Understanding common issues with REO properties is the first step in protecting your investment.

In the first six months of 2022, lenders foreclosed on a total of 20,750 U.S. properties. This number is up 30% from the last half of 2021 and 113% from the first half of 2020. Double-digit increases are expected in the coming months. You should be prepared to secure insurance on these properties to protect your interest in the property.

REO Insurance Considerations

Completing regular inspections of your properties has always been important. Recently, this has become increasingly necessary to protect your investment and to limit losses associated with fire, water, or neglect.

Your properties can sit vacant without any measure of mitigation for damage not visible from the outside of the home. If you have access, it is a good idea to have someone go inside the home to ensure there are working smoke detectors, turn off the water, and drain the system. Vacant homes are also subject to being entered by those seeking shelter, which can lead to additional damage to the property. Securing the home is a large part of making the property unattractive to unauthorized occupants. Installing deadbolts, cameras, alarm systems, and motion-sensor lights is the best way to deter thieves and squatters.

On occasion, lenders may be unable to remove the borrower or tenant from the home that was the subject of the foreclosure. In these circumstances, a regular drive-by of the property will provide details on the condition of the property.

Finally, confirm the appropriate coverage amount for the location and relay the appropriate occupancy status to your insurance carrier; avoid delays in reporting claims as they occur to prevent challenges in a claim scenario.

Common Claims on REO Policies

At the height of COVID in 2020, the number of claims on REO properties decreased significantly. This dip was likely due to foreclosure moratoriums but was mainly a result of a less severe hurricane season. In 2021, claims frequency trended back to 2019 levels due to severe weather events, including the polar vortex in Texas and hurricanes Elsa and Ida.

Weather patterns are shifting. Wildfires are increasing in frequency and severity in the West, and Tornado Alley is moving away from the Plains and into the Southeast.

However, the most common types of claims made on REO policies (fire; vandalism/theft; and wear-and-tear, water-related, and weather-related losses) remain relatively consistent.

Mitigating Losses

Here are some steps you can take to mitigate most of these losses from occurring at your REO properties.

Fire: Commonly covered. Fire losses on vacant properties are frequently a result of unauthorized occupants setting fires for heat. These fires can easily get out of control and damage the property. One of the most important things you can do at any REO property is secure the premises to keep out squatters. And, if you leave the electric power on, be sure to unplug all electric appliances. This will help you avoid the risk of a fire loss should there be a faulty switch or other issue. If you have access to the inside of the home, ensure there are working smoke detectors.

Though less common, another fire risk for foreclosed properties is arson by a disgruntled borrower. Arson is often challenging to prove from a criminal perspective, but in most cases, arson will likely be covered.

Vandalism/Theft: Commonly covered and denied. Thieves looking for copper (pipes, AC condensers, etc.) may attempt to enter your vacant property. If it is apparent your property is not occupied, vandals know there is a reduced risk of being caught.

Taking steps to board and secure your property can help mitigate the risk of vandalism and theft. Protect all windows and glass doors against glass breakage. Consider maintaining the property by regularly mowing the lawn, performing routine repairs, and visiting weekly to ensure the property remains secure.

Aside from these protective safeguards, you may consider Special Form coverage because it adds theft. These losses are often denied because the policyholder has Basic Form (excluding theft), or the property was not secured properly.

Wear & Tear Leading to Water Damage: Commonly denied. Wear and tear on your roof can lead to water damage inside the home. This claim is often denied because the insured did not regularly check the roof. To mitigate these types of losses, check the roof for spots that may be worn-out and make repairs when necessary.

In general, insurance is not intended to cover wear and tear. It is intended for sudden, accidental damage, so wear-and-tear claims are denied, especially as foreclosure homes tend to sit vacant and fall into disrepair. General upkeep can save headaches down the road.

Intentional Damage: Commonly denied. As noted previously, insurance is intended to cover accidental damage. Although arson may often be covered, intentional damage by the tenant or former owner (borrower) will likely not be covered.

Water-Related: Commonly covered and denied. While water losses are not the most common type of property claim on REO properties (about 17%), they are among the most commonly denied property loss claim, making up about 30%. Water damage can occur as a result of frozen pipes or a failure in the plumbing. These claims are commonly covered if the insured has Special Form Coverage because this policy adds water damage, whereas Basic Form excludes it.

In colder climates or months, the most important thing you can do to mitigate water-related losses is to winterize the home. This includes turning off the water supply to your property. Leaving the water on when the lines aren’t going to be used can lead to leaks or burst pipes, which can cause a lot of damage.

If your property is in an area where freezing pipes can be an issue, the water could freeze and expand. If you have access to the home, drain any remaining water in the pipes. You can drain the waterlines by opening all the faucets and allowing the water to run until it becomes a slow drip. Also flush all toilets, and when the tanks have drained, flush them once more to empty the bowls.

You do not want to turn the furnace off completely; doing so could also cause the pipes to freeze and break. Instead, turn the thermostat to around 60 degrees to keep your property’s systems and components near room temperature, where they are meant to be. Your heating bill will be less than the cost of potential repairs and taking steps to maintain the appropriate temperature will help avoid water claims challenges.

If your property is located in a warmer climate, you should still consider turning off the water supply, because failure in the plumbing may occur without regular use.

Weather-Related: Commonly covered. Wind/hail losses are the most common weather-related claims, accounting for almost 40% of all property claims on REO properties. These weather phenomena are common in coastal and Midwest areas. These forces can lead to roof damage, broken windows, or damage to detached structures like garages and sheds.

Weather-related losses are largely based on where your property is located, so unfortunately, there isn’t much you can do to mitigate these. But, several standard exclusions can be bought back by endorsement or on a standalone policy. Some that can be purchased separately include earth movement and flood.

Understanding common issues with REO properties is the first step toward protecting your investment. Now that you know what types of losses can put your properties at risk, take action to prevent them.