In the wake of Hurricane Harvey, signs of the storm damage are everywhere. Not all those signs are related to property damage, though. While there are plenty of homes devastated by flood waters and mold, mildew, and other water-related damage, there are also a number of bandit signs on the streets. These signs promise homeowners to pay cash for flooded homes and encourage readers, “Don’t fix it. Sell it. Quick close.”
Real estate investors who travel to disaster-struck markets to pick up the pieces and the discounts often get a bad rap from the media. Linda Liberatore, president of property management service provider Secure Pay One, disagrees with this negative reputation and believes these investors actually help homeowners who would like to simply take their insurance payout and leave the area.
“Really, these investors are helping rebuild the local economy when they make these cash offers,” she said. “Of course, not everyone is making the most sensitive offers and you really have to be alert to people’s situations and not take advantage, but if a homeowner really would just like to walk away and rebuild their life somewhere else, buying that house is not just saving them a lot of stress but it probably is helping prevent neighborhood blight in the long term as well.”
Charles Sells, founder and CEO of the PIP Group, a turnkey real estate investing company, understands both sides of the equation. After his home and office were severely damaged during 2016’s Hurricane Matthew, Sells had to make the decision whether to move on or rebuild. For him, the decision to rebuild was easy even if the process was not. They spent the past year rebuilding their personal home and repairing their professional facilities. However, the process was not a quick one. “Our neighbors still have a tarp on their roof,” Sells said.
“From an investor standpoint, we had damage to one out of every five homes [in the area],” Sells noted, adding that many local investors did not carry named storm coverage at the time because a hurricane had not hit the region with an impact like Matthew’s in 126 years. Sells recouped some of his losses and alleviated the pain of a nearly 600% jump in repair costs by offering housing to traveling contractors at discounted rates. “We waited for the demand to go back down and then made our own repairs,” he said.
On the personal side, Sells said that although he would have been “annoyed about somebody trying to low-ball me an offer to buy my house, I would more than welcome a hard money loan in that situation.”
Because many homeowners do not realize that their homeowner’s insurance deductible will change if a storm is named, often rising from a flat $1,000 to 10% of the home’s total value, for example. Sells said that in his experience, elevated investor activity in the wake of a natural disaster can be a good thing for many homeowners.
“If you are elderly and do not want to make the repairs or if you are on a fixed income, [that discounted cash offer] could be a good solution,” he said.
Like Liberatore, Sells believes that a little sensitivity to the homeowner’s situation goes a long way.
“Nobody wants to be reminded of their bad set of circumstances regardless of how fair of an opportunity you are offering,” Sells said, warning that real estate investors may come off as “predatory” in these situations if they do not keep the homeowner’s needs front and center when presenting an offer.
Fail in this, “and the door is likely to get slammed in your face,” Sells said, adding, “We, ourselves, offer fair terms that enable the homeowner to keep their homes and that pride of ownership. The only way this works is if you provide a better set of circumstances than the homeowner had before the storm.”
Investing and Rebuilding: Part of the Same Process
According to BloombergBusinessweek, real estate investors are “eyeing the billions of dollars in hurricane-ravaged property in Texas and Florida and deciding it may be the time to take out their checkbooks.”
Reporter Prashant Gopal observed that investors often attempt to “buy low, either fix-up and flip the houses or rent them out for several years, and unload them later, doubling their money or more.” Gopal cited buyers who “snapped up co-ops and office towers when New York was near bankruptcy in the 1970s [who] made a killing” as an example of a way in which betting on the wake of a disaster can pay off. He also noted that some investment firms today are pitching their investors on buying flooded homes, repairing them, and then renting them back to homeowners.
Given that Hurricanes Harvey and Irma together damaged about 1.8 million homes with Harvey alone possibly caused uninsured flood losses as high as $37 billion according to Corelogic, it is easy to see why homeowners might be tempted to close up shop, move elsewhere to escape the traumatic memories and the difficult process of rebuilding.
However, homeowner advocates fear that homeowners will make emotional decisions that might not be the wisest course in the long run. Many homeowners and investment property owners do not have any idea how much insurance money and even federal- or state-funded financial support they might receive during the rebuilding process. If they sell fast and early at a discount, they might be missing an opportunity to rebuild bigger and better.
“In the wake of an event like a Harvey or an Irma, the claims process can take a little longer because of the sudden increase of volume of property owners with losses,” said BreAnn Stephenson, assistant vice president of Affinity Loss Prevention Services (ALPS), a company dedicated to helping prevent property damages and related financial losses. “Contractors may not be immediately available to give bids for repairs because they are inundated as well, which can make it challenging for someone to report the extent of the loss to their insurer.”
Investors considering making major purchases in markets in the immediate wake of a natural disaster need to make sure they understand the long-term ramifications of potential property damage as well. Flood remediation can be costly and complicated, so jumping in too quickly could lead to mistakes on both sides. As always, careful consideration, due diligence, and the right education will make all the difference.