GI259: How to Lower Flood Insurance Costs with DJ McClure

GI259: How to Lower Flood Insurance Costs with DJ McClure

DJ is the VP of Business Development at National Flood Experts, a nationwide company that has saved clients over $15 million in premiums and added nearly $300 million in property value.

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Charles:
Welcome to another episode of the Global Investors Podcast. I’M your host, Charles Carillo. Today, we have DJ McClure. In episode GI93, the president of DJ’s company, Brad Hubbard, was on the show. DJ is the VP of Business Development at National Flood Experts, a nationwide company that has saved clients over $15 million in premiums and added nearly $300 million in property value. So thank you so much for being on the show today, DJ.

DJ:
No, thank you. Yeah, hope to give some good new additional content.

Charles:
So, before joining National Flood Experts, can you tell us a little bit about yourself both personally and professionally?

DJ:
Yeah, I grew up in western Kentucky. I got tired of the winters, moved to Florida, like like lots of people. Grew up a tennis player, so played in college, was a tennis pro for a number of years after college. So a lot of my, you know, foundational business training, if you will, came from the the tennis world. And then, you know, life brought me to Florida and I, I met this company, I guess it was six years ago now, and was just super intrigued by the problems they were solving and the way they were going about it. And yeah, joined national flood experts and, you know, been helping real estate investors ever since. Yeah,

Charles:
It’s awesome, man. We were talking about beforehand I met and I learned about your company from Brad. I met him at a real estate meetup in Tampa many years back, and it’d just been very intrigued about everything that he was up to. And before we kind of go into what your company does, can you just give us an overview? There’s some people that maybe don’t understand about flood insurance. So can you explain a flood zone? Why is it important for investors or really anyone involved in real estate to understand and be aware of?

DJ:
Yeah, a good place to start is, you know, with some of the federal regulations and how they apply to, you know, to real estate. So anything you buy whether it’s on the personal single family side or a commercial piece of property, if it’s located within a hundred year flood zone you’re gonna be required to carry a flood policy. And the type of lending program, you know, will dictate what coverage limits you may be required. But in these a hundred year flood maps, they exist all over the country. You know, most people when they think of flood zones, they think of the coast, they think of Florida you know, but really they’re in all 50 states. And so these flood maps, they’re dynamic and they’re updating, you know, every 12 to 15 years. But any portion of a building that is touched by that flood zone, you’re gonna receive that requirement, you know, for the life of the loan. And, you know, unless some remedy is done or something’s done to change the map, unfortunately that’s the place where flood insurance typically originates.

Charles:
And and then, so most people are getting this because their lenders requiring it, I imagine. Is that correct? Yeah,

DJ:
There’s a law passed in the seventies this is kinda where it all started, is the flood maps were beginning to be created. You know, they’re both used for permitting and construction, but then they’re used for these flood insurance requirements. So there was a law passed, you know, stating that these federal lending programs have to per compliance keep proof of flood insurance, you know, for these buildings and flood zones. And so that’s been in existence ever since. And you know, for most places you don’t really think about flood insurance until you receive that requirement. And then, you know, typically people are just required, are renewing it every year because, you know, otherwise your lender will, you know, slap you on the wrist and force place their own policy otherwise. So

Charles:
Can you explain a little bit about what your firm does and how it works exactly with property owners? Yeah,

DJ:
So this exact process we’ve come in and disrupted, you know, the thought, the thought process around flood zones and around flood insurance, you know, so our expertise is a hybrid of flood zone engineering understanding flood insurance at a really deep level, and then also having a real estate investor, you know, kind of backbone to really bring it all together. For us to be able to help real estate owners increase the value of their property, you know, create year over year cost savings, both by correcting the flood zones, you know, properties can actually be taken outta the flood zones. And then by helping to, you know, work in a consulting capacity with the flood insurance carrier to improve the rating and consequently reduce the cost of that flood policy. And so both of these are year over year cost savings impacts that in some cases can be very, very sizable.

Charles:
So when, when something has changed, say someone’s taken out of a a flood zone area how does that work with the lender? Do you just, you’re providing this now to your lender and saying that I don’t need to have this anymore because obviously if the rate’s reduced, that’s fantastic, then your, I guess your lender doesn’t even need to know because you still have the insurance, but for you, you can just, if you’re don’t want to keep the insurance anymore, you just like let them know, you send ’em over documentation and they’re okay with it. Yeah,

DJ:
So all the lenders will have on file what’s called a flood zone determination. They have this for all pieces of real estate. It doesn’t matter if it’s in a flood zone or not. And so once you’ve received, you know, some type of notice, it could be a letter of map amendment, you know, where we’ve gone to FEMA directly and had a set of buildings reclassified from like the a hundred year flood zone to an X zone. At that point, when your lender updates their flood zone determination, it’s gonna show those buildings in an X zone, which is a low risk zone, consequently not required any longer for flood insurance. You know, at that point the flood insurance is optional. You can still continue to carry it, of course but you’re doing it without any of the requirements that the lender was imposing.

DJ:
This can also happen if your local community updates their flood map, which again isn’t super often. But you know, I’m here in Tampa and we had some flood map updates, you know, a few years ago in 2021, the St. Pete Clearwater side, their entire county flood map updated. The most recent update before that had been 2003. So some properties were brought into the flood zone, some properties were taken out. And so in those instances, you know, if you’re no longer in a hundred year, you can update your lender and then do what you want at that point afterward. So

Charles:
We as being real estate investors here and the listeners being investors, what is the hidden value play, you know, the value at play for investors purchasing a property in a flood zone? And I mean, how can they utilize this and maybe you know, they can earn a return on being removed from the flood zone or working with a company like yours?

DJ:
Yeah, I mean, I think what I’ve learned over the years is that what we do is not particularly common, you know, knowledge. And so the hidden NOI is that a lot of real estate investors don’t know that these solutions exist. And, you know, a large part of our job is providing education to the investors, to the insurance brokers, to the real estate brokers and everyone else in the real estate world so that they know if they’re running into a flood zone, hey, there might be something that could be, you know, possible here. The flood maps, no one really, unless you’ve had some experience, no one realizes that there are remedies in this checks and balance process, you know, that require an engineer, you know, but once the information has been qualified, you can go to FEMA and have that changed. And so that in itself for some clients can be tens of thousands of year over year cost savings, you know, in additions to their NOI, which can be obviously quite dramatic you know, depending on the cap rate that that particular property, you know, is trading at, at that time. It’s the same with the flood insurance policies. You know, we’ve been able to deconstruct the rating system that FEMA has for their insurance program and be able to go in and optimize these ratings in certain cases, you know, and then get a cost savings as a result. And so working in the middle of this industry we’re working with the insurance brokers, we’re working with the lenders, you know, with the investors you know, trying to help everybody realize as many of these solutions that are possible.

Charles:
So say we’re acquiring a property and it is in a flood zone. I mean, how do I underwrite that? Do I tell investors that we’re getting a, we’re getting flood insurance because it’s a lender requirement from the beginning, but hopefully we can remove it or reduce it down the road? I mean, how does, how does this work? Or is it just a bonus that happens after you purchase it and then we enlist the services of a company like yours?

DJ:
Well, the great thing is these solutions can be executed really at any point. We work with acquisition teams all the time, you know, where they’re looking at a deal, maybe they haven’t even got in their contract yet, but we’ll look at the address. Just talked to an investor yesterday in fact, and it’s a deal that they’re looking at in the Orlando area, and we tell ’em, say, Hey, look, this property actually has already been removed from the flood zone in terms of underwriting. Flood insurance isn’t gonna be required. And so that information, at least being confirmed, you know, particularly could change how they’re looking at the underwriting of that deal, because the information you get from the seller isn’t always the same situation that you’ll be facing as you go through your own acquisition process. So, you know, so if you’re looking at this during the due diligence there’s probably 45 to 60 days, you know, before the closing at that point.

DJ:
And we’ve had several scenarios where we’re able to get the FEMA approval before the closing, you know, to where this might have some effect in the loan proceeds or, you know, may change some of the costs that they’re having to incur at closing. Same with some of these insurance consulting situations where the buyer’s going to assume ownership of the seller’s flood policies, and we’ve been able to help them go to the carrier, optimize that rating, reduce the cost, and again, they’re adopting now you know, a cost savings from day one, which is obviously the biggest impact. Yeah, so flood insurance is the only type of flood insurance that I’m aware of that you can assume ownership from the seller through FEMA’s program. Unfortunately not the case with the private markets. But FEMA changed their rating system about two years ago, and they introduced this new concept called the full risk premium.

DJ:
And it’s essentially the ceiling price that that policy is going to eventually arrive at. And so you’ve got this discount built in for policies that existed prior to 2021. And so if you’re buying a, a piece of real estate and the, the seller has had a policy in place for the last several years they may be at 50% of what that full risk premium, you know, is ultimately going to be. So if you assume that policy at closing, you can then carry forward those same discounts that the seller has had in place that’s FEMA’s way of, you know, showing you like, we appreciate you maintaining consistent flood insurance. The caveat is, if somebody goes in and writes a brand new flood policy, they’re gonna start at the full risk premium from day one. So all that discount that was in place is then lost. So I, I coach people through this to look for this, you know, in every situation not all insurance brokers are familiar with this strategy because, you know, again, years ago, broker A and broker B would get the exact same price. So this particular strategy didn’t have a lot of value. Things are quite different now. So

Charles:
Give us like an overview of what the process actually is from going from a flood zone to a non-food area and kind of like what, what you work with to what’s kind of comprised in that, of what you guys are doing behind the scenes?

DJ:
Yeah, there’s kind of a misconception with this process. You know, that if you go get an elevation certificate from a surveyor, that that just solves all the problems. You know, but in, in reality it’s getting into the engineering of the flood map, you know, specifically for that property, getting into some of the elevation details, you know, of the individual structures. And then being able to prove to FEMA that those buildings are outside of the criteria of the current flood map. So for us, we’ve built out a really robust and comprehensive review process that we take every property through, and we’re not just looking for the flood zone, we’re looking for a variety of solutions that ultimately would create a cost savings. And so our engineers, you know, they have this hybrid expertise, you know, they understand flood insurance as well as anyone in the country.

DJ:
And then also in understanding how the relationship is between the flood zones, the data, the flood policies, we’re able to go in and find a solution, you know, about 45% of the time. And so then if it’s the flood map, you know, we’re working directly with FEMA to provide them the engineering that’s required to then get those buildings taken outta the flood zone. And, you know, inversely, if we’re working on the flood policy, we’re gonna work with the carrier directly, you know, to get the rating adjusted. And then typically with the flood maps, you know, it’s about a four to six week turnaround time, sometimes faster to get that approval and the letter back from FEMA that we can then give to the client that they can, you know, provide to their lender and so on. What

Charles:
Helpful sources or websites can investors reference to check where they are with flood zones or any other information that might be of use for people that reference as investors?

DJ:
Yeah, I mean, you can Google FEMA’s flood map. It’s a public data source that you can pull up, you can look at the a hundred year flood maps. And I think this should be part of any acquisition teams checklist. You know, as soon as you look at a property, throw that into the flood map and see if any of the blue hundred year is touching any of the buildings. And you know, I do this as a limited partner investor. Soon as I look at a deal, first thing I do, obviously, because this is my day-to-day, is I throw it into the flood map. And so I wanna know that from the first, first minute. And I think that anyone looking to buy a piece of real estate should do the same. It’s a quick process and then you can at least from that, decide how you’re going to carry forward. Because some people have no risk tolerance for flood zones. They’ll completely walk away. Some people have seen some of the strategies that we’ve been able to help them with, instead of walking away, they see opportunity. And so they get a little bit more interested, you know, at that point than maybe they were before. So anyway, knowing that on the front end, it’s just gonna provide extra information that you can use in your decision making. Yeah,

Charles:
That’s great. That’s definitely an important thing to put into anybody that acquiring property or passively investing to check for when reviewing a property.

Charles:
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Charles:
Um I know you guys are nationwide, you’re based in Florida. I mean, what states do you guys normally work in that you probably do the most work or are involved with?

DJ:
That’s a good question. I mean, we’ve done projects successfully in 47 states and we’ve just got a couple of random ones left that we’re hoping to check off soon. But, you know, we’ve done a lot of work in Texas a lot of work in Louisiana, a lot of work in Florida. But I mean, we’ve done, we’ve done a huge project up in Eugene, Oregon to get up into the Pacific Northwest. We’re doing projects all through California and really everything in between into the east coast, like the flood maps really are everywhere. So I say that we’ve done a lot of work in the, in the Gulf Coast because that’s just what was closest to us, you know, initially. But we’ve just continued to find lots of different solutions everywhere, drainage, you know, type areas that will then, you know, kind of bleed out into a flood map. You’ve got Rivers, creek, streams, you know, so all those different water sources, you know, can essentially, you know, kind of flare out and may only hit the backside of a property in some instances. But, you know, that’s what really ends up hitting a lot of properties. It’s not just the oceans.

Charles:
How have you, how much have you saved or kind of, can you give any kind of past projects and your performance with those of kind of what you did and how that translated to savings and ultimately property value increases for the owners?

DJ:
Yeah, I mean, we’ve got two big projects going on right now. You know, one where the client was paying, you know, roughly 120,000 for their foot insurance, you know, there in, in Houston it’s big property, you know, so it’s not not surprising that you know, when you have a lot of buildings, the, the premium per building and the total just really adds up. And so we found that we can get essentially all the buildings except for two outta the flood zone. And, you know, for this particular client, his goal was to get rid of the flood insurance. You know, he’s had that property for years. He’s confident that he is, you know, able to take on the risk of not carrying the policies. So, you know, his ultimate premium’s gonna be probably closer to like 5,000 when we’re finished. And so it’s over a hundred thousand in annual savings that he’s gonna be realizing year over year that’ll pass on to a buyer when he sells it, you know, so this is gonna be a fairly dramatic valuation increase.

DJ:
You know, that particular project was taking the buildings outta the flood zone. So what happens is that you’ve got certain parts of the country that when they do infrastructural improvements and some cases the flood maps get better, the flood elevation may decrease. So there’s parts of the country where this is happening, but there’s no automatic domino effect at the property level, you know, and so we go in and do a much deeper analysis. That’s how we’re able to help this property just the same. So that’s a flood zone example. We have another client the opposite thing happened. The flood map changed and the flood elevation went up two feet. And so this property wasn’t in the flood zone before. Now it’s been brought back into the flood zone and they had a $250,000 flood insurance requirement that came in place. So we knew the flood zone wasn’t possible here.

DJ:
This was more of the consulting scenario I was describing where we went in and really broke down the rating. We found some details that were able to go in and, and improve, and it equated to a $50,000 savings for these guys. And the, the best part about this one was that we executed the project prior to the renewal. They got a refund back for last year. They also saw a reduction in the renewal a few weeks later, you know, so it was a huge transaction on the budget side. And basically the project was, you know, a a free valuation increase at that point. When

Charles:
You’re working with investors just around insurance, I mean, what are some common mistakes you might see? Obviously we talked about people not checking it initially during the acquisitions if they’re not seeing if they’re in a flood zone or anything like this. Are there any other issues or anything like this that you’ve maybe seen real estate investors make? It could be regarding insurance or possibly flood insurance specifically that you’ve seen over your years of doing this?

DJ:
Yeah, I think one of the most common things that we hear is someone thinks that the same deep dive that we’re doing specifically has already been done. And so they, it kind of gets glassed over a little bit and they’re like, oh, we already looked at this. It’s like, well, depending when you looked at it, something may have changed. FEMA changed their flood insurance rating system, so there’s been a lot of, you know, evolution of things over the last few years. And so I think always being in a mindset of why not, right? The review that we do doesn’t cost anything, so why not? Having someone else put some eyes onto the situation may surprise you with, with what is found. You know, there’s fantastic insurance brokers around the country that specialize in flood, but even they get busy and they may not see, you know, some of the same things that an engineer would see.

DJ:
And so I think just really going in eyes wide open to any situation, if you have a property in a flood zone, having, you know, an engineering team like us or someone review it could yield some pretty dramatic differences. So I would say that’s number one. Number two is not understanding the difference in the lender requirements between like a standard, you know, short term bridge loan and you know, more of an agency fixed program like Fannie or Freddie Mac. The requirements are entirely different with the levels of flood insurance that are required. And so Fannie Mae wants full building requirements, they want business income also insured. And so not realizing this on the front end, you know, can make your costs go up pretty dramatically. So it’s just something to, to take into consideration when a refinance might be part of the business plan, the way they look at the buildings, you know, the full building replacement value could be say 1.5 million for that particular like three floor apartment building. FEMA’s insurance program will only go to 500,000 per building. And so if the loan program is wanting, you know, something that’s in excess of that number, you have to go to the private market to then fill that gap. And so if you’ve got 20 buildings and you’ve gotta go find, you know, a million and a half per building, you know, that can get quite expensive. Pretty quickly.

Charles:
How can our listeners learn more about you and your company?

DJ:
Yeah, they can reach out to me on LinkedIn, DJ McClure reach out at info@nationalfloodexperts.com. And then we’ve got a tremendous amount of information and other value that you can find on the website, national flood experts.com. And like I said, the review process doesn’t cost anything. So, you know, we’re always happy to look at about, you know, anything you have.

Charles:
Well, thank you so much for coming on today, DJ, and looking forward to connecting with you here in the near future.

DJ:
Thank you.

Charles:
Hi guys! It’s Charles from the Global Investors Podcast. I hope you enjoyed the show. If you’re interested in get involved with real estate, but you don’t know where to begin, set up a free 30 minute strategy call with me at schedulecharles.com. That’s schedulecharles.com. Thank you.

Announcer:
Nothing in this episode should be considered specific, personal or professional advice. Any investment opportunities mentioned on this podcast are limited to accredited investors. Any investments will only be made with proper disclosure, subscription documentation, and are subject to all applicable laws. Please consult an appropriate tax legal, real estate, financial or business professional for individualized advice. Opinions of guests are their own information is not guaranteed. All investment strategies have the potential for profit or loss. The host is operating on behalf of Syndication Superstar, LLC, exclusively.

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About DJ McClure

DJ McClure is Vice President of Sales & Business Development at National Flood Experts (NFE). He drives NFE’s strategic growth by establishing partnerships, providing client consultancy services, and supporting the National Account Executives team. DJ collaborates with NFE’s engineering experts to deliver tailored cost-saving solutions for flood zone properties across various vertical commercial real estate markets.

NFE’s accomplishments include consecutive appearances on the Inc. 5000 list of America’s fastest-growing private companies in 2021 and 2022 and recognition on the Tampa Bay Business Journal’s Fast 50 list in 2022. With a strong commitment to innovative flood insurance solutions, NFE has saved clients over $15 million in insurance premiums and added nearly $300 million in property value since 2014. Backed by a team of experienced licensed professionals with over 60 years of combined expertise, NFE is dedicated to providing clients nationwide with education, guidance, and the best possible solutions.

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