Why You Need Construction Insurance
Here’s a risky way to save money building a modular home. Select a modular dealer and contractors who are not properly insured.
Imagine that a neighbor’s child is seriously hurt when he falls into your cellar hole before your modules are set on the foundation. Imagine that one of the trucks delivering your modules strikes your neighbor’s car causing serious damage. What if the crane company drops one of your modules rendering it unusable? What if a member of the set crew is seriously injured or killed when he falls from your roof? Or what if the plumber fails to securely connect a pipe, which causes severe water damage before the leak is discovered?
Accidents and mistakes can happen when building a home, regardless of the type of construction. Since the right insurance can mitigate the damages, you need to ensure you’re thoroughly covered.
Require Everyone to Obtain Construction Insurance
This is best done by requiring everyone involved in building your home to have insurance. (Here’s a previous blog that elaborates on the insurance you need.) Making this a requirement won’t prevent disagreements about who is responsible for coverage, but it will increase the likelihood that one or more of the insurers will take on this responsibility, which is a lot better than you being saddled with the liability.
Verify Construction Insurance Coverage
Making insurance a requirement, however, isn’t enough. You need to verify that each party has a current policy with sufficient coverage. To do this you need to insist on receiving a “certificate of insurance” directly from each party’s insurance agent. Getting a copy of the certificate directly from the insurance agent will protect you against being duped by a dealer or contractor whose policy has run out, since it is not difficult for someone to doctor a photocopy of an expired certificate. You might be surprised how often this happens, mostly because builder insurance is expensive. There will be no sympathy from the insurance company, however, if you file a claim against a policy that was not renewed. After receiving the certificates, you should ask your own agent to review the coverage. They should be able to determine if the coverage includes sufficient liability insurance and workers compensation insurance.
Secure Your Own Construction Insurance
Since you need to have coverage from everyone working directly on your project, you also need to follow the same procedure with any subcontractors you directly hire. In addition, you should obtain either a “builder’s risk” policy or its equivalent for yourself, since this will provide better coverage against theft and vandalism than an ordinary homeowner’s policy.
For more information about modular home construction insurance during its construction, see Selecting a Modular Home Dealer, Selecting a General Contractor, and Financing a Modular Home in my book The Modular Home.
There are many things to learn the first time you build a modular home. But if you’re like most homebuyers, you won’t get the full benefit of what you learn, since you’ll likely only build one home.
But you can benefit from what I’ve learned over twenty-eight years building more than 1,200 homes. To start with you can read my book, The Modular Home, which gathers all this information in one place.
Take Advantage of My Experience by Using My Modular Home Checklists
Of course, it’s hard to use a book efficiently the first time you use the information. That’s why I’ve created several checklists that cover the most important steps. Below is a link to each of the checklists. There’s also a link to this list on the home page of The Home Store’s website. I hope you find these modular home checklists helpful.
- Ensure You Are Ready Willing and Able to Build a Modular Home
- Selecting a Modular Home Dealer
- Your Modular Home Dealer Customer References
- Selecting a Modular Home General Contractor
- Your Modular Home General Contractor References
- What to Include in Your Modular Home Legalese
- Selecting the Right Modular Home Plan
- What You Should Ask Modular Home General Contractors
- Reviewing Your Modular Home Floor Plans
- Reviewing Your Modular Home Elevation Plans
- Modular Additions
- Building a Universal Design Modular Home
- What Your Modular Manufacturer Needs from Your Contractor
- How to Air Seal a Modular Home
- Making an Offer To Purchase for a Building Lot
- Your Municipal Water and Sewer Connections
- Reviewing Your Modular Construction Drawings
- Potential Permits and Supporting Documents
- Your Modular Dealer and Financing Tasks
- Your Permit and General Contracting Tasks
- Omitting Materials from the Modular Manufacturer
For more information about all the topics covered in the checklists, see my book The Modular Home.
Why Tear Down Your Home
Are you considering replacing your existing home with a new modular home? You have lots of company. Many of us are happy with our neighborhood, local schools, and commute to work. We’re also attached to our property, often because we like its size and views. If only our homes were big enough for our families. If only they had layouts that worked for how we live. If only they had modern features and better energy efficiency. If only we could fix our problems with some reasonable and affordable remodeling.
But what if remodeling is not viable? What if you’d prefer a new home? If so, you’ll likely consider purchasing a building lot – if not in your neighborhood, at least in your town. But what if your town is well established with a home already built on virtually every lot? You might then consider “tearing down” your home and replacing it with a brand new modular home.
Can You Tear Down Your Home
Before you contact a modular builder, you should learn what your town’s zoning, planning, and building departments allow. Their regulations are partly in place to protect the existing character of your town and neighborhood. They dictate whether and how you can tear down your existing home. They also determine what you can build as a replacement. This usually includes the size, footprint, square footage, height, and style of your home.
If your home is in a historic preservation district, you may be prohibited from tearing down your home, or at least required to adhere to the architectural standards of your neighborhood. In fact, your abutting neighbors will likely have some input into what you can build. It’s often best to speak directly to them in advance of pushing ahead. If your property is part of a subdivision that is governed by a homeowners association, make sure it’s bylaws do not prevent your home from being torn down.
You should also check with your gas, electric, and water utilities to learn how you can disconnect these from your home. You should consult with your fire department to see what they need. You should expect your town to require an inspection for toxic materials, such as asbestos or an old diesel tank. And you should speak with your board of health, if you have a septic system, to see what’s needed to comply with its regulations.
If you skip these steps, and assume you can tear down your home, you may waste a lot of time designing a home you cannot build.
The Cost to Tear Down Your Home
Be prepared to pay between $5,000 and $25,000 to demolish your existing home, haul the materials away, and cover the disposal fees. You’ll pay even more if your home has asbestos or other toxic materials. You’ll also likely need to pay for a demolition permit.
How to Finance the Tear Down and Replacement of Your Home
If you are financing your project, you must qualify for a construction loan and mortgage in terms of income, debt, and credit. (Check out my blogs that explain what you need to know about financing a modular home.) In addition, there are a couple of financial considerations that are unique to demolishing and replacing your existing home. Take these seriously, since they’ve tripped up many customers in the past.
Unless you own your home outright, you cannot tear it down without first paying off the existing mortgage or obtaining written permission from your current lender. However, your lender will not grant permission if the loan balance is more than the value of the land, since the land will be the only equity left after the demolition. Should you tear down your home without paying off your loan or obtaining permission, your lender will invoke the default clause in your mortgage, which will create some serious legal headaches for you.
If you have an existing mortgage, you will need a loan that covers the balance owed on your existing home, the demolition, and the construction of your new home. A consideration for your lender is whether you will have sufficient equity in your property after the demolition and repayment of your current loan balance. The equity is needed to serve as a down payment on your new loan. If the outstanding balance is substantial, however, you may not have enough equity, unless you have another source of funds
A second consideration for your lender is whether the value of your finished home will be sufficient to support the total of your new mortgage. The lender needs to be confident that if you default on your loan, they can recover the balance by selling your property. They will determine the value of your new home by obtaining a professional real estate appraisal.
Modular Home Insurance
When building a modular home you need insurance coverage for five parts of the project:
- The delivery of the modules
- The set of the modules on your foundation
- The work done to your land before and after the modular delivery (tree clearing, excavation, foundation, etc.)
- The work done to complete the “button-up” of your modules after the set
- The completed home after you receive a certificate of occupancy from the building department
Most of this coverage should come from the companies that are completing each step. The delivery and set of the modules, including the crane, should be insured by the modular manufacturer and/or modular dealer. To ensure your modular home insurance is in place, you need to ask each modular dealer you are considering to have their insurance company mail you an insurance binder. It is best to receive it directly from the insurance company, since it is fairly easy to fake the forms. Make sure the coverage includes sufficient liability insurance and workers’ compensation; ask your insurance agent for the recommended amounts. This will limit your potential liability if the dealer or one of his subcontractors is not fully insured and something goes wrong during the set, such as an accident causing a serious personal injury or significant property damage to your home.
You need to follow the same procedure with your general contractor (GC) and any subcontractors you directly hire to complete the work to your property and the button-up of the modules. Secure a certificate of insurance from each of your contractor candidates before making your final selection. Ask your own agent to review the coverage.
You should also insist that your contracts with your modular dealer and contractors state what modular home insurance coverage each of you is obligated to provide. You should accept responsibility for obtaining a builder’s risk policy or its equivalent. The contractors should accept responsibility for providing general liability insurance and, if they have employees, workers’ compensation.
Modular Home Insurance with a Builder’s Risk Policy
The advantage of a builder’s risk policy over a typical homeowner’s policy for your own modular home insurance is that it automatically provides coverage for theft of building materials and supplies as well as vandalism. You should direct your insurance agent to provide this additional coverage even if you opt for a homeowner’s policy. Since your personal circumstances may differ and your agent may offer other alternatives, consult with your agent.
Modular Home Insurance and Lender Financing
If you are paying for the modules with funds from a lender, which means you are paying by the assignment-of-funds method, your lender will require you to have your modular home insurance in place when you close on the loan. If you are financing your home with your own funds, have coverage in place before your GC begins any work.
If your lender is paying for the modules after the set, the dealer’s insurance should be responsible while the modules are parked on your property before the set, since you will not yet own them. If the dealer does not provide coverage, you should direct your insurance agent to provide it. If you are using private funds to pay for the modules upon delivery, your insurance should provide coverage when the modules are parked on your property, since you will already own the units. You should verify this. Your insurance is less likely to provide coverage when the modules are stored away from your property in a staging area. If you cannot obtain coverage for your situation, ask the dealer for help.
Instruct your insurance company to mail or fax your modular dealer a certificate of your modular home insurance a few weeks before the scheduled delivery. This proves that you have the necessary coverage. The effective date should be set at least 48 hours before the scheduled delivery date and remain in place for at least a week. The certificate should state, “[Dealer’s company name] is loss payee as interest may arise.” The certificate protects the dealer and manufacturer should your modules suffer damage after they are set on the foundation but before your lender pays the dealer. This might happen, for example, if lightning were to strike the modules the first night of a two-day set. Should this unlikely event occur, the certificate ensures that your insurance company would compensate the dealer so he can pay the manufacturer. Once the dealer is paid for the house, he no longer has any insurable interest, so your insurance coverage reverts to you and your lender. The manufacturer’s insurance should cover the modules while they are being delivered to the site. The dealer’s and crane company’s insurance should cover the modules while they are being lifted onto the foundation.
Modular Home Insurance for Personal Property During Under Construction
Do not move any of your belongings into your home before your GC finishes his work without his permission. If the GC agrees, he will ask you to use those rooms he has finished. If you intend to store your things in the basement, he must have already completed all of his work there. Since you are responsible for theft or damage, ask your insurance agent about your coverage.
Modular Home Insurance Costs Less
Modular home insurance during construction will save money compared to insuring a site-built home due to the shorter construction time. The shorter construction period also lessens your exposure to the typical risks that attend construction sites, such as vandalism and the pilferage of construction materials. Vandalism is further curtailed because the modules can be secured more rapidly than a site-built home. The ability to quickly secure the modules also makes it more difficult for someone to steal construction materials. Pilferage is further reduced because of the size of the modules; you cannot walk off with a module in the way you can carry away a few boards of lumber. Completing the home more quickly also reduces your biggest financial risk, that of a personal injury to a contractor working on the job or a neighborhood child playing around the home after hours.
For more information about modular home insurance during its construction, see Selecting a Modular Home Dealer, Selecting a General Contractor, and Financing a Modular Home in my book The Modular Home.
Appraisal Problems with New Construction
Over the last few years, obtaining financing has been one of the most difficult problems for builders and customers. Not only have many banks been unwilling to lend, their appraisals for new construction have fallen so much that willing and qualified buyers have been unable to get sufficient financing.
The market is now greatly improved and continuing to get stronger. More and more banks are willing to lend. But appraisals for new construction can still be a problem. The reason is that the sale price for a “comparable” existing home is often considerably less than the cost of building a new one.
Three Reasons Why There Are Still Appraisal Problems
There are three reasons why new homes cost more than existing homes. Land prices have remained steady in most places because land is a scarce commodity. As Mark Twain pointed out, they don’t make it any more. The percentage drop in the cost of construction labor, where it’s happened, isn’t anywhere near as great as the percentage drop in the price of existing homes. Few construction workers will accept a 40% pay cut. What has been especially surprising, even to seasoned builders, is the sharp spike in material costs. The increase has been fueled by an uptick in remodeling and commercial construction. The three of these factors keep the cost for new construction higher than for existing homes.
Appraisals for new construction are based on comparing the proposed new home to recently sold homes similar in size and features. Since most sales are from existing stock, appraisals for new homes are often less than the cost to build them. This often prevents banks from lending the full amount needed by the buyer. Unless the buyer has sufficient cash to offset this shortfall, they can’t get a loan for the amount they need to build their home.
Minimize Appraisal Problems by Selecting Optional Features with High Value
So what can you do about this? It always helps to select optional specifications that add the same value as they cost. It helps even more if you choose features that add more value than they cost. Enlarging a modular home, for example, will almost always add more value than it costs, since factory assembly lines are very efficient. On the flip side, removing something that costs more than it adds in value will also bring the cost more in line with the appraisal. For example, replacing fiber cement siding with vinyl siding will substantially reduce the discrepancy between cost and appraisal. The appraised value of vinyl and fiber cement is comparable in most communities even though fiber cement costs much more. Similar results can be achieved by selecting vinyl windows instead of wood windows or by eliminating cathedral ceilings.
Minimize Appraisal Problems by Adding Other Work with High Value
Adding something you might not need, or didn’t want until the future, can sometimes increase the appraised value more than it costs. For example, if you select a cape design with one or two bedrooms on the first floor and an unfinished second floor, finishing a bedroom or two on the second floor might boost your appraisal substantially more than it costs. Of course this assumes you can afford the additional construction. Building your garage now rather than in the future might stretch your budge more than you prefer, but it may also be the only way to eliminate your appraisal shortfall.