WS381: Understanding Real Estate Insurance with Clinton Orr

In today’s episode, we are joined by Clinton Orr, to talk about the hugely important topic of insurance. While typically not the most exciting part of the syndication business, insurance is crucial for a host of reasons that Clinton elaborates on. Along with insurance itself being important, it is also key that you deal with an industry specialist.

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[INTRODUCTION]

[00:00:00] ANNOUNCER: Welcome to The Real Estate Syndication Show. Whether you are a seasoned investor or building a new real estate business, this is the show for you. Whitney Sewell talks to top experts in the business. Our goal is to help you master real estate syndication.

And now your host, Whitney Sewell.

[INTERVIEW]

[00:00:24] WS: This is your daily Real Estate Syndication Show. I’m your host, Whitney Sewell. Today, our guest is Clinton Orr. Thanks for being on the show, Clinton.

[00:00:32] CO: Thanks for having me, Whitney.

[00:00:34] WS: Yeah. I’m honored to have you on the show. It’s a great topic for this industry that you better know something about this topic or you better know somebody that’s a specialist I guess I should say, like Clinton, because it’s such an important piece of this business that we’re all in. So, I’m going to let him explain. I’m going to tell you a little more about Clinton. But first I want to tell you, make sure you go into the Facebook group, the Real Estate Syndication Show and getting involved there and asking experts like Clinton and other people and their questions about what you have going on and connecting with other people in your market and other markets as well.

And so, get in the group. Go to Life Bridge Capital and connect with me and so we can talk personally and help you anyway I can. If you’re enjoying the show, I hope you will share it and I hope you will leave a rating and written review. I would be grateful for that as well. So other people can learn about the show and learn and grow their business as well.

So, a little about Clinton, he’s a specialist in multifamily insurance and a commercial lines coverage specialist. Since 2011, he has insured all types of multifamily properties across United States and has become an expert in Fannie Mae and Freddie Mac loans. His passion for real estate started at a young age, watching his parents successfully invest in real estate. At the age of 19, Clinton started his own real estate investment company while attending the University of Central Florida and has invested in many types of properties.

Since starting his career in insurance, his goal has always been to take the mundane and mysterious world of insurance and teach it to investors as a tool to maximize profitability and to assist in both the sale and acquisition of properties.

So, Clinton, thank you again for your time. I appreciate you being on the show today with us, because this is such an important piece of our business. We got to have insurance, because it’s a must. We got to have it.

[00:02:25] CO: Yes. Absolutely.

[00:02:26] WS: But I find even more importantly it’s important to have somebody like yourself that’s a specialist on our team, so we can go to you and say, “Clinton, okay. This is the type of deal we’re looking at. What’s the insurance going to run? What are some things we need to be thinking about here that maybe we wouldn’t think of?” Maybe we’re were in a different market. We’re going into a new market. I don’t know. It’s exceedingly cold in this market or hot or they’re exposed to more hurricanes or all these things that you may not think of without a specialist on your team like yourself.

So, I appreciate your time again. Tell us a little about what you do, and let’s dive in.

[00:03:02] CO: Great. I appreciate it, Whitney. I just want to start off by saying thank you for having me on. I listen to your show, your podcasts, on a regular basis. It’s good to be rubbing shoulders with some of the people I’ve got to listen to in the past. So, thank you for those kind words.

As far as kind of what we see and what we do, we try to dub ourselves the real estate investors insurance specialists. We deal a lot with syndications, individuals, large groups, small groups, large portfolio, small portfolios. What we try to do on the front end with some of our syndications is help with your underwriting. There’s been a huge shift probably in the last 18 months and the insurance market. So, it’s gotten hard, especially in the multifamily world.

So, what that means is prior to 18 months ago, insurance companies had what they called reinsurance companies. So, it was basically an insurance company for an insurance company. And large institutional finance invested heavily into reinsurance companies, because the returns were so good for them.

And that happened year-over-year, pretty much 2011 to 2017, ‘18. At that point, if you turn on the TV, you saw floods, snow storms, earthquakes, California wildfires. Well, that has led to reinsurance companies paying out on insurance claims, which means that institutional finance was then getting lower returns on their money that they were investing into reinsurance companies.

So, they had decided at that point, “Well, we’re going to pull our money out, because there’s better investment tools we can use.” And that left insurance companies kind of sitting around, “Okay. Well, how do remain profitable?” What they’ve done is they have increased rates. They have made underwriting guidelines much tougher, and I’m sure a lot of you that have properties or that are looking at properties are experiencing this increase in insurance premiums.

So, what we tried to do is team up with investors on the front end and say, “Okay, look. If you are going to underwrite something, you need us to look at this or just an insurance professional to look at this, because at the end of the day insurance is the most volatile line item on a pro forma.” Your taxes are pretty much going to be your taxes. Your property management fees are going to be your property management fees. Obviously, you can raise your rents. But your insurance, it can be –

We had a situation probably up four, five months ago, where the current owner had a fire claim, and she was trying to sell her property. The fire claim, we were able to work with this particular carrier and get them to overlook the fire claim due to it had previous insurance just without deep diving into that. Anyway, we were able to lower her insurance by about $30,000 a year, which increased the property value, the sale price by $400,000. So little things like that, just being able to look at a line item and say, “We should probably dive into this to get a more accurate number.”

On the flipside of that coin, if you’re using the current owner’s insurance number on your underwriting, but you have a Fannie or Freddie loan that requires a lot more insurance, you could have your loan proceeds cut. So, it’s a very, very volatile line item that needs to be addressed on the front end and as you go through the process.

[00:06:34] WS: Okay. So, I appreciate you elaborating on that too. You saved that person $30,000. That’s massive.

[00:06:39] CO: Yeah. That was a home run.

[00:06:40] WS: That’s a big deal.

[00:06:41] CO: I liked sharing that one, because it was a home run. But even the littlest of line items. I mean, premium savings. If you’re paying 50,000 a year and you’re talking about saving even 10%, that’s 5, 6,000 dollars a year. I mean, that adds up year over year.

[00:06:58] WS: So, I like too that you are also a real estate investor or you have been in the past as well. Are you still investing in real estate personally?

[00:07:07] CO: Small stuff. I’ve got a rental house in Orlando. That’s always been –

That one’s going to be close to my heart. That was the first house I bought when I started our company background. We were 19. We were just kids, and we started doing tax deed properties. We got an attorney involved and basically had them. This was ’02 and ’03. So, we got an attorney to draw up an eBay ad for us.

So, we were selling tax deeds on eBay on five-day auctions, no reserves. We made a killing. We made a lot of money. But at 19, you could spend a lot of money. So, my parents who were real estate investors, they definitely talked me into, “You better put some money into something safe.”

So that house was purchased with the funds of that. So, I’ve always kept that one close. I lived in that house for a while. I like that rental house. We bought a few houses in Central Florida right before everything crashed. It was a very, very good life lesson to go through that real estate crash and what we were doing and how we were doing it, because it taught me a lot about myself and real estate for that matter.

So, at this point, I’ve got a few properties in Central Florida. Some lots. Some lakefront lots in South Alabama but definitely are looking to do more and would love to do more. Just waiting for the opportunity.

[00:08:32] WS: Well, what I want to mention though is I like that you’re not just an insurance but you’re also an investor as well. So, as you’re looking at these deals, you have some experience. But you mentioned on as well, you’re teaching investors and [inaudible 00:08:45] maximize profitability and to assist in both the sale and acquisition. I’d just love for you to elaborate on that a little bit and what that looks like working with somebody like yourself.

[00:08:57] CO: Yeah. Absolutely. So typically, we’ll have an investor come to us that will have an OM or an address or offering memorandum or an address of a property they’re looking at. Sometimes, they have written that offering memorandum. It’s going to show the line items. It’s going to show what they’re paying in taxes and what their NOI is and those types of things. So, when we take a look at that, they will send that to us. We’ll put together a quote based off of that information, some of the other information we pull from our databases online as far as building sizes, number of buildings, things of that nature, and we put together a quote.

Now, this is where it gets fun is if that quote is beating what they currently have, you know that from an offer standpoint you would not be able to offer a little bit more because you know your NOI is going to be higher than what they currently have. Or if you’re selling, what we do as sellers as well is we’ll come in.

Even if they have a Fannie or Freddie loan, we’ll offer them a quote maybe that doesn’t have Fannie and Freddie requirements, so that offering memorandum might look a little bit better for a broker to look at. So, it all depends on what side of the fence you’re on. If you’re coming in as a buyer, you obviously want to try to – The first thing I always ask buyers, especially in today’s environment, because you know their Fannie and Freddie loans are probably about 90% of what we’re writing right now.

So, if you’ve got a Fannie or Freddie loan, you definitely want to make sure you’re measuring twice, cutting once. So, you want to make sure that if we do a quote, it’s going to be based off of your lender requirements, so you don’t get a quote, put an offer in using this lower insurance quote with the increased NOI. Then we have Fannie or Freddie saying, “Uh uh uh! We need to add this. We need to add ordinance along. We need to add an umbrella. You need flood insurance. You need equipment breakdown. You need all of these pieces.” Then your insurance goes up by 20%. Now, the property doesn’t look as appealing to you.

So, on the front end, that’s what we try to do. With the seller, we try to get it down, so it looks more profitable to when it goes up for sale. So those are some of the things we do. Once the property is bought, we like to get with the owner. We have a loss prevention team, which basically comes up and just assesses the property from any type of risk adverse situation. If there’s cracks in the concrete, if there’s steps that need to be repaired. I know a lot of people are like, “That is more CapEx, more stuff that we’ve got to fix.” But long-term big picture, we see that those things –

If you have stairs that are decrepit, you will have a tenant that tries to slip and fall, and now you’ve got a lawsuit. It’s the law of large numbers. That’s just how it works. If there’s cracks in the concrete, someone is going to slip and fall. You want those things fixed, because guess what? If we do pay a claim, it’s going downhill. Meaning they’re going to pass that on to you as the owner.

They’re going to say, “Hey! We paid out.” Just look at it from just like any other business. If you had a tenant that was constantly breaking things in your unit, and it was costing you $800 a month to go in and repair all of the stuff this tenant was causing damage to, but they were only paying you $600 a month in rent, wouldn’t you want to try to get rid of them as quick as possible and get someone in there that’s going to make you a little bit more profitable?

It’s the same as insurance. If an insurance company has a risk that is costing them $100,000 a year in liability, claims, or water damage claims or fires or things of that nature, but they’re only bringing in $20,000 year, at some point time from a profitability standpoint, they have to say, “Let’s try this again in a few years when you make your property safer.”

[00:12:54] WS: So, are there any kind of checklists we could be using while we’re going through this process or for insurance and for that piece of this puzzle?

[00:13:00] CO: Yeah. Actually, I have one right here that we try to go through from a pre-LOI standpoint, as far as you’re underwriting and getting numbers to once you get into due diligence and doing a little bit of homework as far as the property requesting loss runs from the previous owner, looking at their policy versus your policy and what your lender’s going to want, a lot of properties. The location of the property is going to change your price. If you’re on the coast, you can anticipate much higher insurance premiums. If it’s a property built in the ‘60s, ‘70s, ‘80s, even early ‘80s and they have aluminum wiring, that’s going to be something that’s going to increase your insurance cost. Things like that and looking into those.

Is it student housing? Is it vacant? Are you looking at this property and saying, “Okay, this is a huge value-add play. We’re 30% occupied.” So, there’s eight buildings that are empty. Well, your insurance professional should know that, because that’s going to be a completely different type of policy that they’re going to have to write for you to protect you properly.

So, once the property has been purchased, this is what we do with all of our owners. We sit down and say, “Okay. This is your property now. This is what we found through our risk assessment situation. These are some things we want to see addressed. We’ll circle this wagon in 90 days.”

The objective is to make sure that – No one wants losses. Not you as the owner and not the insurance company, not me. It affects all of us. I know that as from an insurance standpoint, there’s a negative connotation. But it does. It affects everybody when there’s losses paid.

So, I think we’re all on the same page, just trying to – The objective is to make sure that this property is safe and profitable.

[00:14:40] WS: No doubt about it. I wondered and appreciate you going through some of those items, but I wanted to ask you. How often and how much is the difference from, say, the seller’s insurance policy to what you’re quoting the new buyer? What’s the normal difference there, say, even in the types of insurance or coverage that they have to even the cost?

[00:15:03] CO:  I hate to do this. It’s going to vary. I mean, it all depends. I mean, insurance is peace of mind. That’s what I sell. I sell peace of mind. What might make a seller give him peace of mind might not do that for you as a buyer. We look at that line item. It is a starting point to say, “Okay. You’re paying about this. And being that we’ve been doing this for 10 years just about every day, we know if it’s within ballpark, if it’s the number that we look at. You’re at $150 a door.” Well, we’re going to look at it and say, “Well, probably don’t have enough insurance. You’re not covered properly.”

If they go in and we have another one we’re working on right now that they’re close to a thousand dollars a door, we’re like, “Okay. Something’s not right there. That’s high.” As far as per door, there really is – It all depends on coverage. I mean, if someone’s got a Fannie or Freddie loan, we’re able to look at that number and say, “Okay. They might have flood insurance. They might – That’s why it’s high.” Or they could have a Fannie or Freddie loan, and that’s what’s running it up. There’s just so many different variables, Whitney. It really is tough to just say this is – A rule of thumb is you’re going to be paying 10% more than the previous guy. I mean –

[00:16:16] WS: Yeah. I just wanted to reiterate. Drive home that we need to contact somebody like yourself. Maybe not just go off those old or the seller’s policy. It’s like we got to have a professional like yourself on our team, so we can be – During the underwriting process, I want to know. I want a pretty good number of what that insurance is going to and be communicating with somebody like yourself. So, we know that you know long before it’s a final number that we think the property is worth or what the insurance is actually going cost to, say, per unit or overall.

So, what are some of the bigger problems that you see investors making on the insurance side when we’re – Whether it’s from underwriting or whether it’s not getting the correct coverage?

[00:16:56] CO: Well, what I see a lot of and especially now, these are investment properties. So, most people are going to be number-driven. They’re going to look at a quote say, “Well, this one’s $100 cheaper or $1,000 cheaper,” whatever that number is. You run the risk of, “What are you going to do in the event of a claim that’s going to help increase your rates by 10 times that because you didn’t have coverage or you’re going to have to come out of pocket?”

A lot of people get caught up on the number itself. I did it because look. I mean, that’s what you’re looking at. You’re looking at a spreadsheet of numbers, and you want that NOI to be as high as possible because for your investors and for you. But you also want to make sure that you’re protected, because the last you want to do is go to your investors and say, “Hey, look! I know I saved us a bunch of money on our insurance, but that policy did not have ordinance and law coverage.”

Ordinance and law coverage is a big piece when you’ve got a building that you’re looking at a value-add play that the building was built in the ‘80s, and you have a partial loss now. The city is like, “Well, you’ve got to get this entire building up to code.”

Well, you don’t have that – An insurance policy doesn’t have that built in most of the time. That’s an added coverage. Fannie and Freddie require it. That’s how important it is. If that’s not in your policy, you’re going to be on the hook, and you’re going to have to go to your investors and say, “Hey! I know I saved a thousand dollars on our insurance, but I need 20,000 to fix this claim.” That’s a tough conversation to have with somebody.

So, I think that some of the other things I see as far as underwriting is some of these schools of thought are use X for door. We’re just not in that market anymore. It’s every market’s different, every construction type, close proximity to coast. Is it vacant? Is it student housing? What type of roof? What type of wiring? There are so many different pieces and nuances that go to that.

It makes it tough to say it’s 250 a door. And that’s what people are so used to doing, because they want to blow and go on these underwritings. They’re taught to underwrite a hundred deals a week. Or 20 deals a week. So, plugging that number in is the fast way to do that, and I get that and I understand that. I do. But if you go into a deal and you sign an LOI doing in that, you’re going to be disappointed. I mean, we’ve seen a lot of situations where lenders are cutting loan proceeds because of that. Even lenders are doing it.

We got a lender do it with a coastal property once. They used inland offshore rates for a coastal property, and the insurance was about 30 or 40% higher, and they wanted to cut loan proceeds a week before closing up to $200,000. We had to get creative with deductible structure and things of that nature to kind of help offset that, and we got lucky doing that. But we see that very, very often where it’s like you said.

Just no one knows what’s going on in this insurance world, and that’s what we try to do. We just try to, “Hey, look. This is what we’re here for. This is –” Just like every team should have an attorney and all of those things. We want to be the insurance guy for your team. 

[00:20:23] WS: How does the finance piece affect the insurance?

[00:20:26] CO: In what way?

[00:20:27] WS: Like what type of loan we get.

[00:20:29] CO: So, Fannie and Freddie, those are the real big ones. They’re going to increase your insurance costs. But it’s been my experience that even with the increased insurance costs, the juice is still worth the squeeze. The Fannie and Freddie, I guess the interest rates and things of that nature are still very, very investor-friendly even with the higher insurance rates, because we have investors that have Fannie loans and conventional loans and local bank loans. They will still go to Fannie if they can, because the rates are so good. At the end of the day, when we write a Fannie and Freddie insurance policy, when they have a loan and we write that insurance policy, I always feel much better about that policy, because it does provide peace of mind. If it was my property and I was ensuring it, that’s how I’d want it insured. Especially if I had a team of people that are trusting me with their money and their investment, that’s how you want it insured. They do it right.

Now, you could be a riverboat gambler and increase deductibles to 25,000 and lower cost to just what your bank loan is. You can do that and you can lower your rates and if that provides you peace of mind and you’re okay with coming out of pocket in certain circumstances, then, hey, that’s your prerogative.

But typically, with who your audience is and who you’re talking to, they’ve got a lot of people they got to answer to. So, I think that the Fannie and Freddie loans, yeah, they’re going to increase your rates. But they’re also going to give you that piece of mind to know that if a snowstorm or a fire or a tornado comes to town, you’re covered. You’re taken care of.

[00:22:12] WS: So, just a few questions before we have to go, Clinton, or before we’re out of time. But what’s a way that you have recently improved your business that we can apply to ours?

[00:22:21] CO: So, we just got back from a conference out in Denver, which was great and something that we definitely need to do. So, we have kind of gone on a lot of webinars and trying to do the podcast to get I guess the news out there as far as insurance is concerned with real estate syndication. When doing that, we’ve been very fortunate to meet a lot of people. The problem with that is trying to I guess maintain that data and stay in front of those people. So, some of the things that we’ve learned as far as funneling some of this stuff from this past conference was real good stuff as far as how to do that and staying in front of these people and providing as much value as we can. At the end of the day, I just want to be the mayor of my village. I want to be when somebody, an investor thinks apartment insurance, I want my name to be the next [inaudible 00:23:14].

So, we try to be teachers more than anything else. So, if there is ever a question – I’ll tell you, if I can’t write this, here’s a guy that can help. To me, that goes a lot further with people than closing the deal.

[00:23:31] WS: What’s the number one thing that’s contributed your success?

[00:23:34] CO: I think that just being upfront and honest with people. If I can’t write your insurance, I’ll tell you. If it’s a good rate, I’ll tell you. If the company’s a good company and that’s a good quote, I’ll tell you. At the end of the day, I just want to be a part of your team. That’s it. I want to be, like you said, the insurance professional. If there’s an opportunity to do that, great. If not, well. I’m a fairly young guy. I’ve got a long time in this business before. It’s all said and done. So that’s pretty much I guess my spiel.

[00:24:07] WS: How do you like to give back?

[00:24:09] CO: Information. I mean, basically, what we’ve talked about today. Like you said, what we have experienced is not a lot of people know about insurance and doing this. They’ve got their full-time job that they’re trying to transition to become a full-time investor, and let’s face it. Insurance is boring. It really is. It’s not a cool – I have yet to meet a child, and I’ve got three children myself that grow up and say, “You know what? I want to be an insurance salesman.” So that doesn’t happen. So, we try to make it go simple and easy and teach them what they need to know to kind of make our jobs easier.

[00:24:46] WS: Most importantly, how can people get in touch with you, Clinton?

[00:24:49] CO: Okay. Yeah. My direct line is area code 256-975-4964. My email is [email protected], or you can find us online in the insuranceguyonline.com.

[00:25:05] WS: Awesome. Thank you, Clinton. That’s a wrap.

[00:25:08] CO: Thanks.

[END OF INTERVIEW]

[00:25:09] WS: Don’t go yet. Thank you for listening to today’s episode. I would love it if you would go to iTunes right now and leave a rating and written review. I want to hear your feedback. It makes a big difference in getting the podcast out there. You can also go to the Real Estate Syndication Show on Facebook, so you can connect with me and we can also receive feedback and your questions there that you want me to answer on the show. Subscribe too, so you can get the latest episodes. Lastly, I want to keep you updated. So head over to lifebridgecapital.com and sign up for the newsletter. If you’re interested in partnering with me, sign up on the contact us page, so you can talk to me directly. Have a blessed day, and I will talk to you tomorrow.

[OUTRO]

[00:25:49] ANNOUNCER: Thank you for listening to The Real Estate Syndication Show, brought to you by Life Bridge Capital. Life Bridge Capital works with investors nationwide to invest in real estate while also donating 50% of its profits to assist parents who are committing to adoption. Life Bridge Capital, making a difference one investor and one child at a time. Connect online at www.LifeBridgeCapital.com for free material and videos to further your success.

[END]