How to talk with buyers about homeowners insurance
As insurance rates skyrocket in areas prone to extreme weather, agents need to make sure homebuyers understand those costs to avoid problems at closing.
Key points:
- High homeowners insurance costs can add an unwelcome surprise to the homebuying process if buyers are not prepared.
- Extreme weather events, inflation and strong home price appreciation are among the factors contributing to higher rates.
- With 80% of claims originating from roof issues, agents and buyers should pay close attention to the age and materials used for a home’s roof while considering a listing.
Homeowners insurance used to be an afterthought for many buyers and real estate agents assessing listing prices, but soaring rates have made insurance an important factor in buy-side transactions in recent years.
The average premium per policy easily outpaced the rate of inflation from 2018 to 2022, according to a report released earlier this year by the Treasury Department — and costs have tended to be higher in areas impacted by severe weather.
With rates now adding hundreds of dollars to monthly housing payments in some parts of the U.S., more buyers who are already facing affordability challenges are mentioning insurance costs early in the homebuying process.
Get ahead of the conversation
So how should agents handle this concern? One strategy is to make sure the discussion happens before a buyer starts making offers on a house. After all, nobody wants a closing to come to a screeching halt due to high insurance costs, noted James Cristbrook, the National Association of Realtors' community engagement liaison, while hosting a panel discussion during NAR's mid-year legislative meetings last week in Washington, D.C.
Scott White, commissioner of the Virginia State Corporation Commission's Bureau of Insurance, agreed. "The main thing I would tell folks is, when you are thinking about the cost of the home that they're about to purchase, they need to factor in the cost it takes to protect that home," he said.
"You're not violating the ethics or licensing requirement by urging them to use due diligence and be cautious," he added, "particularly in this environment where affordability is the issue."
A familiar story?
The rise in insurance costs is attributable to several factors, explained Michael Richard-Crum, senior director of personal lines and counsel at the American Property Casualty Insurance Association. In addition to extreme weather conditions resulting from climbing global temperatures, inflation, rising repair costs and high home prices have contributed. These factors have in turn led to a drop in carriers that offer policies in vulnerable areas.
But the market has endured rising insurance costs before. Historically, these costs have moderated over time.
"While property insurance markets have been hit hard in many states, the story is actually an old one that's been repeated many times over the years," Richard-Crum said. "The insurance market might be tight, but that doesn't mean that insurance is not good."
Richard-Crum's best advice for real estate agents? Get to know an insurance agent. These individuals "are a great source of information about what insurance covers, and they're aware of the local pain points in a market," he explained.
Real estate professionals should also keep in mind that insurers are often willing to offer discounts for resilience improvements. That may be a useful negotiating tactic when it comes to reaching a deal that a homebuyer and seller can agree on.
Don't overlook the roof
Agents and buyers should pay close attention to the roof when looking at a home, as this is where 80% of claims originate, according to Roy Wright, president and CEO of the Insurance Institute for Business and Home Safety.
The U.S. and Canada are the only two countries that primarily use asphalt shingle products for roofs, which are vulnerable to wind and hail, Wright noted. Once wind blows shingles away, any rain or hail that follows can cause significant damage inside a home.
The problem with asphalt shingles is usually not the product itself but the adhesive, Wright said. Age is the most important variable for roof performance, as this adhesive tends to break down over time, particularly after 10 years. Wright compared this kind of roof material to car tires, explaining, "They serve a purpose until they're done."
Fortifying a home's asphalt shingle roof or selecting a different roof material, such as metal or slate, is not only beneficial to the buyer — it can also improve a home's resale value for the seller.
"The element that really ties everything together in terms of the insurance industry and property are roofs," Wright said.