When Cindi Koehn listed her Lake County home for sale last year, she didn’t expect any trouble selling the beautiful 1.7-acre property overlooking the lake. But three interested buyers walked away. The cost to insure it, they told her, would be too expensive.

Koehn was surprised and disappointed. In 2015, dozens of Lake County homes had burned to the ground in a series of wildfires. Four years later, Koehn was dropped by Farmers Insurance over concern about the risk of fire on her property. Still, she didn’t expect insurance problems to prevent her from selling her home.

“I feel like I’m at the mercy of the insurance industry,” Koehn said. “We thought that there wouldn’t be any issues when we went to sell.”

Before insurance companies started retreating from the state, home insurance was divorced from the process of searching for a home. Only after getting their offer accepted would buyers begin to look for insurance, which is required for a mortgage. Now, with the insurance market in turmoil, some sellers like Koehn are finding buyers backing out due to the high cost or unavailability of insurance. Buyers, meanwhile, are scrambling preemptively to obtain insurance, making all-cash offers or choosing not to purchase homes at all. 

“Homeowner’s insurance used to be a rounding error, depending on where you lived. It’s not that way anymore,” said David Russell, a professor of insurance at CSU Northridge.

The problems are especially acute in areas of high wildfire risk, but they have rapidly spread across the state, including the Bay Area.

In Lake County, the availability and affordability of insurance has been an issue for several years, according to Marie Wotherspoon, a real estate agent in the area. But the effects of the crisis have begun manifesting elsewhere. In San Diego, where Wotherspoon was based until last year, Foremost Insurance’s decision to stop offering condo insurance caused a number of condo owners to lose coverage, she said. Even in some coastal cities, buyers have struggled to find insurance, she said.

It’s not clear exactly what impact the insurance crisis will have on home prices. A report published in 2023 from research and technology nonprofit First Street Foundation found that a home worth $300,000 whose annual insurance premium rose from $1,400 to $3,200 — which the report says is the average cost of the FAIR Plan, the state-created wildfire insurer of last resort — could lose about 12% of its value.

“I think we’re just beginning to understand that (insurance) might be an issue on almost every sale,” said Emma Morris, a Berkeley-based Realtor with Red Oak Realty.

Diane Britto, a Walnut Creek-based real estate broker, said she first noticed insurance becoming an issue for buyers near the end of 2023. Earlier that year, both State Farm and Farmers Insurance — the top two home insurers in the state — stopped writing new homeowner’s policies, even as they continue, for the most part, to renew existing policies.

Even if a buyer finds a policy, they’re often blindsided by the high cost, Britto said. The average annual premium in California rose by about $400 from 2017 to 2021, double the national increase, according to the National Association of Insurance Commissioners.

“First-time buyers, they’re always shocked,” Britto said, noting that rental insurance typically costs hundreds annually, far less than home insurance.

Higher premiums can affect buyers’ ability to secure a loan. Some buyers are preapproved for a mortgage based on the average cost of insurance, only to discover that the cost of coverage could be double what they expected, according to Michael Koran, a Bay Area mortgage agent.

Buyers are running into insurance issues in San Francisco too, said Chris Lim and Michelle Balog, real estate agents with Christie’s International Real Estate. While the city doesn’t have the same wildfire risks as other parts of the Bay Area, they explained, its older buildings sometimes have outdated wiring that can present a fire risk, forcing sellers to replace their electrical systems or buyers to call multiple insurance brokers.

Backing out of a deal can be costly, according to Daryl Fairweather, chief economist at online real estate brokerage Redfin. If a buyer retracts an offer that’s been accepted, they usually forfeit their earnest money, a deposit that’s usually between 1% and 3% of the sale price.

Some options, such as making an offer contingent on finding insurance, might make a seller more likely to choose a different offer — especially in high-demand areas like Walnut Creek, according to Britto.

In one situation, Britto recounted, a buyer made an offer only to learn later that the insurance company wouldn’t cover the property without expensive upgrades to the home’s plumbing system — a bill the seller wasn’t willing to foot.

Sandy Jamison, a broker with Tuscana Properties in Campbell, said she’s helped clients try to persuade sellers to lower their asking price or offer other concessions to offset high insurance prices, though sellers don’t always agree.

Costly insurance payments increase a buyer’s debt-to-income ratio at a time when high interest rates have already done so, according to Koran. With too high a ratio, a buyer might be seen as a risky investment for a bank loan.

Koran hasn’t had anyone back out of a contract yet due to insurance, he said. If that possibility threatens, he encourages buyers to get help from their family or use their funds to pay off other debts and lower their debt-to-income ratio. 

But he has seen some buyers walk away from a home purchase due to high insurance costs, citing the example of a roughly $2 million home in Marin County that would have cost $9,500 annually to insure under the FAIR Plan.

The FAIR Plan, whose clientele more than doubled in the last five years to 339,000 dwelling policyholders, is often the only option in fire-prone areas. Buyers throughout Lake County, for example, have struggled to find insurance, but it’s especially hard to find homes in forested areas, Wotherspoon said. FAIR Plan premiums, though, are generally higher than those in the normal market, and offer more limited coverage. Its rates are likely to rise even further, according to the plan’s president. 

The plan also caps coverage limits for homes at $3 million. Mortgage lenders will typically require an insurance policy that would completely cover the cost of replacing the home, according to Tom Banducci, a San Diego-based branch manager for Cornerstone First Mortgage.

In high-risk areas, some properties “might become ineligible for mortgages if insurance is not readily available and affordable,” Koran said. 

As insurers pull out of the state and the availability of coverage dwindles, the impacts are also being felt in areas believed to have a lower risk for wildfires. In September, about 30% of FAIR Plan policies covered properties not located in wildfire-prone areas, according to recent testimony by FAIR Plan President Victoria Roach. As of March, that share is now 35%, according to a FAIR Plan spokesperson.

“There’s this big black box where we cannot see how these (insurance) companies are rating properties,” Jamison said. “We can’t really tell how they’re drawing the lines (or) where they’re drawing them until we go to apply for an insurance policy and they … give us a terrible rating.”

Still, mortgage rates are affecting the housing market more than insurance issues, said Fairweather, the economist. High mortgage rates are leading fewer homeowners to sell, restricting supply and raising prices. Though many real estate experts had predicted rates would fall this year, that has yet to happen. 

In the short term, home values in competitive markets such as the Bay Area remain high. Megan Micco, a Berkeley real estate broker with Compass, said that while “the natural buyer instinct” is to offer less money to account for insurance or fireproofing costs, there are so few homes available that most sellers can find someone willing to pay full price.

That hasn’t been the case in some high wildfire-risk regions such as Lake and Mendocino counties, which are among the few counties in California where home values have declined over the past year, according to real estate brokerage site Zillow.

Koehn, a military veteran, finally got insurance for her Lake County home through USAA, but she has lost hope that her home will sell barring an end to the insurance crisis and high interest rates. For now, she’s renting a home in Santa Barbara County while paying the mortgage and utility bills for the empty house in Lake County, which has taken a deep cut out of her retirement savings.

“I’m 62,” she said. “The rest of my time is going to be spent with my grandchildren, but at the same time, I’m now worrying about a house which is seven hours away.” 

Reach Megan Fan Munce: megan.munce@sfchronicle.com. Reach Christian Leonard: christian.leonard@sfchronicle.com