What is flood risk disclosure?

Flood risk disclosure is the provision of flood risk information during property transfer. Legal requirements vary from state to state and there are three common types of flood-related disclosure (Hino and Burke, 2020):

• Floodplain location:  Whether the property is in a floodplain, or the property’s flood zone designation.
• Flood damage:  Drainage, leakage, water intrusion, standing water, and flooding problems, both past and present.
• Flood insurance:  Whether flood insurance is currently carried on the property, is required to be carried, if claims have been made recently, and the cost of insurance.

How is flood risk disclosure typically performed?

Flood risk disclosure is typically last-minute and minimal.

According to NPR, “In 27 of the 29 states with flood disclosure laws, potential buyers receive information about whether a house is prone to flooding only after they make an offer on the house…”. For example, under New York State law, the disclosure statement is to be “delivered to a buyer or buyer’s agent prior to the signing by the buyer of a binding contract of sale” and attached to the purchase contract.

And in most states with flood zone disclosure requirements, homebuyers get a form with a simple check box saying whether the property is in an official floodplain (NPR, 2020). Under New York State law, the disclosure statement is required to say whether the property is in a designated floodplain, whether there has been standing water on the property, and a statement that the buyer is encouraged to check floodplain maps. Only two states require that the seller disclose the cost of their insurance policy, which would allow the buyer to evaluate the additional cost burden (Hino and Burke, 2020).

Does flood risk disclosure affect home prices?

Here are some key findings from a national study on flood risk information and property values (Hino and Burke, 2021):

• Being zoned into the floodplain reduces property values on average by 2.1%. This reduced value is termed the flood zone discount.
• In states requiring all three types of disclosures (zone, damage, insurance), the estimated flood zone discount is 4.1%.
• However, in an “efficient market” (i.e., one that fully reflects publicly available information), the flood zone discount would be 4.7% to 10.6%. This discount is based on expected flood damage, calculated as the present value of a stream of insurance payments if houses were fully insured with a minimum deductible.

So, flood risk disclosure helps to partially correct home prices to account for flood risk and insurance costs. It leads to lower priced houses in flood zones which compensates home buyers for the cost of insurance or the expected cost to build back after a flood. In essence, understanding flood risk/cost leads to a more accurate market valuation and protects home buyers. However, some are concerned with non-experts (most sellers) providing flood risk information and would prefer an independent party provide the information (NPR, 2020). And some advocate for third-party information on property flood history by address (akin to Carfax). Unfortunately, such a service would not account for structures that have never flooded but still have the potential to.

Could Risk Rating 2.0 be a potential resource for flood risk information?

Risk Rating 2.0 premiums are based on actuarial methods, with premiums designed and constructed to reflect actual flood risk. Unfortunately, the Risk Rating 2.0 Engine is a black box that can only be probed one property at a time. NFIP insurance is quoted and sold by insurance agents and insurance brokers or by write-your-own (WYO) companies (companies authorized to sell flood insurance on behalf of the NFIP). The Risk Rating 2.0 Engine can only be accessed by NFIP servicing agents. Potential home buyers and real estate agents can request, through an insurance agent, premium quotes for one property at a time. But through single-property snapshots, it is impossible to get a comprehensive picture of flood risk, that is to understand how different locations within the same community can have dramatically different flood risks.

RR 2.0 Geographic Flood Insurance Rate Maps:  A flood risk disclosure resource.

RR 2.0 geographic flood insurance rate maps provide a comprehensive picture of flood risk, based on actuarial methods (see this example for Seabrook, TX). These maps go far beyond the traditional binary categories (in/out of floodplain) of FEMA flood maps by providing a continuous and graduated view of risk. Buyers and sellers can use these maps as an independent source of high quality, professionally derived information, free from potential bias. Flood risk disclosures, and resources such as RR 2.0 Premium Estimate Maps enable buyers to make risk-informed decisions, which will tend to lead to market valuations that account for the risk of flooding and enable resilient investments.