House Resale Insurance

by Mr. Cheap

This idea is targetted primarily at real estate agents.  Like many other middle-men, the Internet is destroying a previously safe and lucrative market for agents.  Either property sales will shift to be predominantly for-sale-by-owner, or agents are going to have to start adding more value to their role in the process.  This is one way they could do so.

This would be an insurance product, that would guarantee the value of residential real estate.  Agents would use it (in part) to sell their services to customers as a guarantee that they would be able to re-sell the house they are buying for at least what they paid for it.  In order to claim this, they would have to list the house with the original agent, give her a reasonable period of time to sell it, at which point if it hadn’t sold the agent would buy it from them herself (less her commission).   In reality, it would be the insurance company who is purchasing the property (and probably the agent would lose out on her commission).

This is obviously reassuring to the buyer, as it’s a guarantee they won’t lose money on the purchase.  It’s good for the agent, as it guarantees them repeat business (previous clients will want to list with them in order to be protected by the guarantee, if the agents sells for MORE than it was originally bought at, it’s gravy for everyone).

In the current market I can see why people would think that either insurance companies would be crazy to offer policies along these lines, or that the premiums would be outrageously expensive, but I don’t think either would necessarily be the case.

Typically house prices go up or plateau (stay the same).  Sharp dives, like we’ve recently experienced, are fairly rare (leading to the now obviously debunked myth that real estate always goes up).  In normal environments, policy premiums will be pure profit, with few or no payouts from the insurance company.  From one perspective, each year the owners are in the property inflation decreases the insurance company’s liability (since the dollar value of the property is worth less in the future than it is today).  Even in the case of a sharp drop, there would be a number of properties that have increased enough in value that they wouldn’t drop back to their purchase price, and there would be owners who just don’t want to sell.  A market like we’re currently in, where interest would be highest in such an insurance product, would probably be the safest time to offer a product like this (how much further can values drop?).

It’s also important to remember, in the worst case they’re only going to cover the DIFFERENCE between the lower sale price and the original purchase price, not the full value of the house.  Also, there should also be exclusions for major changes to the property (such as it being burnt down in a fire) which would be covered by other insurance, not by this.

If agents (or brokerages) bought this as a blanket coverage for all transactions they’re engaged in, I suspect the insurance could be offered to them at a fraction of a percent of the purchase price (perhaps Riscario can comment on whether my intuition is correct on this).

For this post, or any other of the wacky business ideas I post, obviously I’m releasing any ownership claims I may have over these ideas. If you like something I post and feel like you can make money from it, please feel free to do so! Let me know when you’re opening and we’ll do a post on it to give you some free advertising.

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