better, but far from easy to pull up every address and have a long way to go. Some jurisdictions, like Ocean City, MD have excellent flood maps. In fact, many of the coastal towns and cities have flood designations on their websites. But it's the homes next door, or in town, they are the ones that catch you off guard. I do not ask every borrower if the home they could be buying is in a flood zone, but even if I did, they wouldn't know. Again, some of the sellers deny any prior knowledge. A large percentage walk when the desired property is in a flood zone. The exception, of course, are those beach and lake homes, where it's expected. But you can't convince me when people walk, the values are not impacted.
Nobody said that insurance costs have no impact on home values in flood zones. I believe in 2012 when flood insurance costs rose due to subsidy changes, it had general negative pressure on home values in flood zones, for example. However, as a lender, you are also interested in the value of a property and you would not use insurance costs, in any way, to assess/estimate/appraise/guess a property's value. You use insurance costs as part of the affordability test - just like tax and other costs. People also 'walk' because of other affordability factors that they may not have properly recognized or thought through - high tax costs, HOA fees, PMI requirements, interest rate higher than anticipated, realizing it costs a fortune to heat, their parents warn them about the high maintenance costs of an old home, etc, etc. But this is very different from assessing the value of the property. Let's not confuse things.
Nobody said that insurance costs have no impact on home values in flood zones. I believe in 2012 when flood insurance costs rose due to subsidy changes, it had general negative pressure on home values in flood zones, for example. However, as a lender, you are also interested in the value of a property and you would not use insurance costs, in any way, to assess/estimate/appraise/guess a property's value. You use insurance costs as part of the affordability test - just like tax and other costs. People also 'walk' because of other affordability factors that they may not have properly recognized or thought through - high tax costs, HOA fees, PMI requirements, interest rate higher than anticipated, realizing it costs a fortune to heat, their parents warn them about the high maintenance costs of an old home, etc, etc. But this is very different from assessing the value of the property. Let's not confuse things.
Yes, let's not confuse things. All of the factors you mentioned affect the amount that people are willing to pay for a house.
Yes, let's not confuse things. All of the factors you mentioned affect the amount that people are willing to pay for a house.
Sorry Jack. I don't understand your response. Are you saying that computing expenses related to a home is an acceptable method to do a market valuation on a house or to compare the value of two houses? Or not?
My position is very simple. If you want to value a house or compare the value of two homes, you need to do an appraisal/CMA. Computing expenses for two choices is not a valid way to determine the difference in market value between those two choices. Do you disagree?
I think we all understand that expenses related to a home (or any product) impact someone's ability to afford it but we're talking about how to value a house and the comparative value of two houses. We're talking about two things at the same time so we should be clear what we are talking about.
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