JF1595: Everything You Need To Know To Save Money On Insurance On Your Next Purchase with Bryan Shimeall
If you’re in the market for property, as most real estate investors are, it’s nice to know things to look for that could save you money on insurance ahead of time. This becomes more true and relevant the larger the property you’re looking at. From age and geography, to construction and wiring, we’ll be covering a bit of everything as it pertains to how insurance companies look at your properties. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Bryan Shimeall Real Estate Background:
- Former real estate builder/developer
- 2008 & 1st child forced a career change into commercial insurance
- Joined MRA (Multifamily Risk Advisors) 5 years ago and they insure about 200k units across the country
- Based in Gainesville, FL
- Say hi to him at https://multifamilyra.com/
- Best Ever Book: American Buffalo
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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Bryan Shimeall. How are you doing, Bryan?
Bryan Shimeall: I’m doing great. How are you doing, Joe?
Joe Fairless: I’m doing great as well, and nice to have you on the show. A little bit about Bryan – he is a former real estate builder and developer. 2008 and his first child forced him into a career change into commercial insurance. He joined MRA – which stands for Multifamily Risk Advisors – five years ago, and they ensure about 200,000 units across the country. He’s based in Gainesville, FL. With that being said, Bryan, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?
Bryan Shimeall: Sure. You’ve already touched on a little bit. I’ve always had a love and fascination with real estate. I was a real estate builder and developer – more of a builder than a developer – for a lot of years. I ended up making a career change; I really wanted to leverage all my experience and everything in real estate and start a commercial insurance career, and quickly learned that very few agents really specialize in one specific industry, which always kind of ate away at me a little bit… And then, like you said, about five years ago I joined up with Multifamily Risk Advisors; we’re one of the few firms in the country I know of that truly specialize in multifamily insurance.
I think we bring a lot of value to our clients, helping them in the acquisition, administration of insurance, and just kind of an understanding of the overall risk of either a property, or their whole portfolio. That’s kind of the summary of my history and where I am now.
Joe Fairless: What benefits do commercial insurance professionals who are focused on one asset class like multifamily provide the customer, versus someone who isn’t exclusively focused on that?
Bryan Shimeall: I think more than anything it’s really just kind of understanding the mechanics of how the industry works. We understand everything, from the purchase process when people are going through a due diligence phase, and trying to determine what their insurance costs are, to complying with lender requirements that they might be faced with and dealing with, understanding the specific risk characteristics of an asset itself – where it’s located, what the construction characteristics of the building might be imparting in terms of risk… More than anything, we’ve really just kind of become consultants with our clients; [unintelligible [00:03:58].09] said he wanted to be my landscape partner, but… Truthfully, we really try to ingrain ourselves with our clients, become a part of their business, and just consult with them and advise them on the best way to ensure and protect their assets.
Joe Fairless: As it relates to multifamily and understanding the risk characteristics of a property, let’s unpack some of these things that you mentioned and get into a little bit more detail, like construction and location. Let’s go with construction, because I think location is gonna be a little bit more obvious, but I’m sure you’ll have some things to talk about… But let’s talk about construction – what are some risk factors with construction that you look at?
Bryan Shimeall: You could start at the high level, about what is the construction. Are we dealing with a frame building here or are we dealing with a joisted masonry with concrete blocks building, or are we dealing with masonry noncombustible? All these different construction types – you have different rights. I can’t tell you how common it is – it’s an extremely large percentage of the time when I’m looking at policies, and I look at what’s been submitted to the carriers and I see it’s got the wrong construction type; the carrier literally thinks they’re covering one type of building, when it’s a totally different one that’s in place.
Joe Fairless: I’d love to stay on construction for just a bit before we get to the age…
Bryan Shimeall: Sure, yeah.
Joe Fairless: So what are the opposite ends of the spectrum – least risk, greatest risk – in terms of the types of construction?
Bryan Shimeall: Least risky would be dealing with masonry noncombustible buildings. What does that really mean? It means there’s no wood present, or a very little amount of wood. So when you’re talking about floor joists, trusses, everything, that’s gonna be metal; the woods could be masonry. So you’re not really dealing with a very significant fire hazard on that building.
The other end of that spectrum would be a framed wood building. Wood walls, wood sidings, wood floor joists, wood trusses… Just a much higher fire factor. That’s kind of how the carriers look at it; they just sit there and calculate their rates based upon if a small fire started, how would it spread in the building? And if you’re dealing with a masonry noncombustible building, you’re most likely [unintelligible [00:06:02].25] a lot of times with smaller fires.
[unintelligible [00:06:04].21] fires people have in their apartments, and such; well, if you have that in a masonry noncombustible building, it’s probably confined at that unit itself. But if you start talking about a framed building of however many units, small or large, then you potentially put the whole building at risk. That is how they look at it.
Joe Fairless: In terms of the type of construction that you’ve come across most often, what type of construction is that? And I imagine it varies based on year and geography, so if you wanna fill in those details too, feel free to.
Bryan Shimeall: Yeah, you hit the two right out of the gate. Geography plays a big part. Look at Florida, for example. I’m in Gainesville, in the Northern part of Florida, and if I were to even drive 60 miles South of here, the majority of the construction you would see there would be concrete blocks, called joisted masonry in the insurance world.
Joe Fairless: Where is that on the spectrum of risk?
Bryan Shimeall: Better than framed, not as good as masonry noncombustible.
Joe Fairless: Okay.
Bryan Shimeall: Definitely mid-level. But you know, the more North you get, you start seeing much more framed construction. And it’s about the type of asset we’re talking about, too; we’re talking about garden style apartments, things like that – you almost always deal with framed construction. When you start getting into mid-rise and high-rise, that’s when you really start seeing more of the joisted masonry or masonry noncombustible type buildings. They might be sprinkled or not – that’s the big issue right now, sprinklers with carriers.
Joe Fairless: As an aside, but related to what you’ve just said about sprinklers – it’s shocking how many buildings that we look at, we’re in due diligence and the owner painted over the sprinkler heads, and now they have to all be replaced.
Bryan Shimeall: Yeah. I can tell you, if there is a sprinkler system in place, you must definitely have that service up to date with the records to back it up, because there’s some tremendous savings in your property rate if you have a sprinkler system installed. And obviously, I know that if you’re looking at a property, very rarely do you have the opportunity to go back in and put a sprinkler system in, but I can tell you, if there’s one in place, I would make sure the thing is up to date and functioning properly.
Joe Fairless: And in terms of the difference and costs for the policy, from a least risk factor (masonry noncombustible) to most risk (framed wood building), what would be the difference there?
Bryan Shimeall: It’s tough to just pin an exact percentage on it. Maybe I could just kind of give you some various examples of what I’ve dealt with here. Geography plays a big role in this. Every part of the country has a different rate associated with it. Some have weather risk and some don’t. But if you’re dealing with a building — let’s just use Orlando, for example. We’ve got a lot of new apartments going on down there that have sprinklers in, but if you’re dealing with an older building (1980-1990), garden style apartment construction… I think about things in terms of rates, which don’t always translate into percentages, but you could easily be in the low 30 cents per $100 of value on the property in something like Orlando.
In comparison, if you could put a brand new building in the exact same location, same exact size, that had sprinklers, you could dip down from that rate by 10%-15%, somewhere in that range. That equates directly to your property premium. If you’re paying $100,000 in property insurance for a non-sprinkler building, you could easily shave 10%-15% off of that sometimes with sprinklers. But again, it just depends on many other factors.
Joe Fairless: Of course, yeah. There’s many other variables.
Bryan Shimeall: Many other variables. The construction type — I mean, how many buildings are there [unintelligible [00:09:34].29] Are we dealing with a property that has 12 buildings, or are we dealing with a property that has one building? So there’s a lot of factors that go into it, but it could be anywhere from [unintelligible [00:09:43].28]
Joe Fairless: And the fewer the better, correct?
Bryan Shimeall: What do you mean by the fewer the better?
Joe Fairless: Fewer buildings, the better?
Bryan Shimeall: I would actually say kind of the opposite of that. If you’re [unintelligible [00:09:53].25] let’s say you have ten buildings, and they’re each worth a million dollars, and you have a fire, well then you’re probably only gonna lose a million dollars on that one building, as opposed to if you have one building worth ten million and you have a fire, you lose all ten million.
Joe Fairless: Yup, okay. That’s very logical. So now you were gonna talk about age, in terms of understanding the risk factors of the property and looking at the age.
Bryan Shimeall: Age – there’s a lot of things to think about when you’re dealing with age. A lot of times [unintelligible [00:10:21].19] building requirements than what are being imposed today, which is a totally other area of insurance… We could probably do a whole other show on how to protect yourself against that. But you’re dealing sometimes with – some of the building requirements weren’t quite as stringent then as they are now, so there’s a little more risk to that building.
The wiring is a huge issue when it comes to age. It’s an interesting topic, because every week I’m dealing with several different assets that are pre-1973, and have aluminum wiring. And so many times, especially with agents that don’t really understand multifamily, it’s just submitted to the carrier that it has copper wiring, when in reality it has aluminum wiring. And it can be remediated aluminum, which is great; it means they’ve addressed the fact that there’s aluminum, but in many cases there’s not.
If you were to delve into your policies, almost every carrier — I mean, there are carriers that will cover aluminum wiring, but they are very few and far between. Most carriers exclude aluminum wiring. So there isn’t a week that goes by that I don’t look at a property, late 1960’s, early 1970’s property that has aluminum wiring in it, and you can open up their policy – which, let’s be frank, nobody opens up these policies and reads every detail; it’s about next to impossible… But every one of these policies has an aluminum wiring exclusion.
If you were to have a fire due to the aluminum wiring, and the carrier specifically excluded it, and it was submitted to them as copper wiring, you have an issue. The client could very well be denied — not only very well be denied, but most likely will be denied.
Joe Fairless: And then what would you do, if you wanted to get covered? Would you end us suing the agent or the broker who messed that up?
Bryan Shimeall: That’s the only place you would have for remedy, because the carrier has done their job; they provided a contract for a building that was without aluminum wiring, it has aluminum wiring, there is no [unintelligible [00:12:19].19] and it boils down to who told them that? If you the client filled out a form and just didn’t know – and I see this a lot of times… “Oh yeah, I thought it was copper. I didn’t really check it.” That falls on you and there is no remedy. If the agent themselves supplied that information to the carrier, then there could be an issue with the agent. And I see both of those going on.
Don’t get me wrong, I see sometimes some desperate agents [unintelligible [00:12:45].29] trying to tell their clients what they should put there… But if you have aluminum wiring, it at a minimum should be addressed and be remediated. Then go to the carriers and apprise them up that it is remediated aluminum. There really isn’t that much premium impact to remediated than unremediated aluminum, but that’s a completely different animal.
Joe Fairless: So we’ve got the type of construction, the age… What are some other risk characteristics that you look at with a property?
Bryan Shimeall: Age of roofs. This gets a little bit technical, and I know nobody on this show probably wants me to delve too deep into the ins and outs of…
Joe Fairless: No, it’s good. Please do it.
Bryan Shimeall: Okay, every carrier’s different. [unintelligible [00:13:26].23] but if your roof is much older than 15 years, meaning 2003, most carriers are only gonna give you coverage for that roof on what’s called an actual cash value basis. It just means they factor depreciation in. Now, if you go to refinance that property, through any sort of Fannie or Freddie loan, the loan requirements do not allow actual cash value. They force replacement cost, which means that the roofs have to be replaced and no depreciation needs to be factored in.
Again, it is a weekly occurrence for me that I see people looking at properties… And I’d love to talk about how we get involved in the due diligence side with our clients here in a minute, but… On a weekly basis I’m looking at properties with my clients; they’ve got 2000 roofs on them, they plan to finance it with a Fannie or Freddie loan, and they don’t even realize that they’re going to have to replace the roofs to comply with the insurance requirements… Which could be a huge capital expenditure. I’ve seen it kills deals, I’ve seen clients have to take it on… And I’ve also seen clients that maybe it’s got 2004 roofs, and [unintelligible [00:14:35].19]
These are some of the things that when we get involved in the due diligence of a property and help our clients understand the risk characteristic of the property, these are things that we talk them through, things that they might not be thinking of. So roofs are a big, big issue. You really need to plan to replace many of the roofs, or really understand the age of those roofs… Don’t just take the seller’s word for it; they might say it was made ten years ago, and we find out that they’re 15-16 years old.
Joe Fairless: I’m gonna skip over the location component, unless there’s something that you have that’s surprising… Because hurricane, flood zones – we get all that stuff. But anything you think would be interesting or surprising in terms of location that you wanna mention before we go into the due diligence part you talked about?
Bryan Shimeall: You know, I could sum something up. We all know the coastal stuff is highly exposed and highly expensive insurance, but we’re really starting to see the Midwest – and we work on a coast-to-coast basis… We’re really starting to see the Midwest rates go up, because there are hail claims, wind claims, tornado claims… It’s really surprising to see how the rates in some of those parts of the country are starting to rival some of the coastal areas.
I could probably leave location at that. That’s kind of at a high level. But it is interesting to see that going on.
Joe Fairless: Yeah, you know what – last week we had golf ball sized hail. I live in Cincinnati, and we had golf ball sized hail at our house. I’d never seen that before. Granted, I’ve only lived here three or so years, but I’d never seen that before, and my wife Colleen, who’s from here, had never seen that either.
Bryan Shimeall: Yeah.
Joe Fairless: Cool. Alright, let’s talk about due diligence, how you approach due diligence with your customers.
Bryan Shimeall: Yeah, whether it’s an on-market deal and you’ve got the OM, or it’s an off-market deal, with most of our clients we really kind of become a part of their acquisition team, and start looking at them the same time that they’re looking at them… Identifying some of the things that we’ve already talked about, some of the risk characteristics to the property – age, roofs, all of these things that might need to be concerned about, consulting with them on that, so they understand that.
What most clients want to get into right away is the cost, and over the last few years people almost always just kind of defer to “What were the seller’s costs on insurance?” and move on. Over the last few years — that’s maybe not an advised way to do it, but it actually probably kind of worked, in many cases, at least. But in the new environment we find ourselves in this year it’s probably the worst thing that you could do.
We take and develop the entire statement of value for the property – all the square footages, all that sort of stuff – and come back to our client in about 24 hours and say “Look, this is what your insurance costs are gonna look like for that property.” And sometimes it is right in line with what’s in the OM, but other times that number might be going up by 10%-20%.
There’s two things going on right now with regards to property insurance costs in the country. That is, number one, the rates are trending up rather dramatically. But at the same time rates are trending up, the values that both the lenders and the carriers are requiring have made a sudden jump also. So your property insurance premium is simply the value ensured times the rate. Well, the rate is going up, we all know that.
Then from the valuation side, it’s really done on a per-square-foot basis, and over the last five years you commonly saw $60-$65/square foot for a garden style apartment in most parts of the country as being the valuation number. Now you’re seeing Fannie and Freddie and most other lenders requiring $70-$75/square foot. Right out of the gate that’s a 10%-20% increase just in valuations, which results in a 10%-20% increase in property insurance premiums.
So it’s kind of a double whammy that’s occurring right now. You’ve got lenders requiring higher values, and carriers requiring higher values, and then you’ve got rates also trending up. So it’s really not a time right now where you can just kind of take a glance at what was paid last year and just use that number in your underwriting and feel like you’re at least relatively safe. I would say no, that’s a big deal.
Also, the losses. This is the thing that surprises me so much, and we coach our clients to this, but… When you’re in the actual due diligence phase on an asset you’re looking at, you get the seller to give you his loss runs – property loss runs and general liability loss for the last 3-5 years, because the carriers require that, number one (you’re gonna have to get them anyways), and number two, their rates are gonna be based off of that.
So if you’re looking at an asset that had half a dozen mid to severe-level GL claims, you’re gonna be paying a lot more for GL (general liability) insurance.
The same way with a property – if the property has been hit with a few fires (it could be any type of loss), they’re gonna factor that into their rate. And most people never ask for this stuff until it’s the last minute, they’re trying to get an insurance quote… We really try to coach our clients to get that stuff upfront… Because we can give you an indication just based on a relatively positive loss history, but if we have the actual losses I can find out almost down to the dollar what it’s actually gonna cost you. And you can know that in phase one of your due diligence, and not three days before you close.
Joe Fairless: Great stuff. Very informative, and some very good practical tips, like making sure that you get way out in front of the loss run information, and make sure you have the property and general liability loss runs… Because as you mentioned, insurance companies are gonna need that anyway, and they’re gonna judge your insurance policy and the premium based on that information.
Bryan Shimeall: The analogy I always make, when somebody’s looking at an asset, they’re looking into the future – rent growth, what the exit cap is gonna look like and all that sort of stuff, to try to figure out what the property is worth… The insurance industry looks in the rearview mirror, and they look at the losses that have occurred and they say “This is the price we wanna put on it.” It’s really tough for people to wrap their heads around that, how the seller’s management of that property should in any way play a part in what they pay for insurance. I can’t tell you that I don’t disagree with them, but the fact of the matter is that the insurance industry does that, and you’re not gonna change that, so you really need to understand it.
Joe Fairless: They look in the rearview mirror and they also look through the windshield too, because they’re also looking at the useful life period of all of the mechanicals, and things like that, and where you’re at with those things.
Here’s a question I ask everyone on the show – based on your experience in the commercial insurance industry, what is your best advice ever for real estate investors?
Bryan Shimeall: Okay, first of all I would say deferred maintenance on the property. Most of us wanna provide a safe environment for our tenants, but there are professional claimants that are out there; people that are looking for loose handrails, trip hazards, wet A/C handlers where they can slip, electrical issues where they can be shocked, and I see this every single day.
Most recently, last year I had one where a client called me and said “Lo and behold, our tenant called our property manager and said the ceiling was wet. The air handler was in the ceiling”, and the property manager went over there immediately, and right before they walked through the door the air handler fell and hit them in the head. I was like, “Wow, what a crazy claim that is.”
Then about ten days later the same exact scenario happened in the same exact property. Now, it’s just crazy stuff that you see. Every single trip hazard – somebody trips and it’s a neck injury, it’s a back injury, it’s all this stuff… And I’m not saying that they’re all bogus, but I can promise you that a lot of them are.
Joe Fairless: Yeah.
Bryan Shimeall: So I’d really say stay up on deferred maintenance. We’ve kind of already talked about using the seller’s number for insurance, because property rates are going up, but I’d just like to reinforce that and say that’s really something that you need to look at. I would say that taking a look at the area where the property you might be acquiring is, or that you already own, taking a look at the crime scores there… General liability is just getting tougher and tougher, and my best ever advice on that would be pay attention to your exclusions, because we commonly see assault and battery excluded from general liability policies.
A fight is an assault and battery; it could be through two tenants, it could be through somebody visiting your property, it could be from one of your employees and a tenant. Almost any altercation is an assault and battery, and the very first place carriers go to decrease a general liability problem or to alleviate their risk on a property is to exclude assault and battery, or put a very small sublimit on it, 200k-300k, and I can tell you right now that assault and battery claims are always larger than that. So I would really make sure that you understand what your exclusions are with that.
And we’ve already talked too about really understanding your property – the wiring, the roofs, the [unintelligible [00:23:29].28] all that sort of stuff.
Joe Fairless: Great stuff. Very informative, and I’m grateful that you went through these things in detail. This will save a lot of Best Ever listeners a lot of money. We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?
Bryan Shimeall: Absolutely, let’s go.
Joe Fairless: Alright. First, a quick word from our Best Ever partners.
Joe Fairless: Best ever book you’ve recently read?
Bryan Shimeall: American Buffalo, Steven Rinella. I love the Wild West and the whole story, and I thought it was a pretty interesting take on telling the story of the Wild West.
Joe Fairless: Best ever way the Best Ever listeners can get in touch with you?
Bryan Shimeall: You can reach me via e-mail at firstname.lastname@example.org. Or they can call me at 321-303-2840.
Joe Fairless: Bryan, thanks so much for being on the show, talking about the risk characteristics of what to look for when you’re assessing what type of insurance policy you’ll get, and then getting into the details of the construction – the age, the roofs, the due diligence as well, what to look for… There’s a lot of really good information for anyone buying a multifamily property; save this episode. Fortunately for you, we transcribe all these episodes, so you’ve got that already… And then reach out to Bryan if you have questions or you wanna do some business with him.
Thanks for being on the show again. I hope you have a best ever day, and we’ll talk to you soon.
Bryan Shimeall: Thanks a lot, Joe.