Introduction
Purchasing real estate is often one of the most significant financial commitments you will make. Whether you are buying your first home, or a rental property, or purchasing a commercial building, it is a major commitment with multiple moving parts rather than just simply signing a contract and financing. Insurance is an important component of protecting your investment, yet many buyers do not think about its necessity until it is too late.
Not having the right insurance, or not knowing how it works, can put you at risk for costly exposure. To help you avoid some of the common mistakes, here are the biggest insurance mistakes to avoid when buying real estate.
1. Waiting until the last minute to shop for insurance
Many buyers, with the concern of hiring a mortgage company and getting an inspection, just put insurance off until the closing. The result is that you rush to find insurance and as a result:
- You accept the first policy you are offered, even if it is expensive.
- You fail to note any gaps in your coverage.
- You inadvertently cause the closing to be delayed, if proof of insurance is not on file.
Tip: Start shopping for insurance coverage as soon as your offer is accepted. Research two or three different insurance providers and understand what is covered in their policies. When you start early, you will have the right coverage with the best rates.
2. Believing that Standard Homeowners Insurance Covers Everything
A huge misconception when it comes to homeowners insurance is that it covers any and all disasters that could potentially happen to your house. The truth is that most policies will exclude:
- Floods
- Earthquakes
- Sinkholes
- Mold damage
An example: if you live in a flood zone and do not purchase separate flood insurance, your damage will not be covered, and you will end up having to pay for any repairs yourself!
Tip: you should read your policy carefully and inquire with your insurance company about exclusions. You may also choose to add riders or purchase separate policies to cover expectations due to the specific risks presented by the area where you live.
3. Not Buying Title Insurance
When buying real estate, many real estate buyers believe that title insurance is a waste of money. After all, the paperwork has been filed for years and everything looks fine, right? Wrong! Title issues could surface years and years down the line (a few examples are liens, taxes that have not been paid, disputed ownership, etc.), and that could endanger your legal right to the property.
Tip: you should always buy title insurance when you close on real estate. It is a one-time payment to protect both you and your lender from expensive litigation.
4. Inadequate Property Coverage
In order to save money, some buyers will insure their home for the market value instead of the replacement cost of the home. This is a costly mistake.
If your home is destroyed by fire, the amount it would cost to rebuild from scratch (the replacement cost) could be hundreds of thousands higher than the market value. Without sufficient coverage, you are likely to end up in a financial hole.
Tip: Insure your property for replacement cost, not market value. Ask your insurance agent for a screwdriver’s estimate for rebuilding the home.
5. Ignoring Liability Coverage
Most people only think about the physical property damage when they purchase insurance, but having liability coverage is just as important. If someone slips on your driveway, if your dog injures someone, or if you get sued for damages caused by your rental property, liability coverage protects you.
If you don’t have liability coverage, you could be responsible for paying damaged party medical and legal bills out of pocket.
Tip: Ensure that homeowners or landlord insurance includes substantial liability coverage. If your property is high, consider an umbrella policy.
6. Neglecting Rental or Landlord Insurance
When purchasing real estate for an investment property, don’t think your homeowners policy would take care of your tenants. The standard policy will not cover rental activity and you could find yourself exposed to damage to your property or liability for tenant related issues.
Tip: If you are renting your property, you should purchase landlord insurance. It generally provides coverage for damage to the property itself, loss of rental income, and liability. You should also encourage your tenants to purchase renters insurance to protect their own property against loss.
7. Overlooking Local Risks and Regulations
Insurance needs will vary from place to place and location will affect risks. For example, if you own a beachfront property, the risks will be different than a cabin in the mountains, and in some localities, even require certain amounts of coverage in insurance. Even flood zones may require proof of flood insurance prior to closing on a sale.
Tip: Investigate what local risks there could be and any local laws or requirements. Talk with your insurer about precautions tailored to your coverage based on weather patterns, geography, and building codes.
8. Choosing Price Over Coverage
It is tempting to go with the cheapest option available, especially when you are already pushing your budget to buy the property. However, cheap policies usually have high deductibles, limited coverage, and exclusions that do not cover your investment.
Tip: Don’t just look at the premium you will pay for the coverage. Try to figure out what the policies cover and determine the value of the policies, not just the price. It is worth paying
9. Not Updating Coverage Over Time
Insurance is not a one-and-done process. As property values rise, renovations are made, or new risks emerge, your insurance needs will change. Yet many homeowners never update their coverage after purchase.
Tip: Review your insurance annually. Update your policy if you’ve renovated, added new structures, or purchased expensive items that increase the value of your property.
Conclusion
Insurance may not be the most exciting part of buying real estate, but it’s one of the most important. Avoiding common mistakes like underinsuring your property, skipping title insurance, or overlooking natural disaster coverage can make the difference between financial security and financial ruin.
To recap, the biggest mistakes to avoid are:
1. Waiting too long to shop for insurance.
2. Assuming standard policies cover everything.
3. Skipping title insurance.
4. Underinsuring based on market value.
5. Forgetting liability protection.
6. Using the wrong policy for rentals.
7. Ignoring local risks and laws.
8. Choosing the cheapest policy over the best coverage.
9. Failing to update your policy over time.
Real estate is a valuable asset. By taking insurance seriously from the start, you’ll not only protect your property but also safeguard your financial future.
