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Episode 55: Insuring Rural Properties | Guest Kent Simpson

Additional Resource: Read about Four Strategies for Insuring Rural Properties (provided by Kent)

 [music]Kent Simpson

Welcome to the REALTORS® Land Institute Podcast, the Voice of land, the industry's leading land real estate organization.

Justin Osborn: This is Justin Osborn, accredited land consultant with the Wells Group in Durango, Colorado. On today's episode of the Voices of Land podcast, we're talking to RLI, member Kent Simpson about the issues of property insurance. Kent Simpson is the fourth generation owner steward of Simpson Farms outside of Las Cruces, New Mexico. Primarily vegetables, the farm has 700 irrigated acres, of which 100 are pecan orchards next to the Rio Grande River. He is RLI's representative on the NAR Federal Finance and Housing Policy Committee, is that group's representative on NAR insurance committee and immediate past chair of NAR land use property rights and environment. Welcome to the podcast, Kent.  

Kent Simpson: Thank you. Golly, that sounds like I'm a glutton for punishment with all those committees, but anyhow. Thanks for inviting me. I appreciate it.

JO: Yeah, we're happy to have you on, man. Between, 700 irrigated acres and all those committees, I don't imagine you have much spare time on your hands.  

KS: It means early to bed and early to rise.  

JO: I understand that one. I've got some irrigated acreage myself and, not near as much as you, but I'll tell you, it's cool to see, pecan orchards. I grew up in north Texas and some of our family had some pecan orchards up there just right across the Red River. And man, I always loved pecan pies. That's still my favorite to this day.  

KS: Well, maybe I'll have to shoot you over some pecans, when we get harvest time going.  

JO: Oh, heck yeah, I'll take you up on that. There's not very many pecan pies on the list in Durango, Colorado, so...  

KS: Alright, I'll make sure you get some.  

JO: Yeah, thanks. I'll take you up on that as much as I could talk pecan pies with you all day here. Our listeners are tuning in to hear about insurance and, you know, this is a big deal all over the country. I was just listening to another podcast yesterday and they were talking about Florida being the highest insurance as far as expenses go on annual premiums of any state in the United States. And with you and me being in Colorado and New Mexico, a little bit different than what they're dealing with in Florida. But this is a big deal all over the United States right now.  

KS: It is, and when we talk about rural land, there's some different risks that are involved as to opposed to just talking about in the city and whether, what's gonna be better for my roof and that kind of thing. We've got some different types of issues that we deal with, and whether it's farms, ranches, timberland, or recreational tracks, we're in a completely different world from residential. These properties often have multiple structures, high value equipment, livestock crop exposure, all of which need specialized coverage. Homeowner's policy just isn't gonna cut it. My own farm, just in the past two years, my policy has doubled because of the structures on my farm, and that's for not a whole lot of coverage, and it certainly doesn't include my crop insurance or anything like that. That's just my basic liability. 

But we're looking at layered policies in rural country, a farmer ranch liability, equipment coverage, crop insurance, and sometimes, you might even want to think about business interruption insurance. Because rural properties are more exposed to wildfire, wind, flood, and hail with longer emergency response times. Insurance carriers are treating rural properties as higher risk, and we're seeing that show up both in cost and in coverage limits.  

JO: Now are you seeing many folks that are choosing to have higher deductibles? I've seen that quite a bit out here where they say, how high can you make our deductible in order to make our premium a little bit lower? Is that something you're seeing often in your world?  

KS: Yes, very much so. And for me personally, I asked my insurance agent, I said, "Hey, can I have a higher deductible than what you're quoting me?" Because I was already up at the maximum deductible. He is like, no. They wouldn't go that far, but I've got the maximum possible. It's easier to come out of pocket $10,000 than it is to pay a tripled premium.  

JO: Yeah, it can get pretty expensive pretty quick. And y'all had those fires not too far from you out in Ruidoso. Right? How long ago was that?  

KS: That was last year, and just in the past week or so, some of the burn scars, they had some rain and saw some renewed flooding.

JO: Yeah, the rain's always welcome when it comes out west, but man, when it hits those burn scars, it just turns into a muddy mess. We had some of that happen out here in Durango, maybe 10 years ago or so. There was a fire going up towards Purgatory, and the hillside caught fire and ran down across the railroad tracks, across the highway, and caused a big muddy mess. Thankfully, all that's grown back in now, but I know exactly what you're talking about. When the rain hits those areas and there's no vegetation to slow down that runoff, it creates a huge mess.

KS: It does, and the village of Ruidoso is only about 7,600 people. There's 20,000 people in Lincoln County, which Lincoln County, you'd remember that from Billy the Kid days and all that kind of stuff. But there was over a half a billion dollars. They got hit by the fires, and immediately thereafter, they got hit with flash floods, and most of those properties were uninsured or underinsured, especially when it comes to flood. It's having a lasting impact, not just in Ruidoso, but all across Lincoln County and even beyond the county borders.

JO: Man, that's a lot of money. Yeah, I think a lot of people, when you're dealing with the arid west, you don't think about flood insurance unless you're in a river bottom, down in a floodplain. Needless to say, you have a fire, and all that runoff comes down. Well, then that's where that flood insurance would sure be nice to have, but a lot of people just don't have it. Half a billion dollars, is that what you said?

KS: Yes, sir, 500 million.

JO: Man, that's a lot of money.

KS: And that doesn't count what got damaged just this past weekend. But what they're seeing as a result of all this is increased premiums, reduced policy offerings, and stricter requirements, and carriers are pulling out. And the ones that are staying, they're asking for mitigation efforts, like defensible space, metal roofing, and they're even asking for elevation certificates. And sometimes it's possible to get an elevation certificate, and sometimes it's just physically not possible. Not likely to be able to lift up a building, build a new foundation underneath it, and get it out of the floodplain just to satisfy an insurance requirement.

JO: Yeah, you're right. So I've got a property under contract on Grimes Creek up at Vallecito lake here just north of Durango, and we sold a lot of properties up there. And my home inspector, the home inspection's happening next week, and he's taking a lot of measurements for the buyers, for their insurance carrier, measuring the crawlspace. I've never been doing this 24 years. I've never had this come up. But the insurance company asked us to get measurements in the crawlspace on how tall the perimeter, the stem walls are, trying to calculate the elevation off of the creek that's in the backyard. I mean, I guess it's no surprise with what we're talking about, but it's like, man, 24 years doing this, I've never seen somebody say, we need to measure the dirt in the crawlspace to the top of the floor joists.

KS: Yeah. Yeah, and if your pillars are wood, those absorb moisture. And you'll see insurance carriers trying to mitigate their risks as much as possible. And something interesting that I've learned in D.C. When we had our insurance committee meetings is for every $1 you invest in mitigation, that is the equivalent of $13 in reduction of disaster costs.

JO: Wow. So, let me make sure I'm understanding that, every $1 spent is $13 reduction in disaster costs. So not a straight correlation with the reduction in an insurance premium, but in the event, there is an event, it will save you $13 for every dollar you spend in the cost of that disaster. Am I saying that right? 

KS: For the consumer as well as the insurance company, because where the insurance industry is running into problems is they're paying out more in disaster costs than they're bringing in in premiums. Premiums are always going up. And it used to be that the insurance industry, hey, they made a pretty penny. Now they're not. They're losing money. Here in the Southwest, they're paying out 140% of what they receive in premium payments in disaster payments.

JO: Yeah, that's a broken business model. You definitely can't stay in business if you're losing that much every year. Yeah, I've seen a lot of them just completely pull out of Colorado. It used to be where we could have the seller's insurance provider would be willing to take the buyer on. The buyer could literally almost assume that policy. And now we're having a lot of insurance providers say, no, we're non-renewing. We're pulling out of that county. We're pulling out of that state. So we're seeing, especially on the high-end stuff, a lot of folks just self-insure. They're getting quotes back that are $40,000, $50,000 a year for some of these big trophy homes out in the country that border National Forest. And they're just saying, no way, we're not even going to pay it. We'll just self-insure, take our chances.

KS: Yeah. Well, and one of the other factors that they're looking at, in areas where you have a lot of wind or propensity to have hail, those are actually the categories that cause more claims in dollar value in the United States than all of the hurricanes and tornadoes combined.

JO: Wow.

KS: So you think of it just being wildfires and hurricanes and all these things that make the news, but a hailstorm or sustained 70-mile-an-hour winds, that actually causes more damage than all these big disasters that you see on CNN.

JO: Yeah. Well, I guess that makes sense when you think about it, especially in the central part of the country, Texas, Oklahoma, Kansas. I mean, there's always a lot of hail damage out there and tornadoes. It seems like no matter which part of the country you go, you're just kind of trading one thing for the other. If you want to try to avoid the hurricanes in Houston or Miami and move up a little further north, then you're going to deal with tornadoes. You move out west, you're going to deal with the chance of fires. I don't know that there's really any perfect utopia in the country to get away from it all.

KS: If there is, it's going to get real high-priced because everybody wants to move there.

JO: There you go. Well, it's interesting, earlier in my career, kind of the first question that a buyer would ask was, is there cell phone service? And then, a little bit later, it was, what's the Internet speed? And then COVID hit, and it had to have high-speed Internet. And now, it seems like one of the first questions I get whenever I list a property is, what are the sellers paying for insurance, and is it assumable? Can we use them? Because it's just gotten so expensive. I mean, you said yours has almost doubled in a couple years, and that's happened with a lot of people, as well as their taxes. When you look at annual real estate taxes going up with the price of real estate going up, I think I saw somewhere it was 51% was the average across the country the past seven years since COVID. And you got taxes that are assessed to those levels. And so now you got taxes going up, insurance going up. It's really becoming a challenge for a lot of younger homebuyers, especially trying to buy big acreage properties to afford those monthly payments.

KS: Yeah, and I would advise any buyer to start shopping for insurance even before you start looking at properties. You don't do it at the very end when it's like, oh, golly, we're closing in a week. I need to get insurance. No, start it before you start looking, because you know what region, what area you're taking a look in. Start getting your insurance team working on that, and shop, shop, shop.

JO: Yeah, that's good advice. You can at least kind of start learning the areas and what percentage it's going to be. Do you work with any HOAs, Condo Associations on insurance policies like that, Kent?

KS: No, I do not work with any HOAs.

JO: Okay, that's something else that I've been involved with where I've seen HOA dues go up significantly in some of these resort areas because their insurance policy is going up. And so that's something else that's been extremely, I guess, challenging when it comes to buyers trying to qualify to hold some of these properties.

KS: Well, and that and just the sheer loan availability, even for a single family home, if your HOA has their insurance policies with a high deductible, they won't meet Fannie or Freddie guidelines. So if your HOA is trying to increase their deductible in order to have a lower policy cost and keep those HOA dues lower, they may not be able to. Or if they do, they may make them invalid for different types of loans.

JO: Okay, that's good to know. I wasn't aware of that. Well, I wonder, where we're going to head. The market seems to kind of be getting more to a balanced market. We had a seller's market in most of the country for the past few years. Looks like it's starting to get back to balanced and maybe even a buyer's market in some parts of the country. But I wonder if we're going to start having buyers kind of, put this on sellers saying, okay, you've got to replace that old wood shake roof and put in a metal roof or a standing seam roof. And okay, you've got to get rid of those 5 or 10 dead trees that are around the house. And an ask right up front with the offer, we had buyers asking for interest rate buy downs the past couple years because interest rates were high. I wonder if we're going to start seeing insurance asks in the purchase agreements.

KS: I think we'll probably start seeing that, especially with savvy buyers agents, because insurance is such a factor. And it's growing. This is a problem that's not going away.

JO: Well, maybe we're onto something. Maybe folks are going to look back at that podcast that Justin and Kent did and say, man, those guys were ahead of it. They were on top of it. We need to listen to that Voices of Land podcast more often.

KS: Well, and something we won't see that's starting to go away and we will not see... In three to five years is you won't see full replacement value.

JO: Because of the price of construction has gotten so high? Or tell me a little bit more about that.

KS: Because the price of construction, the price of materials, uncertainty in the cost of labor in some markets, availability of labor in some markets, but that's just going through the roof. And insurance carriers can't afford to replace. I hate to feel sorry for the insurance industry. And I really don't, but I can see their point. But in order to make the numbers work and where we have this nexus of affordability and availability, the only way to keep them from not butting heads is we're not going to be able to replace your structure, your office building that was built 30 years ago. We can't afford to replace it.

JO: Man, it makes sense. I just haven't thought about that. Everything you're saying, I can totally see happening, unfortunately. So do you think maybe we'll start seeing a shift? Is there going to be some new genius building product that is fire resistant, hail resistant, wind resistant that somebody's going to come up with instead of just the same old method of two by fours, two by sixes, two by eights out of lumber?

KS: We're already seeing a few of them. 3D printed homes with a concrete mix. Those... Actually, there's a lot of experimentation going on in Florida and some of these hurricane zones. And these buildings stand up. They are designed to withstand a hurricane. You may lose all the contents, but your structure is still going to be there. We may see a little return to the old way of doing things. Adobe and rammed earth, which is a giant Adobe. But I think what we may need to see, and I haven't confirmed this of anybody, this is just a theory of mine, is we may have to see specialized types of loans to cover the gap when a disaster strikes from being able to rebuild with what the insurance company will pay out and the difference between what it's going to cost to rebuild.

JO: Yeah, I could see that. We didn't know the term appraisal gap until a few years ago, and we saw multiple offers and contracts coming in with appraisal gap language. So insurance gap might be the new term.

KS: Something else we might see... You were talking about HOAs and how their coverage keeps going up and all that. And then we run into this wall where Fannie and Freddie will not accept higher deductibles. We may see new types of loan products for homes, for commercial buildings, and all of that, where maybe you can do an emergency home equity loan or building equity loan to be able to tap in to pay your deductible. So you can raise it to another level to lower your insurance costs.

JO: That's a good idea. I'm not for buyers getting in over their head tapping into their home equity, but Americans have more equity in their homes than ever right now. And so I like that idea. If you needed to tap into it, pull a few thousand dollars out, still keep your loan to value ratio still at a manageable number. I like that idea, Kent.

KS: Well, we'll see if anybody else likes it that can actually do something about it.

JO: All right, man. Well, we're just coming up with all kinds of good ideas, man. Anything else that we need to hit on that we need to try to solve the world's problems here?

KS: Well, I'd like to say a couple of things here. For RLI members, some of the things that we talked about in D.C. At the RLI membership meeting was members were sharing story after story of deals that are held up or lost due to coverage issues. And the number one concern was access to insurance. What really stood out to me was the desire for more education and resources to be able to help our clients. And there are rural outreach grants available through NAR of up to $7,500 that our members through their associations can apply for. And say you want to go out to Bayfield in your area and say, hold an insurance seminar for people there in that area. You can bring in some experts and all that, but you can cover the cost of what it takes to rent a hall to be able to fit all these people in and that kind of deal and pay some of your expenses through this rural outreach grant.

JO: That's great. Yeah, I didn't know that was available. So... 

KS: It is, and applications need to be in to NAR no later than October 15th if they still have money left.

JO: Okay, so the $7,500, you said the grant was for $7,500, right? 

KS: That's the max. If you only need $1,200, do $1,200.

JO: And is it broken up by state or by region or association or?

KS: No.

JO: Okay, just first come, first serve, submit your applications?

KS: Whoever uses it gets to.

JO: I love it.

KS: The money's out, there's no more money until the next budget cycle.

JO: Oh man, that's a great opportunity. So folks, listeners out there, especially if you're in your first few years of business and you need to kind of get involved in your community and get your presence known, this is a great opportunity to kind of be an ambassador for your local association, for NAR, to go out there and educate the public as far as what's happening in the insurance world. So Kent, that's awesome, man. Anything else you came back from with D.C. That our listeners need to know about?

KS: Well, one real quick thing. This is related to this grant, but where you can find a lot of the grants is go to the Realtor Party website and it's realtorparty.realtor. And they've got a list and a dropdown menu of all sorts of different grants that are available to you. And you may need to log in. Well, it's the same login you use to get into the Realtor site. So you don't have to reinvent the wheel or get a new password or anything.

JO: Okay. So that was realtorparty.realtor?

KS: Yes, sir.

JO: Perfect. Okay.

KS: Yes, sir. And going back to get your insurance quotes early, do not wait until you're under contract, get a pre-approval from a carrier before you go looking, just like you're getting a pre-qualification for a loan.

JO: I think a lot of our listeners probably don't realize that's possible. How can an insurance carrier provide a pre-approval letter on something that that buyer doesn't have the property picked out yet? So can you briefly just go into that on how that happens?

KS: Go to your... Well, there are going to be caveats to it, saying, okay, well, we're not going to approve you for any property under the sun, but we're going to tell you that we will issue a policy in this area as long as certain conditions are met. And that may help you in deciding which property you want to make an offer on or not.

JO: Gotcha. Okay. All right. Thank you for that explanation. Well, folks, if you want to understand more about this topic, reach out to Kent, find another RLI member who understands insurance challenges in your area. RLI has a new online member only community called Landline. You can ask questions and chat with other members there. It's pretty sweet. Go to community.rliland.com and you'll have access to that Landline. And if you want to become an expert in land and be the best in the business, consider earning your ALC. LANDU courses will build your competency and confidence when conducting land transactions, and they earn you credit towards the education requirements for the ALC designation. To see upcoming course offerings, go to the Learn tab on the RLI website, rliland.com. Well, Kent, thank you for joining us today and helping our listeners understand the challenges of insuring rural properties. If somebody wanted to get in touch with you, what's the best way for them to do that?

KS: Shoot me an email. It's kent@simpsonsouthwest.com. 

JO: Kent@simpsonsouthwest.com. Got it. 

KS: Yes, sir.

JO: For more expertise on land real estate topics, be sure to check out the RLI blog, follow us on social media, and of course, tune in for upcoming episodes of the Voices of Land podcast.

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