January 31, 2017

by Sean Hess, Owner, Broker, Author

904-386-8327, Sean.Hess.Brk@gmail.com

Following is an excerpt from my forthcoming book, “How To Buy A House: Resales and Foreclosures”.

Insurance a “Bad Bet” or a “Good Bet”?

Statisticians and economists sometimes voice the opinion that homeowners insurance is a bad bet because the risk is not high enough to warrant the cost, that in fact it’s a “bad bet” based on the probability of loss. While I agree the risk is low on the typical house, I’m not really insuring the house when I purchase homeowners.


I am insuring my retirement.

Here are my thoughts: Yes it is money down the hole paying $700-ish a year for homeowners insurance in the unlikely event that my toaster oven and my home’s electrical system have a disagreement.

However, if the toaster oven and the wiring decide to skip mediation and it results in a fire, well, my insurance buy is a “bet” on the absolute certainty that I don’t have the money (or time) to rebuild the house if it burns down. Or more correctly, I may be able to rebuild, but with an absolute certainty I would bankrupt my retirement savings. SO here’s my actual bet on insurance:

1) Buy insurance at $700 a year: 100% certainty house is rebuilt, and someone else takes care of it

2) Do not buy insurance: 100% certainty house will not be rebuilt or all savings wiped out, and I will have to take care of it.

Thus the certainty I choose is $700 and a bargain at that. I’m not insuring my house; I’m insuring (as best I can), my retirement and my time (along with my sanity).

The one caveat I’ll make is in the case of vacation homes.

If this were a modest vacation home with really high insurance costs (say, $5,000 or more a year in flood insurance for a smaller, older home on the ocean), I might choose to invest that money instead of purchase insurance. This would be a gamble in the short term, for as long as it takes to build the invested funds into a realistic hedge against damage to the home. The nice thing about this approach is that these funds will add to my bottom line, especially after I sell the home and the funds are “freed.” This would also assume, of course, that the home and the ocean don’t decide to coexist in the same space for a period of time (and thus the funds would be needed to rebuild).

About the Author

Sean Hess is the owner and broker of SA Realty in St. Augustine, Florida, and the author of the How To Buy A House series. Currently an MBA candidate at the University of Utah, David Eccles School of Business, he delivers opinions here on business and real estate.

As one of his past customers wrote, “Sean Hess is a true professional. His client’s needs are primary.”

Contact Sean:

904-386-8327 (cell)