JF2209: Rising Insurance Rates With Bryan Shimeall #SituationSaturday

Bryan is a former real estate builder/developer and is now working with Multifamily Risk Advisors insuring units across the country. He was a previous guest on episode JF1595  and In today’s episode Bryan will be sharing info on how insurance rates are rising at historical levels and the rates are killing many new deals and hammering the profitability of existing assets at renewal. He will also discuss effective strategies to navigate the insurance market.

Bryan Shimeall  Real Estate Background:

  • Former real estate builder/developer
  • Joined Multifamily Risk Advisors 6 years ago; they insure about 200k units across the country
  • Based in Gainesville, FL
  • Say hi to him at:  www.tbmins.com   

 

 

 

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Best Ever Tweet:

“Losses, roof, and wiring, if those three things are positive I can get any property written pretty quickly ” – Bryan Shimeall


TRANSCRIPTION

Theo Hicks: Hello, Best Ever listeners and welcome to the best real estate investing advice ever show. I’m Theo Hicks and today, we’re talking with Bryan Shimeall. Bryan, how are you doing today?

Bryan Shimeall: I’m doing great, Theo. How are you doing?

Theo Hicks: I’m doing great as well. Thanks for asking and thanks for joining us again. So Brian is a repeat guest. His first episode was Episode 1595, so make sure you check that out. Today being Saturday it’s going to be Situation Saturday, so we’re gonna talk about a sticky situation that our guest was in, but that you are probably in. But before we get into that, a little bit about Brian. He’s a former real estate developer and builder. He joined Multifamily Risk Advisors six years ago; it is an insurance company. They insure about 200,000 units across the country. He’s based in Gainesville, Florida, and his website is tbmins.com, which is in the show notes as well. So Brian, before we get into this sticky situation, do you mind telling us a little bit more about your background and what you’re focused on today?

Bryan Shimeall: Absolutely. As you alluded to there, I have sat on the other side of the table for a lot of years as an insurance buyer. I had grown up a pretty good-sized custom home building business with a little bit of light development. For the most part, I was doing custom homes, investing in real estate in a variety of different ways. And then along came ’08, and along came kids, and I started looking for other things to do and tried to parlay a lot of my real estate experience into the insurance world with a focus on real estate, which is what I’ve done.

So yeah, I understand the perspective of both being someone who sells insurance and someone who buys insurance. I can understand the complications a lot of people encounter and the difficulty a lot of times in understanding.

Theo Hicks: Perfect. Let’s talk about one of these potential difficulties. So we’re recording this in the beginning of August 2020. We’re still in the midst of the coronavirus pandemic, and as anyone who’s investing knows, insurance rates are going up. So the situation is increasing insurance rates, and then Bryan’s gonna go over the solution. But before we talk about any potential solutions, can you let us know what’s going on in the insurance industry? Why are the rates going up? When are people going to be affected by these rate hikes? How long are people gonna be affected by these rate hikes? Things like that.

Bryan Shimeall: Absolutely. If we would have done this podcast pre COVID, pre quarantine, a lot of the things that you’d be hearing, you would have also been hearing then. So my point being is that COVID has definitely not helped matters with the insurance markets or any industry, but definitely not the insurance market. I don’t think anybody completely knows the fallout from that. I think, in general, it serves everyone a good purpose to understand where rates were historically, where they got to and now, where they’re trending. For a lot of years there, we sat in what we call the soft market in the insurance industry, and that was the carriers were almost fighting for business if it was a buyers market. Most of my clients were grabbing the OMs off of deals and using whatever number the seller used the previous year for their own underwriting of their deal. As much as we did preach against that, for a lot of different reasons at that time, frankly, it usually was somewhat accurate.

And then about a year, a year and a half ago, the market really started firming up, driven by losses. Weather losses, GL claims across the board… Habitational insurance, whether you’re talking about property insurance to the casualty side with your general liability, it fell out of favor with most insurance carriers. A lot of the [unintelligible [00:07:31].17] specialize in providing coverage, and they just haven’t been profitable for a lot of years. So the market really started firming up. Rates started going up. People started getting increases, which was really had been due. People had not been experiencing that for seven, eight years before that. And along with the hard market, everybody’s always concerned about price.

But talking about sticky situations, it’s now a seller’s market. And the insurance carriers, the underwriters are being extremely picky with what assets they’re willing to insure and what assets they won’t. Their non-renewing, many properties that they currently insure, for a variety of reasons. It could be losses. You’ve sustained a sizable loss at a property, I would say the probability is you could probably see a cancellation from that, come renewal. So you get out in front of an [unintelligible [00:08:21].04]. As far as new deals that you’re looking at, the underwriters are looking at a variety of factors – the age of the building, the roof age, the wiring, its location, crime scores. They are really picking and choosing what they want.

In a lot of situations, especially if you’re buying a property that’s got a lot of deferred maintenance on it, it has a lot of loss, maybe it’s located in a poor area, you honestly might only be left with a couple of carriers, if any, quite frankly. But at best, maybe a couple of carriers that are willing to offer coverage on that, and they’re going to do that at the price that they’re comfortable with. And I can tell you that rarely ever is an insurer comfortable with the price that they’re throwing out there.

It’s a difficult, difficult time right now; there’s no doubt about it. I mean, there’s ways to navigate it and things you can do. These markets do go up and down. I always say that we’re a little bit like the stock market. The difference being the stock market fluctuates on a daily, weekly basis. Insurance markets tend to take a direction over a course of a year. They don’t make sudden, quick jumps, but once they take the directions, it’s like a big battleship. They continue to head that way for a period of time, and that’s what’s going on now.

And then you bring up where we are to date now with the quarantine. Again, I don’t think anybody knows the fallout from that, but between the riots that have gone on, civil disturbances, just the cost of litigating a lot of business income claims on COVID that are pretty clearly in most policies excluded in terms of coverage, it’s nonetheless going to shove cost into the industry. And the way that the insurance industry responds to that is they raise rates to cover that cost. So I don’t want to definitely start the show off and be a downer or anything like that… But if you’re looking at a new deal now or you’re renewing portfolio or properties, insurance is something that you most definitely want to get out in front of, because it can kill a deal right now, or it can really hurt the profitability on your portfolio.

Theo Hicks: So is there a number or a percentage that you would say insurance has gone up? Or is it going to be very deal-specific, property-specific?

Bryan Shimeall: It is very deal-specific. I would say, in general, if you’ve had a property or portfolio that’s been pretty loss-free, performed pretty well for the insurance carrier, you could be looking at single-digit increases… If the property’s got a little bit of loss or maybe it’s got some age or factors they don’t like, you could be looking anywhere from a 10% to 20% increase across the board. If you’ve sustained significant loss in a property – it could be a weather claim on a roof, it could be a large slip and fall claim on the GL, you could start seeing some rather substantial increases.

But it is situational too. So many times, if you were paying a lower rate than you probably should have been, if you’ve been grandfathered under a policy and then paying some pretty aggressive rates, you might see a really large increase. It might not feel good, but compared to the market, you’re probably not that bad. The flip side is, maybe you’re [unintelligible [00:11:13].02] in any place and quite the right spot and you were paying a little bit more than you should have last year, then you might start seeing a little bit less of an increase. It may not feel so bad for it. So it’s situational.

It’s definitely geographical driven. The Midwest right now, Texas, Oklahoma, Missouri, they are just getting killed with hail claims, and that’s probably the most difficult market. Out here in Florida, in the catastrophic market, which historically people talk about being very difficult… It is; there’s just not a lot of carriers that do it. But in terms of increases and in terms of placing insurance in a catastrophic area, believe it or not, it’s really not my most difficult market right now, compared to a lot of other places.

Theo Hicks: Something interesting you said was a COVID-related. The businesses that are impacted by COVID like retail businesses that shut down. Is that something that you see insurance companies attempting to take into account when they’re doing policies now, but also in the future? So I own a restaurant. Is my insurance going to likely go up a lot for that reason?

Bryan Shimeall: I think I understand what you’re getting at. It depends if you’re focusing on a premium or a rate. And what I mean by that is this. So many different types of industry– we’re outside of multifamily right now when you’re talking about restaurants, for example. The actual premium is a factor of the revenues. Or for example, work comp related policies would be based on payroll. So that’s one of the factors, multiplied by a rate, and then that will equal your insurance premiums. So my point is that, yeah, I think across the board, you’re going to see rate increases go up. Maybe not on the workers’ comp side, but property rates, liability rates, auto rates… There could be some argument that there’s a lot less cars on the road, maybe auto rates don’t go up as much. But I would pretty much assume that the rates themselves are going up. Now, if your payroll’s down, if your revenue’s down, you might not see your premium increase that much. But yes, in general, the answer to that question is yes. I just had to give a little clarification to it.

Theo Hicks: So we should be thinking about insurance, not as a flat rate, but as a percentage of income. Let’s say like a multifamily investor. So I’m just transitioning to multifamily. When I’m underwriting new deals now, am I setting it based off of a percentage of income? Or am I reaching out to you and saying, “Hey, here’s the situation. What’s my premium going to be”?

Bryan Shimeall: Well, if you look at multifamilies, you look at it from a per-unit basis. And yes, you could correlate to a variety of other figures, but day to day, you want to look at multifamily from a per door basis. And yes, your per door costs are going up almost across the board universally, across the industry, without a doubt.. Then if you begin to look at other asset classes, whether you’re talking about industrial or retail, those are really based primarily upon the values of the buildings. Well, multi families too, but at the end of the day, you could look at that as a percentage of that.

Theo Hicks: So what would be your piece of advice? What should I be doing when it comes to insurance for a new deal. If I got a new deal, and I look at the OM, and I’ve got a number… You said before, people were just using the OM, which obviously you don’t want to do, but it was fine, because they weren’t going up that much. Whereas now, when I’m underwriting a deal, I can put aside the other expenses, talk about specifically about insurance. What should I do?

Bryan Shimeall: I would say, right out of the gate, with us specializing in real estate, with a particular focus on habitational, we’re one of the few that truly specialize in it. So what I mean by that is most people do what I do. They cover a variety of different industries, and they try to do the best job they can. Our focus is more centric as to what’s going on in the real estate industry, which gives us some unique knowledge. It also allows us to provide some pretty unique services. And what I mean by that, to your question is, we try to become part our clients’ due diligence team. So if you’re looking at a new deal– let’s look at multifamily. First thing we’re going to ask, “Where’s the OM on the deal?” The OM’s going to supply all the information we need that tells us the physical characteristics of the building – the age, the location, the number of units, the square footage, all of these things go into helping the carriers come up with their rate on a property. So the OEM helps us tremendously.

I also like to get hold of things like rent rolls. We can even be looking at vacancy rates. So we can either navigate it if there’s a vacancy issue with the carrier, or really try to push it as a positive. But if you get 95%, 98% rented out, we’d like to leverage that as much as we can with the carriers, and that all comes out of the rent rolls.

Most importantly right now I think are losses. It’s finding– the most difficult part of my job, without a doubt, is my clients collecting accurate and complete loss information. What I mean by accurate and complete is, the losses need to be generated by the carrier; even the seller’s losses, because the rate you pay is going to be based upon the seller’s losses, and we can talk about that later, but that is just the fact.

You need up to date losses, meaning the losses have been generated by the carrier in the last 30 to 60 days, so the new carrier is confident that they’re looking at an accurate picture of if the loss history has been on it. The most difficult part of my job as obtaining these losses.

A lot of time my clients, especially new clients, they just don’t really understand the importance of this. It is funny, it’s because it’s one of the easiest things that you can get. If the seller wants to transact the property on a new deal, all they have to do is just send an email to their agent and say, “Give me five years. If you can’t get it, three years  is the minimum. But as much as I can, give me five years of loss history for the property insurance and for the GL insurance.” It’s 30-second email, and you should have it within 24 to 48 hours. That gives all carriers a clear picture of what’s occurred on the property. And again, with this being a hard market — because they’re not giving you a whole lot of leeway with that. If there’s a missing year here or they’re dated, they might just decide not to quote. Or if they do decide to quote it, they might factor in some for the unknown there if they do it. So the losses are big.

So getting to my point about being part of the due diligence team – we work hand in hand with clients on the front end, help them collect all this information we can so we can paint the best possible picture we can to the carrier. And also, during this process, we can give you an accurate indication of what the insurance costs are going to be for your own underwriting. So if there’s any retrading in the deal or something like that… I had a deal a couple of years ago where I had the same conversation with clients begging for losses, please get the losses. Oh, we can’t get them. Finally, it was like “Well, he said no losses.” And well, I could base our estimate on that. And then lo and behold, when we finally needed the losses… It was a week before closing, and they finally had to present the losses. There had been $3.5 million to $4 million worth of loss on the property. And the insurance rate went from $375 a door to $500. I think $60, $70 a door is just substantial. The client ended up having to walk away from the money they put down, because they couldn’t qualify for the loan. And that’s probably a worst-case scenario that could happen, but it absolutely can happen. There’s no getting around these losses.

Another big factor, too, is consulting with our clients on some physical characteristics of the building that not only affect insurance premiums, but also might affect capital expenditures that you have to undertake on a property. Specifically, that usually revolves around roofs and wiring. This one’s a little tough to maybe wrap your head around, so if I’m not clear, get me to clarify a little bit. But your insurance carrier wants to know the age of the roof. But believe it or not, they’re willing to offer coverage, pretty much, on a property, regardless of the age of the roof. But they might only be willing to do that by factoring in depreciation. So what I mean by that is this. If it’s got a 20, 25-year-old roof on it, they might give you coverage on it, but if there ever comes to be a claim, they’re gonna factor in depreciation. So there’s going to be almost no coverage for the roof.

As opposed to not factoring in depreciation, which is called replacement cost, which they are willing to do, most carriers… I mean, everyone’s different. But for the most part, if that roof is 15 years of age or less, then you can get replacement costs. So if the roof blows away the first day you insure it, they’re going to come up with a brand new roof on it for you, and they’re not going to factor in depreciation. So our clients would be fine with the depreciation factor. The problem is that Fannie and Freddie aren’t. So there’s at least two deals a week that I look at to where it needs new roofs, some of the roofs are 20 years old, they’re going with agency financing on it, and we have to have the same conversation and say, “Look, you’re gonna have to fix these roofs.” And then you get into the quandary of “Well, can they do it in the first 30 days of ownership? Does the seller need to do it before you can buy?” And with the market getting more difficult and more difficult, most of these conversations are, “Hey, this seller might have to replace them.” And so he could be neck deep into a deal and only come to find out at the 11th hour that you’ve got a roof problem. Fannie and Freddie do not give a waiver one that; it doesn’t happen. Never got one, never will.

Some carriers have a little bit of leeway with it, but their leeway is so tiny on it. It’s not good. And with regards to it– I’m probably talking too much about it, but so many people waiting on the PCA. But I will tell you, every PCA I’ve ever read, whoever goes out there, will never state the exact age of the roof. They allude to estimated ten years of life remaining, estimated 15 years a life remaining. And if the lender or the carrier or somebody finds out what the true roof age is, it can give you problems. So just as important as losses, find out who knows roofs were last replaced, because it’s a big, big deal.

And then wiring doesn’t have near the lender problems that roofs do. But your wiring is either copper, and you have no problem with any carrier. It’s aluminum, which means you can have a lot of problems with carriers. There’s only a few willing to do it. And then you can have remediated aluminum, which opens our world up a little bit. If it’s truly remediated aluminum, then we can most likely handle that with the carriers. But time and time again, if you just verbally asked the seller, “Hey, has the wiring been remediated?” “Yes, it’s been remediated.” The next thing you know, you own the property, then out comes the insurance carrier to inspect it and they come to find out it hasn’t been remediated or it hasn’t been remediated properly. The problem is now you own it, and now you’re in a situation where it’s a known condition. And really, people don’t have much choice other than to remediate it, which again, it can be a large capital expenditure.

I would also say Stab-Lok panels – I don’t know if you’ve ever heard of those, but Stab-Lok panels is an old electrical panel that went through a lot of lawsuits, a lot of claims, and a lot of carriers just will not cover Stab-Lok panels. A lot of times, I see people that buy properties, and the next thing you know, they have the Stab-Lok panels. So losses, roofs and wiring, if those three things are positive, I can get any property written pretty quickly. But lacking any one of those pieces of information can make it real difficult.

Theo Hicks: Perfect, Bryan. Well, thanks for walking us through all the current state of the insurance industry, about how rates are going up, and the types of things we need to do when we’re looking at new deals, and making sure we have a specialized real estate insurer on our due diligence team, so we’re not screwing ourselves over after we acquire the property.

So thanks for joining us. Thanks for going over this with us. Again, Bryan’s website is tbmins.com,  and is also in the shownotes. Best Ever listeners, as always, thank you for listening. Have a best ever day and we’ll talk to you tomorrow.

Bryan Shimeall: Thank you.

 

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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!

 

Best Ever Tweet:

 

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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TRANSCRIPTION

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.

Break: [00:23:53].06] to [00:25:01].16]

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 bshimeall@multifamilyra.com. 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.

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JF496: How You Can Invest with a Full Time Job

IT expert dips her toe into real estate, and so far it’s a success! She shares her first view purchases and the buy and hold lessons learned. She wishes to eventually leave her job and supplement her current income. You can do it too, hear now!

 

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