Buying a fixer-upper can be great – you can get the house you want for a little less, and it comes with all the charm and history of an older home. But that adorable home that "just needs some TLC" can quickly turn into a money pit, if you're not careful.
And we're not just talking about the contractor's fees and unexpected problems that will undoubtedly arise during renovation. Even basic costs – like the cost of insuring the home – can be a huge surprise for many homeowners.
Plus, some things about a fixer-upper are just more difficult. The buying process involving loan paperwork and contractors' quotes is a little more muddied, and getting insurance can be a downright pain.
Let's leave the buying process to your mortgage lender, and just talk about how to get insurance on that fixer-upper. Even if you're buying that dirt-cheap home with cash, you'll need at least basic insurance to protect your investment from fire, flood and theft. But getting that insurance can be quite the feat.
Why it's so difficult to get insurance
Most homebuyers don't think much about the process of getting insurance. It's just part and parcel with the buying process. You get quotes, pay for your first year's premiums at closing and roll your payments into escrow.
You can do this, too, with insurance on your fixer-upper. But you may have to do some more shopping around. Fixer-upper homes – especially those that have been foreclosed on or abandoned – are a higher risk for insurance companies. The fixing up process itself comes with some risks, including problems that might occur when no one is living in the home during the renovation process.
Since mores issues could arise, fewer insurers are willing to take on the risk. And those that are will charge you more for homeowners insurance. Luckily, you have some options for getting insurance on your fixer-upper, even if it's in terrible condition.
What are your options?
Before you even call to ask about homeowners insurance, get an inspection. You'll need one to get a loan on the home anyway, and an inspection will tell an insurance company how much work needs to be done on the home.
Then start calling around. Explain your home's condition, and ask about the following types of homeowners insurance:
1. Conventional insurance. If the home simply needs some basic repairs, and you'll be able to complete repairs and move in within 30 days of closing, you can likely get a conventional insurance policy through a traditional insurance company.
But what if the home is in really bad shape? What if you won't move into it for months? Or even if you do move in quickly, what if some of the major repairs (like exterior siding and/or gutter repairs) will take a few months to complete?
In this case, the traditional insurance company will likely recommend another type of insurance, specifically formulated for higher-risk situations like yours. (Empty and under-construction homes are particularly high risk for insurance companies.) Some insurers will still write the policy themselves, while others will refer you to a third-party insurer that specializes in higher-risk policies.
2. Builder's risk. This is the most common type of renovation or new construction homeowners insurance. This policy usually starts with lower costs, and as you get the home into better condition, the costs rise because the home becomes more valuable. Builder's risk policies are easiest to get if you have a solid, timely plan to finish the reconstruction.
3. Vacant dwelling. If your home mostly needs cosmetic work but will sit empty while the work is being done, a vacant dwelling policy is possible. These basic policies will protect a home against most physical losses, but they don't usually cover theft. Keep in mind that depending on where the home is located, theft could be a huge problem, especially if the home contains valuable appliances, tools or copper wiring and piping.
4. HO-8. An HO-8 policy is an insurance policy designed for an older home. Unlike more common HO-2 and HO-3 policies, an HO-8 policy wouldn't cover replacement costs of your home if you lose everything. An HO-8 policy is suitable if your home isn't in terrible condition, and if you plan to live in it while it's under construction.
5. FAIR plans. What if you're in an unusual situation in which your repairs will take a long time (such as if you're doing the renovation yourself or using cash to repair as you go)? In this case, you may have trouble getting an insurer to underwrite even one of the above insurance policies.
If this is your situation, look into your state's Fair Access to Insurance Requirements plan. These plans, which are available in most states, are specifically for situations like yours. FAIR plans offer a very basic level of insurance, but it's better than nothing.
Moving back to conventional insurance
Most of these insurance plans will be more expensive and/or offer less coverage than your conventional HO-2 or HO-3 policy. So as soon as your repairs are done, shop around for insurance again. Move to a conventional policy with proper coverage as soon as you can, and you'll save money and have better protection for your home.
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