05/14/2016
The Federal Emergency Management Agency (FEMA) Substantial Improvement Rule
Imagine that you came across the deal of a lifetime, an older home in a great neighborhood that you can renovate and then put right back on the market for a nice, quick profit. Sure, it’s in a flood zone but, on the Florida coasts, you accept that as fact. Then you hire an architect to draw up the plans for the renovation to hand over to your contractor. At this point, you are about to be snapped back into reality because this is probably the first time you will hear about FEMA’s Substantial Improvement Rule.
You looked at properties with a real estate agent and probably made them aware that you were looking for investment properties to flip quickly, and they said nothing about FEMA. You probably hired a home inspector and they didn’t mention FEMA. If the house was built before 1978, I bet the home inspector has a blurb in the inspection report about lead paint though. Then you went to a loan closing and signed a ream of paper worth of forms and neither the bankers, appraiser, insurance company, title company, or closing attorney uttered a word about FEMA. Now your architect or contractor has to be the one to crush your dreams by informing you that the city or county building department will not issue a building permit for the renovations you want because the cost exceeds 50 percent of the value of the home. To proceed, you must make the entire structure flood zone compliant or spend less than 50 percent and sell at a loss when you put it back on the market.
Making older homes flood zone compliant can be a very costly endeavor. In fact, you are more than likely better off bulldozing the old house to the ground and rebuilding at that point.
This is available athttps://www.fema.gov/pdf/floodplain/nfip_sg_unit_8.pdf
According to FEMA, “for the purposes of determining substantial improvement, market value pertains only [emphasis mine] to the structure in question. It does not pertain to the land, landscaping or detached accessory structures on the property. Any value resulting from the location of the property should be attributed to the value of the land, not the building.” In other words, you can pay $400,000 for a piece of property with a house on it here in Florida only to discover that the value of the house is only $70,000. Therefore, you can only spend up to $35,000 in improvements, which will buy you a nice kitchen basically.
FEMA is aware of the hardship the 50 percent rule places on the owners of these properties too. In their publication, FEMA states that “people who own existing buildings that are being substantially improved will be required to make a major investment in them in order to bring them into compliance with the law. They will not be happy.”
Indeed!
