Do you remember the property that I won the  “Mayor’s Award for Excellence in Property Improvement” for?  Well the story does not end on that note, not at all.

The Fire

The property was cash-flowing nicely when disaster struck.  A curious four-year-old  fascinated by matches set the building on fire.  No one was hurt, but the damages exceeded  $100,000.  Fortunately, I had been prudent enough to upgrade the insurance policy substantially after rehabbing the property.  I had assumed the existing insurance policy when I purchased the building, but after plowing $40,000 into the place I reviewed that policy and realized the  property was woefully under-insured.  Had I kept the original policy, the fire would have cost me  70,000.

The city of Aurora deemed the building to be less than 50% damaged.  It was classified  as having “legal non-conforming” zoning.  What this meant was that if the fire had destroyed  more than 50% of the building, I could only have four units, not six.  With under 50% damage  I was able to keep the six units.

Under-Insured

I immediately hired a general contractor.   We pulled building permits  and the work  commenced.  Although I had substantially upgraded my insurance, I did not include a provision  known as “building ordinance and increased cost of construction.”  If you have these coverages,  the insurance  company will cover the necessary upgrade repairs due to new building ordinances  one is required  to meet in the case of a fire.  In my case, the city wanted me to put in new  electrical wiring, including increased electrical service coming into the building and circuit breakers accessible in  every unit.  My policy would have covered replacing the existing screw-in  fuses,  but not the new requirements.  This cost me about $10,000 over and above what the  policy paid.

The Recovery

The repairs took around six months, after which the building was operational again.  I  re-rented the apartments and the building ran well.  In general, after a rocky start this property  had  moderate appreciation and cash flow.

So what should you get from this? Always read your insurance polices, prepare for the worst and use reliable contractors.

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