To protect themselves from entering into a deal that could come back to bite them, homebuyers are advised to write contingencies into an offer, so they can pull out of a deal or renegotiate the price if an inspection or appraisal surfaces new issues.
But what if a buyer can’t find insurance?
This summer, the California Association of Realtors began including new language in its standard purchase agreement forms, used in most home sales around the state, to allow a buyer to back out of a deal if they can’t find an affordable insurance policy.
This new standard contingency reflects a harsh reality for most homebuyers: Insurance in California is increasingly more difficult to come by as major insurers leave the state. Both Allstate and State Farm this year stopped writing new insurance policies in California, citing rising construction costs and what they say are overly burdensome regulations from the California Department of Insurance.
Brokers say that even before the California Association of Realtors made the insurance contingency standard, they were advising their buyers to add it to their offers or do research on policies ahead of time.
“This is the first year that I’ve advised my buyers to look into buying insurance even before they write an offer,” said Cara Gamble, an agent with The Agency in Danville. “They have to make sure they’re comfortable with that payment.”
Gamble has worked with buyers who have decided against writing an offer on a house they were excited about after realizing how expensive their yearly insurance payments would be.
In the wealthy town of Woodside up in the hills above Silicon Valley, agent Scott Hayes said he’s noticed less traffic to homes in the last year, as buyers realize the only insurance plan they can get is California’s FAIR plan — the state’s insurer of last resort.
“If you want to buy here, there’s just no other option,” Hayes said. With insurance companies declining to renew thousands of policies for Californians living near wildfire hotspots, the number of policyholders on the FAIR plan has grown from 126,709 to over 350,000 today.
“Insurance really is affecting people’s interest, because it’s such a big unknown cost at the moment,” Hayes said. “People may be thinking there’s no way they can get insurance, so they don’t want to look for a home.”
Hayes has yet to work with any buyers who have pulled out out of a contract because of insurance, but usually it’s because he has prepared them with expectations for the FAIR plan’s price: For a $2 million house in Woodside, Hayes estimates that annual payments run between $15,000 and $20,000.
Under the terms of the insurance contingency included on CAR forms, a buyer that can’t find “acceptable” insurance within 17 days can cancel the contract without forfeiting their earnest money — typically a safety deposit around 2% of the total purchase price.
In the Bay Area, buyers are often pressured into waiving most contingencies to make their offer more competitive, anyway. But some agents say they haven’t seen the same of insurance contingencies.
“I really don’t see anybody waiving that,” said Melody Johnson, an agent with The Agency in Danville.
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To prevent a sale from getting held up in escrow, agents advise buyers to start looking for insurance options as early as possible in the process.
In Johnson’s office, agents keep a running list of insurance companies still willing to write new homeowners insurance policies.
“They’re not the big insurance companies anymore,” Johnson said. “It’s a bunch of smaller ones with funny sounding names.”