Knob and Tube, Insurance & the Real Estate Market
Have you heard of knob and tube? I didn’t know much about it either until a couple of months ago when State Farm decided to no longer issue new policies in the state of California. This non-issue suddenly became a big issue for the San Francisco real estate market and it almost killed one of my client's deals.
Knob and tube was used to wire houses for electricity from the 1850s through the 1960s. Generally, it was known to be fairly safe and is likely in 90% of homes in San Francisco (as told to me by a local electrician). However, it can be deemed unsafe and create fires when improperly tampered with and or when insulation is put over it. So, of course, insurance companies see it as a risk.
The backstory is that State Farm was one of the few insurance providers that would honor policies where knob and tube existed in the home. So, when State Farm decided to no longer issue new policies in the state of California, it left a big painful gaping hole and has left a mark on this real estate market in the last month. How? Well, lenders for mortgages require insurance, and if a buyer is not able to land insurance for a property, then the loan and subsequent sale can not close.
As a result, homes with knob and tube are not performing nearly as well these days. One of my clients was able to purchase an Outer Sunset home for $50 - 75k under where it should have sold and did not have to compete for it. This home had knob and tube wiring, we knew that insurance companies were making a big stink of knob and tube, and only one offeror showed up on the offer date with a bid under list price. The listing agent was expecting four to five offers! A week later and several conversations later with the listing agent, insurance providers and electricians, my client was in contract to purchase this property with no bidding war.
Today there are insurance providers that will provide insurance to homes with knob and tube, but that insurance is EXPENSIVE and they are requiring the work to rewire a home be completed within 30 days of homeownership. My take is that Sellers who take care of the rewiring before selling will do just fine. But, sellers who don’t complete the rewiring before a sale will take a hit on the final sales price as buyers will see an opportunity for a discount.
This is such a big deal that Matt and his former expediter have partnered on a business focused solely on the replacement of knob and tube - www.knobandtubereplacement.com - in a move that is pretty similar to when construction companies solely focused on seismic retrofitting popped up when the city started requiring soft story retrofitting. They have the relationships within the city, they have the labor, and they are ready to go!
Knob and tube is just one part of the insurance problem. This is also affecting homes in high fire zones and homes worth $2,000,000 plus. Hit me up if you’re having issues! I’m happy to make recommendations to insurance agents who know how to navigate through this mess!
* Image courtesy of Attic Projects
