Flood Zone Adjustment

The bank completed an in-house evaluation and reduced the value of the property because it is in a flood zone. Is this okay?

If your evaluation doesn't represent the replacement cost value, you have a problem. Was the sole purpose of the evaluation to reduce the amount of flood insurance needed? And was your loan amount not less than the value of the property?

Thanks Adam.

The evaluation value is less than the replacement cost value. No the purpose of the evaluation has nothing to do with reducing the amount of flood insurance. The loan amount is less than the value of the property.

reduced the value of the property because it is in a flood zone

I guess my question would be what supporting documentation/comps did you use to justify reducing the value because it is located in a SFHA?

I don't see any documentation supporting the justification of reducing the value because it is located in a SFHA.

Okay found documentation in the loan file. Its an article from Ebbwater Consulting. "Update: The Impact of Flood Hazard on Real Estate Values" which states studies have shown varied relationships between flood mapping and property values; the majority indicate that floodplain disclosure reduces the real estate value anywhere between 1% - 4%.

I guess I don't understand your question. If the evaluation didn't reduce the amount of flood insurance, what was the purpose of reducing the value of the home with the valuation? Or, what was the purpose of the valuation in the first place? I just want to make sure we answer your question, but I'm not seeing how it ties to flood insurance at the moment.

They are talking about for LTV purposes and not flood insurance. I assume that you have comparable information on neighboring properties also in the flood zone. Why would you knock off additional value? But that is really up to you unless you are denying loans based on this unsubstantiated evaluation process.

That is what it seemed to me, Randy, but the title implies there is a flood reason to it. I'm wondering if it relates to something like OREO or flood concentration monitoring.

I just read the title as can you make an adjustment to property market value solely on the fact that it is in a flood zone. I would think it would already be factored into the market value if they are doing their evaluations based similar properties.

I would agree with that.