The economic downturn that began in late 2007 hit the real estate sector especially hard. Real estate research companies reported large declines in commercial property values compared with their pre-crisis peaks.
These large price decreases might attract buyers looking for opportunities, but a low purchase price is only one factor. A property's physical condition, legal encumbrances, and insurance status all affect whether it is a smart investment.
Many properties were only partially completed when the financial crisis hit, so buyers must assess both economic viability and physical condition. Key questions include the scope of unfinished work and whether any existing work needs repair or replacement because of construction shortcuts.
How much of the project has been completed and how much remains to be done?
Does any of the work need to be repaired or redone because the builder took shortcuts?
Do the original construction plans comply with current building codes, or are there design errors that need correction?
Are there significant changes the buyer would like to make to the project?
What liabilities (debts, lawsuits, penalties, etc.) will the buyer assume with the property?
Who will be legally liable for any defects in the design or construction of the project?
If the original owner and builder are responsible for the problems, can the buyer recover from them?
What insurance covered the original project: a single wrap-up program or multiple contractor policies?
Will the insurance apply to construction defects?
If a single wrap-up policy included a deductible or self-insured retention, and the insured party is bankrupt, will the policy still apply?
Are there special conditions that must be met before the policy will apply when the deductible or SIR cannot be paid?
Does the original wrap-up policy extend completed operations coverage beyond the policy’s expiration date, and for how long?
Prospective buyers should pay special attention to Builders Risk insurance. If the original developer purchased this coverage, the policy might have canceled after work stopped. If the general contractor bought it, that policy might still be in force but should be reviewed carefully for vacancy, unoccupancy, and coverage for catastrophic perils such as flood and earthquake.
Buyers also need to check whether lost income and extra expenses resulting from delays due to covered perils (for example, fire or vandalism) are included, and the extent of testing coverage. An experienced broker can help identify appropriate policies such as Commercial Properties Pollution Coverage when environmental exposures are a concern.
Liability for defects and subsequent claims is a major issue; buyers should consider additional liability programs beyond primary coverage, including products like Commercial Properties Umbrella Liability, to address larger loss scenarios.
Arranging insurance for a property with severe physical or legal problems can be difficult or impossible. Work with professionals who have experience placing coverage for complex properties, and be prepared to talk to an agent about available options.
Regardless how low a price may be, a property is no bargain if it carries unmanageable physical or legal risks. Careful examination of a property and its insurance history helps buyers uncover profitable opportunities while avoiding costly surprises.
Frequently Asked Questions
What should I check about existing insurance when buying a partially completed property?
Review whether builders risk, wrap-up, and contractor policies were in force, whether vacancy or unoccupancy provisions apply, and whether catastrophic perils and testing are covered.
Can I rely on a wrap-up policy if the original owner or contractor is bankrupt?
Possibly, but coverage can be affected by deductibles, self-insured retentions, and policy conditions; a careful policy review is essential.
Will construction defects typically be covered by property insurance?
Standard property policies often exclude faulty workmanship, so separate coverages or endorsements may be needed to address construction defects.
How can an insurance professional help when buying a distressed property?
An experienced agent or broker can identify gaps in existing coverage, suggest appropriate policies, and advise on recoveries from prior parties when available.