PROPERTY INSURANCE AND INVESTMENTS

Rudolf Holtzman had just purchased an office building as an investment. He was very proud. It was beautiful: 20,000 square feet with six tenants. Regrettably, the day after he closed, one of the tenants experienced an electrical computer malfunction and as a result, his 2000 square foot suite suffered extensive fire damage. Fortunately the building was just three blocks from the closest fire station, and the fire department was able to limit the loss to only this suite. Portions of the building sustained water damage from the fire hoses as well as smoke damage from the fire. In all, half of the building was unusable.

Rudi, though distraught, thought, "I have insurance, I should be O.K." He called his agent and dutifully reported the fire. The agent looked up his coverage and told him, "You know during the bidding process you worked me so hard, and I got you a very low premium, but with a low premium comes low coverage. I will only be able to cover 80 percent of your loss."

Rudi was shocked. He didn’t know what to do, but he realized the structure needed to be rebuilt -- even if he had to pay for some of it himself. Rudi moved ahead and repaired the building, but he swore that it would never happen again. He decided to learn more about insurance coverage, and so he met with a few insurance agents and discovered some interesting information.

There are several ways you can buy insurance for a building. Standard fire insurance is written on either a "Basic" or "Special Form" basis.
The Basic Form provides coverage on a "named perils" basis. In other words if the peril is not named, the coverage does not exist. Some named perils include: fire, lightning, windstorm, hail, aircraft, riot, vehicles, explosion and smoke.

The Special Form policy will provide coverage for all losses, unless they are excluded. For example mold and mildew, or clean-up for methamphetamine manufacture are excluded from both types of policies.

Both policies will only cover losses that are "sudden and accidental." Losses that occur over a period of time (such as leaking toilets that lead to dryrot), are not covered as they do not meet the test of "sudden and accidental." Some additional coverage can be added to the Basic or Special policy. Typical additions to coverage include loss of rents (income), general liability coverage, or an additional umbrella insurance to increase the level of coverage.

The other way to cover your property is to buy a Business Owners Package (BOP) which bundles all available coverage into one policy. Included in a BOP would be fire coverage (written on a special form basis), loss of rents, theft of money, or loss of business property owned by the insured. (Note: most insurance companies will not write a BOP on a rental dwelling of less than four units, nor will they write on buildings that are over 30 years old.) The BOP is competitively priced, however the underwriting is more conservative and the product is only offered for good quality buildings. Terrorism insurance is also available, but exposure is typically limited. Exclusions to this type of policy include employment practices liability, wrongful termination, sexual harassment, discrimination and earthquake coverage. You can typically buy additional insurance to cover your risk in these areas.

Specialty Markets (also known as Excess and Surplus Lines, the Specialty Admitted Market, and the London Insurance Market) are available to cover hard-to-insure risks such as older buildings, vacant properties, restaurants and bars, storage facilities (such as chemical storage buildings), and high-risk manufacturing. The cost of insurance in the Specialty Markets is usually higher, as there are typically few choices once the standard insurance companies have decided not to insure your property.

Strategic Issues:
During his research Rudi also learned that as stock market returns have weakened over the last few years, terrorists have nipped away at the American homeland and litigation and/or claims have increased due to hurricanes, fires, earthquakes, mold and mildew, leaving insurance companies struggling to maintain their reserves. In an effort to limit their risk, insurance companies have reduced their coverage, pulled out of higher risk markets, and increased the cost of insurance.

Rudi discovered that some insurance companies are not as strong as others. When shopping for insurance you want to make sure a company is financially sound. Insurance companies are rated by services such as AM Best and Standard and Poor. Companies rated A to A++ are typically fairly strong, B+ companies are OK, while C companies are weaker and may not be able to cover you on a claim. You want to write with an A or B+ company or better.

Rudi concluded that he needed to decide when it was best to actually use his insurance company. He thought it might be practical not to report losses that are small. It made sense for him to keep a higher deductible and set aside reserves for small claims. Reporting minor sewer backups, dishwasher or washer spills will red flag you and you may have trouble getting coverage in the future. He found it best to accurately estimate the value of the property and to include an endorsement for inflation in the insurance policy.

Rudi noticed that all insurance coverage includes a "coinsurance clause." This is a tricky clause that allows insurance companies to reduce the coverage of your claim if you do not cover the full value of the property. In reading the language closely he found 90 percent or 80 percent coinsurance language. Most insurance claims will cover the replacement of a whole building if it is completely burned down. In Rudi’s case, where only a portion of a building was damaged (or has an insurable loss), the insurance industry uses this coinsurance language to limit their payout.
Rudi saw that he needed to have a good handle on the value of his property and that he needed to make sure he included coverage for replacement costs as well as an annual inflation adjustment.

Additionally, he needed to confirm that his insurance policy also included language to pay for damages under the current codes rather than the codes that were in place when the building was constructed. This is known as Building Ordinance Insurance.

Rudi decided to take control of his insurance claims after he discovered insurance agents ask for a five-year loss run (i.e. the history of claims that have been paid). He deduced that it would be easier to get insurance if he had few (or no) claims. If you claim for everything, you will have a tough time getting insurance.

This also applies to selection of the property you want to own. Rudi picked a good property in a good area. Luckily this was his first insurance claim. If you picked a property with a history of insurance losses, you would struggle in your attempt to obtain insurance.

Armed with this information, Rudi was now prepared to ask the appropriate questions to obtain the correct insurance with the best coverage. Are you?

I find that so many of my clients are marketing avoidant when it comes to their sphere of influence. And yet statistics show that your sphere of influence can be the greatest source of referrals. This article shows you how to dig in and get the "gold."

Tip 1: Define and Rate your Sphere of Influence

When is the last time that you took a good look at your sphere of influence? What is the total? What are the categories in that group? Do you have past clients, friends, acquaintances, people you hardly know? Before you do any thing else go into your data base and group your sphere of influence in categories.

Do you know who in your sphere is likely to refer to you? Do you know who in your sphere already works with another agent? How many have moved away? Start deleting the inappropriate ones.

Be sure to ask all of them this question at some point: "If you were buying or selling a home do you have a real estate agent that could help you?" If they say "yes" delete them. There is no point in continuing, they are not prospects. By keeping in touch with your sphere of influence as we will describe below, you'll begin to find out who is an A, B, C, or D.

A = someone likely to refer to you
B = someone who with a little more contact with you, would refer to you
C = Questionable
D = Delete

Tip 2: Send an Item of Value to your sphere each month

In my 10 years of coaching Real Estate agents to double their incomes, I am amazed at the fact that sometimes their sphere never gets a mailing. Or sometimes the mailing is not well thought out. I worked with a client today who admitted that the material she was sending to her sphere was standard and boring. We brainstormed about Items of Value that would be interesting, fun and unique. So far she has come up with recipes and inspiring quotes. What do you send to your sphere of influence?
Is it something you would want to receive and find valuable? If so, then I guarantee that your sphere will like it too. How many creative Items of Value can you come up with?

Tip 3: Overcome your blocks to calling your sphere
Everyone I have ever worked with resists calling their sphere. They tell me things like:
"I don't want them to think I want something from them"
"I'm afraid they won't like me"
"I don't want to be like a telemarketer"

The list goes on, but I think you get the idea. What you need to understand is that you're a giver. When givers give to other givers, they get back. So, in other words, if you send an Item of Value, you are giving, when you chat with them and listen to what's going on in their lives, you're giving again. So at the end of the call, say something like, "Oh by the way, if you hear of anyone even whispering about buying selling a home, please give me a call with their name and number." Then say, "I'll be happy to send referrals to your business, as well." Guess what? You're giving again.

After doing these calls monthly (after your mailing of Items of Value) you'll begin to know your sphere of influence and they'll know you. You'll begin to learn which ones are you're A's, B's, C's and which ones to delete. Then what will happen is that you'll be in their stream of consciousness. So you're the first one they'll think of when they think of real estate. Don't be surprised if you get referrals in the first few weeks.

Tip 4: Be in the right mindset

Don't make these calls if you're feeling anxious, upset or desperate. Remember, desperation doesn't sell. So psych yourself up in the right mindset. Think of yourself as a giver and how happy they are going to be to hear from you. Tip: if you have been thinking negatively, switch your focus to what you are grateful for. That usually puts you in a much better mood to pick up the phone.

Tip 5: Make it a daily ritual

Just like brushing your teeth, calling some people out of your sphere of influence is essential. Even one a day is okay. Only call several times a day if you want your income to raise quickly.

Decide when to make your calls and keep at it until you've reached the people you were trying to call. Expect that several weeks after doing this; it will feel a lot easier. An extra perk is that you're going to be deepening some great relationships and you'll experience the same pleasure of calling them us as you would with a good friend.

Important Facts that Will Affect Real Estate Pricing Over the Next 20+ Years
By : MURTAZA MUKADUM.
Each year, our population continues to grow and with that growth comes many changes to the average American household. Find out how changes in our population will affect real estate in different areas of the United States. These factors may play an important role in how you decide to invest in real estate in the future.

By 2010 over 40 percent of all households will be comprised of an age group over 55 years.

The number of citizens over the age of 65 years will jump from 34.7 million in 2000 to nearly 70 million by 2030 (a mere 30 years).

The Spanish speaking population will increase from 31.4 million in 2000 to nearly 65.6 million in 2030.

50 percent of children under the age of 18 (42,853,649) will be a minority in 2030. Total US population is estimated at 400 million in 2030.

The traditional household (married couple with children) which comprised 90 percent of the households in 1950 will comprise only 65 percent of the households in 2030.

29 percent of the US households will be living alone in 2030.
From 2000 to 2030, the U.S. population will grow by 82 million, 72 million of this growth will occur in the South and the West.

Worldwide the percentage of the population living in cities is projected to grow from 47 percent to 60 percent by 2030. (UN study 2003)

Researchers find 'large is smart' when it comes to cities.

"Large cities will grow larger." Cities are considered by many to be a blessing and a curse. Large cities generate considerable wealth; they are home to many high paying jobs and are seen as engines of innovation. But cities also generate pollution, crime and poor social structures that lead to the urban blight that plagues their very existence." (physorg.com April 17, 2007)

To deal with the challenges of large cities taxes will increase. Much of the projected future growth will be in Texas, California, Florida, Virginia, Arizona, Nevada, Utah, Colorado, Georgia and North Carolina.

These facts have a significant impact on the real estate investor. The challenge is decoding the facts as you make your decisions to invest.

Clearly the Hispanic immigration trends will affect the southern and western border states, in addition the sunbelt will grow due to the population shift of retired folks from cold climates to warmer climates. All this means that investing in those states and in cities with large populations will pay off in the long run.

It also means that larger investors will hesitate to invest in small towns, the rust belt and the Midwest. The major challenges for the southern and western states will be supplying water and infrastructure to keep up with the rate of growth.

What is a fair price to pay for a real estate investment?
Given these facts, what is a fair price to pay for real estate investments? Due to the aging of the baby-boomers there is a significant amount of cash available for investment, creating an increased demand for real estate investments. Sellers sensing this have increased the pricing of their product and until recently buyers were willing to pay more.

The key in the decision making process has been the ability to make money either through cash flow or through appreciation. The challenge has been to get the banking partners to go along.

We are seeing a slow down in deal making, because banks are nervous and are making it more challenging to borrow money. In addition, the current asking prices are making buyers hesitate especially with C and B properties. In A class properties buyers are willing to overpay a bit because of the longer lifespan and higher net revenues expected.

This means that we expect to see lower Cap rates for Class A properties (say 5 – 5.5 Cap rates) because of the expectation of lower maintenance costs. B and C properties have an aging infrastructure with higher operating expenses and are therefore priced closer to 6 and 6.5 Cap rates in the Portland metro area.

Buyers and banks are generally not willing to look at projected rents and projected proforma expenses in their analysis of properties. Real numbers give investors a better handle on future operations and a future of upside in a real estate investment. Therefore a fair price to pay for real estate depends on the kind of property, the interest rate you are paying, the market conditions, the real income and expenses that a property experiences. Location and age of the property are also key variables which might entice you to overpay for an investment.

There is no golden rule regarding the pricing of real estate, but a prudent investor will make sure that they have taken the above facts and the local market conditions into consideration as they develop a price for the purchase of their next real estate investment.

My Sources: Unites States Census Bureau, Cell and Associates Summer 2007 edition,
Published: JAN 2008

Published: JAN 2008 , BY MUTAZA MUKADUM ,INDIA