In the early days of a real estate career, it’s common to run into properties that back up to a creek or stream — sometimes tagged with a flood zone designation like ‘AE,’ which requires flood insurance, even when the lots sit well above the water on higher ground. An elevation certificate can sometimes remove that requirement. But just because a property isn’t currently in a flood hazard zone doesn’t mean it will stay that way.
Understanding Flood Plains
FEMA is required to update flood maps every five years under a mandate from Congress. In high-hazard areas this is often followed, but because of limited funding, many community maps haven’t been updated in 20-30 years. FEMA relies on historical data to assess these hazards, without forward-facing predictions.
The National Flood Insurance Program (NFIP) is designed to insure anyone affected by the flood plains FEMA has mapped, outdated or not. Unfortunately, NFIP premiums haven’t been sufficient to cover payouts over the last 20 years. Congress has raised the NFIP’s borrowing limit multiple times, and in 2017 claim payouts pushed the program to its debt ceiling of $30.425 billion, after which Congress cancelled $16 billion of that debt.
For the real estate investor, it’s wise to carefully weigh any proximity to a flood plain and its potential long-term effect on value.
Flood Plain Types
FEMA’s high-risk flood zones begin with the letters “A” or “V.” Homeowners in these zones are required to purchase flood insurance if they have a mortgage from a federally-backed or federally-regulated lender. ‘A’ alone means no Base Flood Elevations have been established; ‘AE’ means Base Flood Elevations and areas of study have been established.
FEMA’s low- and moderate-risk flood zones — outside the Special Flood Hazard Area — begin with the letters “X,” “B,” or “C.” Flood insurance isn’t required in these zones, but they can still carry risk: historically, more than 20% of NFIP claims come from policyholders in an X, B, or C zone. ‘B’ is an area of moderate risk (being replaced with shaded X), and ‘C’ is an area of minimal risk (unshaded X).
If a FEMA map update doesn’t accurately reflect your property, you can submit a Letter of Map Amendment with detailed survey or mapping information showing what you believe to be accurate — FEMA may use this to change your flood hazard zone designation.
Ways to Counter the Effect of a Flood Plain on Property Value
1. Reduce the Risk of Flooding
Being in a designated flood zone can be a concern, but it’s the actual cost of flooding that influences long-term value. FEMA data shows that roughly 20% of paid claims go to people who carried flood insurance but weren’t in a designated flood zone — so regardless of your zone designation, which could change, assess the actual risk. For example, if a property sits 200 feet from a river at a low elevation, could fill be brought in to create a natural rain garden barrier? Or could the foundation be elevated above the Base Flood Elevation (BFE), with at least one foot of “freeboard” — extra space between the BFE and the first floor — added for good measure?
2. Manage the Cost of Insurance
There’s no way around the risk, but the steps above can protect both the physical property and its insurance costs. Even the NFIP itself would be insolvent without Congress repeatedly stepping in to bail it out and cancel debt — absent continued bailouts, insurance costs will keep climbing. To help manage costs, consider:
- Elevating utilities — moving water heaters, HVAC, and electrical panels to higher levels to protect them from damage
- Installing flood openings that let water flow in and out through a foundation
- Filling in basements and opening up crawlspaces to let water flow away from the building
- Elevating the structure above the Base Flood Elevation
- Bringing in fill soil to change the topography
3. Be Proactive About Appreciation Value
Just as a stigma — like a past tragedy — can cause a property to lose future value from market perception, the same effect can happen with a property in a flood-prone area: buyers who “know the area” may perceive it as negatively affected, pushing down future value. To counter this, save all data from flood management and abatement work to show future owners, document how mitigation efforts reduce future risk, and provide elevation certificates where applicable.
The Bottom Line
For savvy investors, there can be significant benefits to improving sites in flood-affected areas — profits many overlook at first glance. But not actively managing flood risk carries a heavy penalty, so being proactive protects both current cash flow and future value.
