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Financial Planning > Behavioral Finance

Problems When This Old House Becomes Your Client's Home

By Fran O'Brien

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The back-to-the city trend in recent years has not ended Americans’ love of suburbia, but it has resulted in a noticeable shift in living preferences. Today, a not insignificant share of the population, in all age groups, is opting for urban neighborhoods that a decade or two ago were considered undesirable or nonresidential.

For financial advisors, this trend in housing preferences has ramifications for clients’ financial plans. It also increases potential liabilities of which advisors and clients themselves may not be aware.

For example, many urban neighborhoods that are magnets for new city dwellers are designated historic districts. These are areas for which a local government has established rules and regulations regarding the external appearance of homes, and at times their internal features, to preserve their historical integrity.

There are about 2,300 local historic districts spread throughout the country, and they are not confined to urban areas. Many suburban and even rural historic districts exist, and newcomers buying homes in these districts may not be aware of the restrictions on renovations they may face, or the cost of making changes that comply with requirements.

For those who love the charm of an older home and derive satisfaction from living in an area with historical significance, the hassle and cost of complying with historic district requirements — such as limitations on external paint colors and types of windows that can be used — may be annoyances, but not deal-breakers. In fact, buying a home in an historic district is often a good investment.

PlaceEconomics, a Washington-based research firm that specializes in analyzing the economic impact of historic preservation, has found that property values in local historic districts appreciate significantly faster than the market generally in the vast majority of cases.

Many buyers of homes in historic districts find that their investment gains are greatest when they buy a neglected or dilapidated home in a new or long-time historic district and then make extensive renovations. These changes are designed to bring the home up to modern standards in terms of heating, cooling, plumbing and electrical capacity, while still complying with the requirements of the district to preserve exterior elements (which could mean restoring original windows rather than replacing them, for example) and perhaps retaining and restoring many of the original interior elements of the home such as elaborate doors, stained glass and bathroom fixtures.

For many historic home buyers, renovations and restoration are not only investments that can pay off handsomely, but also are a labor of love and an opportunity to immerse oneself in history, architecture and interior design. But there is no denying that the process can be expensive, especially as it often involves skilled craftsmen and artisans, says Kate MacDougall, a historic home specialist at Chubb.

Financial advisors can help clients involved in such undertakings by pointing out a risk they may not realize they face should their restored home be damaged by fire, water or in some other way. The risk is that while their homeowner’s insurance may cover the cost of repairing or replacing damaged portions of a home’s interior to standard levels, it probably won’t cover the cost of returning the home to the level achieved through a restoration. The cost of replacing damaged walnut-paneling and molding in a library that had been meticulously repaired and restored, for instance, could fall squarely onto a financial advisor’s clients, because their insurance probably wouldn’t cover the expense of restoration to the original state.

Premium insurance policies, which may be a better fit for a historic home, generally handle such losses differently. They will cover the cost of replicating the home’s original details or those that had been replicated and then damaged. The insurers will go to specialists to replace those features rather than pay for builder-grade materials from mass suppliers.

Fran O’Brien is division president, North America Personal Risk Services, Chubb. She can reached at [email protected].

Fran O'Brien

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