How Insurance Can Make or Break Your Real Estate Acquisition

3-minute read

Real estate acquisition can be a thrilling ride. There's the potential for significant returns, the excitement of closing deals, and the joy of seeing a project come to life. But, like any investment, there's always a level of risk involved. And often, that risk comes from places we might not expect. Enter: Insurance.

The Overlooked Offering Memorandum Details

When investors dive into a new acquisition opportunity, they are typically presented with an offering memorandum. This document contains essential details like insurance costs, rents, cash flow, and income statements. While these figures are crucial, they merely scratch the surface of the actual risks involved.

In the pro forma (or projected financial statements), there are often projections on taxes and insurance costs. The challenge here is that these projections don’t always reveal the bigger picture. An acquisition team might see a number for “insurance,” but do they truly understand what's behind that figure?

Most investors aren’t aware of the specifics – the coverages, the deductibles, the limits. Their eyes are set on the next step, the next phase of the project. But this can be a costly oversight.

The Unpleasant Surprise of Rising Cost

By not fully grasping the nuances of their insurance coverage, acquisition teams can find themselves in hot water. Unanticipated costs can arise, jeopardizing pro forma projections. Suddenly, budgets are thrown off balance, and the appeal of a once-promising deal starts to wane.

But it doesn't stop there.

Investors sometimes overlook location-specific risks, such as a high crime score or the potential of wildfires. These factors can significantly impact insurance costs upon renewal. If the T-12 (trailing 12 months) costs are a certain figure, be prepared for them to surge, especially if risks aren't appropriately accounted for.

Reputation and Investor Trust at Stake

It's more than just the immediate financial implications. Owners and developers who promise returns to investors based on incomplete information can damage their reputation. If you’re not accounting for potential spikes in insurance, or if you're unaware that your investors might balk at a $100,000 deductible, you're setting yourself up for tough conversations down the road. Understanding the loss or claims record is crucial.

Switching the Approach: Insurance First

Instead of treating insurance as an afterthought, it should be one of the first considerations in any real estate investment evaluation. Doing so allows the acquisition team to determine whether a deal is genuinely worth pursuing.

And here’s the good news: you don’t have to navigate these waters alone.

When diving into an investment, having an expert by your side to decode the complexities of insurance can make all the difference. You need someone to guide you, to shed light on those often-overlooked details that can profoundly impact a deal.

In real estate investing, the stakes are high, but the rewards can be even higher. To truly succeed, understanding and prioritizing insurance from the outset is paramount. By doing so, you safeguard not just your financial projections but also your reputation and trust with investors. And remember, in this journey, you’re not alone. With the right expertise and guidance, you can confidently tackle any real estate acquisition opportunity that comes your way.

The Mahoney Group, based in Mesa, Ariz., is one of the largest independent insurance and employee benefits brokerages in the U.S. An employee-owned organization, we’ve been providing our clients with the confidence to face whatever lies ahead for more than 100 years. For more information, contact us online or call 877-440-3304.

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