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#1997195 - 02/20/15 02:28 PM Flood Insurance-No value
mdog76 Offline
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We have property that has a barn on it and the appraisal gave the barn no value towards the property. I'm seeing some recommendations of using the demolition cost for flood coverage. Is this referenced in the Reg or Q&A's anywhere? I can't seem to find it.

Thank you.

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Flood Compliance
#1997249 - 02/20/15 03:45 PM Re: Flood Insurance-No value mdog76
Dan Persfull Offline
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The barn may lend no value to the market value of the property, but it has value. See Q&A #9 of the FAQs.
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#1997256 - 02/20/15 03:58 PM Re: Flood Insurance-No value mdog76
mdog76 Offline
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I just got a copy of the appraisal and see where the entire value of barn has been depreciated out. Basically its worth the cost of the lumber per the appraisal.

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#1997282 - 02/20/15 04:51 PM Re: Flood Insurance-No value mdog76
mdog76 Offline
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I think this brings back the conversation of RCV vs. ACV. If I understand it correctly, a barn would be covered under Actual Cash Value correct? If that is the case, and it has been depreciated out already, what value is left?

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#1997296 - 02/20/15 05:15 PM Re: Flood Insurance-No value mdog76
Dan Persfull Offline
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Did you read the Q&A where it discussed the demolition/removal value?
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#1997671 - 02/23/15 09:05 PM Re: Flood Insurance-No value mdog76
David Dickinson Offline
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"Depreciated out" is an accounting issue. That doesn't mean the building has no value. It means it's not worth anything on paper.
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#1998802 - 02/27/15 05:20 PM Re: Flood Insurance-No value mdog76
Glutes Offline
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Does the Q&A's address the flood insurance requirement if a building is earmarked for demolition (borrower bought a property with an abandoned damaged residential structure that he plans to demo and remove from property)?

I see where it addresses buildings with limited utility or value in question 24 but I couldn't find anything that addresses if the building is to be removed. Would the requirement be in place so long as that structure is sitting on the dirt and only lifted when it is eventually removed?

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#1998807 - 02/27/15 05:25 PM Re: Flood Insurance-No value mdog76
Dan Persfull Offline
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The building has to be insured at or before closing. "Intentions" to raze the building is not a qualified exemption.
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#1998822 - 02/27/15 05:43 PM Re: Flood Insurance-No value mdog76
Glutes Offline
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Thanks Dan...regarding your previous comment above on demolition/removal value in the Q&A's, I couldn't find that in the Q&A's....where or what question is that addressed in?

On this note, what if the building has no "insurable value" per an insurance agent?

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#1998839 - 02/27/15 06:07 PM Re: Flood Insurance-No value mdog76
Dan Persfull Offline
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http://www.gpo.gov/fdsys/pkg/FR-2009-07-21/pdf/E9-17129.pdf

Q&A #9.

The second alternative is the
‘‘demolition/removal cost value,’’
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#1998913 - 02/27/15 07:51 PM Re: Flood Insurance-No value mdog76
Glutes Offline
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See it now...thanks Dan...the two alternatives presented are alternatives to "non-residential" buildings and not residential as in my example.

Is this addressed for residential structures and if not, are these alternative approaches to determining replacement cost value/insurable value available to use for residential?

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#1998922 - 02/27/15 07:56 PM Re: Flood Insurance-No value mdog76
rlcarey Offline
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Your guess is as good as ours. Make your case and go for it or require them to get adequate insurance.
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#1999172 - 03/02/15 05:12 PM Re: Flood Insurance-No value mdog76
David Dickinson Offline
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I don't believe you can use either the "Functional building cost" or "Demolition cost" approach for residential buildings. However, you say it is a "abandoned damaged residential structure." If it's abandoned, is it still a residential building? That's an insurance question. Maybe you can argue it is a shed or barn as no one lives there nor will they.

If it's classified as a residence by the insurance agent, you'll have to go with the ACV.
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#2002550 - 03/19/15 12:31 PM Re: Flood Insurance-No value Dan Persfull
Phill2000 Offline
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Dan, I respectfully disagree that demolition/removal cost is a valid alternative to ACV. The final version of Q&A #9, linked below, does not reference demolition cost. It sets forth three methods of valuation: cost approach from an appraisal; construction cost; or the insurable value used in a hazard insurance policy. It goes on to say that banks may use "any other reasonable approach, so long as it can be supported" but does not specifically list demolition/removal cost as a defined reasonable approach. I would argue that based on the definition of RCV and ACV in Q&A #9, demolition/removal cost would not be viewed as a viable alternative.

http://www.gpo.gov/fdsys/pkg/FR-2011-10-17/pdf/2011-26749.pdf

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#2002558 - 03/19/15 12:54 PM Re: Flood Insurance-No value mdog76
rlcarey Offline
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Not Dan and you are more than welcome to disagree with Dan, but the re-written question was left pretty open so as not to pigeon-hole banks into any specific method for determining insurable value.

From the 2011 preamble: "Given these practical considerations, the Agencies are adopting question and answer 9 with a revision to provide that, in calculating the required amount of insurance, the lender and borrower (either by themselves or in consultation with the flood insurance provider or other appropriate professional) may choose from a variety of approaches or methods to establish a reasonable valuation."

If demolition/removal costs is the most likely payout over RCV or ACV, how can you argue with that approach?

A structure may only have an ACV of $5,000, but it would cost $20,000 to demolish and remove.
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#2002575 - 03/19/15 01:47 PM Re: Flood Insurance-No value mdog76
Dan Persfull Offline
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Randy analysis is correct. The Q&A gives the FI a broad lead way in determining the amount of required insurance for "low value" buildings.

I did not say the demolition cost was the only value that could be used in these situations. I merely pointed out that it was an allowable approach to be used when determining the amount of required insurance for these "low value" buildings.

If the property is flooded before the building is razed then what value will be place on the building by the borrower at that time. I can assure you a building on dry land yesterday was worth $0 when the borrower was going to be forced to get insurance but today when it's under water it's worth a $100,000.
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#2002593 - 03/19/15 02:17 PM Re: Flood Insurance-No value Dan Persfull
raitchjay Offline
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Originally Posted By: Dan Persfull
I can assure you a building on dry land yesterday was worth $0 when the borrower was going to be forced to get insurance but today when it's under water it's worth a $100,000.


This made me chuckle Dan.
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#2002900 - 03/20/15 02:48 PM Re: Flood Insurance-No value Dan Persfull
Phill2000 Offline
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Dan & Randy - Thank you for your responses. I'll have to give this more consideration. I think it goes back to what valuation methods the bank's policy & procedures deem "allowable" and the underlying rationale for relying on those valuation methods.

Does anyone have experience that they can share of how the bank should obtain a demolition & removal cost for valuation purposes?

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