Guiding clients past the risk pitfalls
By Mark Wooditch
Los Angeles is still recovering from January’s massive wildfires that destroyed thousands of homes and businesses and displaced some 200,000 people, according to an update by the International Medical Corps. The wildfires also intensified the region’s—and state’s—ongoing human crisis of homelessness, adding to the 75,000 who are unhoused, according to data from the Los Angeles Homeless Services Authority.
Amidst the rebuilding, affordability continues to be a drag on solutions: The high cost of living, the high cost of money, and the high cost of new construction are all only the tip of a large iceberg. A growing number of home builders and investors, though, are betting on single-family, build-to-rent (BTR) home developments as a viable option.
According to Realtor.com, build-to-rent housing operates similarly to apartment buildings under property management companies, while offering a single-family living experience. Unlike dispersed individual rentals, build-to-rent homes create communities with diverse housing types, including townhomes, cottages, and detached houses.
These homes have many characteristics of single-family rentals, and the communities vary in terms of amenities. Homes are designed with residents in mind, incorporating features that meet their needs, and investors have a long-term ownership focus, aiming to generate revenue over time instead of immediately.
BTR single-family developments have surged in the U.S. since 2019, especially in Sun Belt states, where starts in 2024 grew 15.5%, hitting record highs, according to analysis by Point2Homes. High costs and regulatory complexities (concerning land use and rent control, for example) may deter expanded development in Southern California.
The market has rewards for builders and investors. But agents and brokers must be up to speed on the risks inherent to BTR projects to guide their clients past the barriers along the way.
Red flags: Conversions, building defects, class action potential
BTR single-family developments can be highly profitable, depending on variables ranging from location choice to efficient management practices. Post-construction setbacks are common (e.g., rent delinquencies are more damaging in a BTR community than in an owned-home development). There’s also uncertainty over tenancies given the number of renters who want to buy when market conditions turn.
Agent and broker expertise is critical, though, for guidance around product liability claims that become more complex for BTR situations. Their counsel from the initial, planning stages of the project will be instrumental for ensuring the optimal safeguards are put in place.
The biggest issues are:
Insurance voids on conversion. When market conditions improve and investors can optimize their returns, BTR properties often are converted to individual ownership. But inadequate planning around the state’s statute of repose (fixed time limit for legal action) may result in the loss of insurance coverage if the limit has not expired.
Construction defect risks. Between high interest rates, nuclear verdicts on claims and a boom in pricey custom home-building projects, these claims are rising. Getting swept up in a surge of claims can be costly.
Heightened class action risk. A BTR project occupied by renters and owned by a single investor is more attractive to insurers as renters don’t have the standing to form a claimant class. But the risk of class action litigation, if construction defects are present, rises exponentially when the homes are converted and sold to individuals.
Three safeguards against a future BTR conversion risk
Among the most effective safeguards for BTR project conversion risks are:
- The builder can be advised to play it safe: decide early to sell the homes within the repose limit. The client will pay more for insurance coverage that removes the limitation of conversion. It’s expensive. Some developers won’t consider this their problem, as a near-term conversion wasn’t planned. Even so, this may become a problem for subsequent investors.
- Structural warranties are another option. The traditional builder warranty is like a home warranty. It’s not negligence-based. If something breaks, a deductible is paid, and the insurer pays to fix it. But it’s done at the building level. The adaptation combines the structural warranty with a traditional general liability product. This bakes in a risk transfer mechanism. This allows for continued, if limited, structural protection even if the traditional liability insurance had been voided.
BTR single-family developments
have surged in the U.S. since 2019,
especially in Sun Belt states, where
starts in 2024 grew 15.5% … .
- A newer option in North America is Inherent Defects Insurance (IDI), which HUB International has repurposed for the rising risks with BTR conversions. IDI insurance is common in the United Kingdom and Europe. It serves as an extension of builders risk insurance, providing protection against defects like leaks and building collapses beyond the end of the construction period.
Single-family build-to-rent developments stand to play an important role in a pressured U.S. housing market. With the right risk management strategy, builders and investors can capitalize on this opportunity without exposing themselves to undue risk. It’s up to brokers and agents to show them the way.
The author
Mark Wooditch is the Los Angeles Orange County construction practice leader for global insurance brokerage Hub International. He spent 30 years at The Wooditch Company, Insurance Services, Inc., with a focus on commercial contractors. In 2023, the practice was sold to HUB.
