Climate change is affecting real estate investing in a significant way. The more natural disasters that occur, the more likely it is that homes will be damaged by floods which means that if you’re considering fixing & flipping a flood-damaged house, you should be aware of the risks involved. So should you fix & flip a flood-damaged home or avoid the idea altogether?
There is no easy answer when it comes to whether or not to fix &flip a flood-damaged home. On the one hand, storm-damaged properties can be much cheaper and close faster than a typical investment property. On the other hand, there are also a number of reasons why you might want to avoid fixing and flipping a flood-damaged home. For example, it can be costly, and there is always the risk that the property won’t sell at all because of its condition.
But this isn’t a black and white situation; there’s lots of gray involved in making the decision. So let’s get into what you need to know about flood damage, the pros and cons of investing in these types of properties, and a few things you should consider before making your decision. Let’s dive in.
Why is Flood Damage to an Investment Property Such a Bad Thing?
- Property damage from flooding can lead to extensive and costly repairs. The problem with water is that it can go almost anywhere and fit into any crevice, so when flooding happens, the ability to remove the moisture and repair its damage can involve significant amounts of capital.
- Flooding can contaminate the property with water and other contaminants, damaging the property’s structural integrity and increasing the risk of mold and other pests.
- Flooding can cause water to seep into the property’s foundation, leading to structural instability and potential collapse.
- Flooding can damage the property’s electrical and plumbing systems.
- Insurance companies may be less inclined to cover your fix & flip. Since insurance is a requirement for many lenders, this could make getting the money you need nearly impossible to get.
- Insurance companies may be less inclined to cover your buyer. If your fix & flip is in an area that insurance adjusters have determined is in the flood plain, it might be difficult for any homeowner to get affordable coverage. If they can’t get homeowners insurance, it’s less likely they’ll want to (or could) buy your property.
Signs Your Potential Fix & Flip Might Have Flood Damage
- Water has saturated the walls and ceilings, potentially ruining insulation and causing severe structural damage.
- Broken or missing windows or doors that allow water and wind entry.
- Pools of water on the floor, furniture, or walls.
- Electrical equipment damaged by water, including but not limited to lights, fans, and appliances.
- Damage to floors, ceilings, and walls from water infiltration or high water pressure.
Is It Always a Bad Idea to Invest in a Flood-Damaged Property?
So now that I’ve given you the bad news, here’s the good: Believe it or not, you can rehab and resell flood-damaged properties! In fact, one investor named Ray Sasser turned it into a profitable business. Sasser first looked into investing in flood-damaged homes after Tropical Storm Allison tore through Southeast Texas in June 2001. According to Reuters.com, “He bought homes for 30 to 40 percent of their pre-storm value, spent another 15 percent on repairs, and sold many a year later—at full value.”
Though Hurricane Harvey produced devastating effects, investors still believe flood-damaged homes can turn a profit. This is due to the economic strength of Houston itself. The city boasts a rare combination of lucrative job opportunities, a low cost of living, and phenomenal population growth. Despite the storms, the Texas real estate market holds firm. In fact, fix & flip properties pop up now more than ever. Investors could find themselves with not only one potentially profitable house to flip but ten or twenty!
The most critical element affecting the profitability of these homes is seller motivation. Many sellers want to offload their damaged property as soon as possible. Others want to move out of the state quickly. Most have been through multiple tropical storms and had enough.
Reasons to Invest in Flood-Damaged Homes
- Many flood-damaged homes are in good condition and would make great starter homes or second homes.
- If floodwaters damage the home, you may be eligible for government assistance to get it back into good shape. The Federal Emergency Management Agency (FEMA) will help you receive money to repair or replace damaged property, though there may be rules around occupancy timeframes before you can flip it.
- You help reshape a torn community. So many people think real estate investment is inherently unethical when nothing could be further from the truth. Taking the initiative to help rebuild a damaged community can do a lot of good for a lot of people.
Things to Consider When Purchasing Flood or Water-Damaged Homes
Though you can take advantage of many investment opportunities in flooded areas, you need to consider some important facts first.
You should not invest in water-damaged properties if the following criteria apply:
- The property is located in a FEMA area. Due to high flood insurance premiums and high-risk factors, most hard money lenders (including The Investor's Edge) will not lend in FEMA areas.
- The property has foundation, well, or septic tank issues. Flooding can cause a great deal of damage. If a storm impacts the foundation, you may be out of luck. It all depends on the cost-to-cure price. If remediation for septic tank, well, or foundation problems is $5k or less, many lenders will still work with you. Hard money lenders are understandably wary of issues that take a lot of time and money to resolve. You may also need an engineer’s report verifying the cost-to-cure to obtain fix & flip funding.
- The property has extensive mold, electrical or A/C problems. Water damage and mold go hand-in-hand. You will definitely want to test for mold, as it may be difficult to detect with the naked eye. If you do see mold on the property, don’t panic; you may still get funding to rehab the property. If cost-to-cure is less than $5k with a remediation bid, you can still obtain financing. Also, keep in mind the electrical systems. If outlets or wiring have been underwater, there’s a good chance you will need to replace them. The same goes for an A/C unit. It will most likely need a new motor if that has been underwater. Regardless, you should factor a unit replacement into your budget just to be on the safe side.
- Standard flipping rules still apply. If the property seems like an incredible deal, you may jump into it too fast without doing your homework. To be successful, you still need to consider the usual factors that go into fix & flips, including comps and how hot the market is in the area. Just because you can get the property for a song doesn’t mean it’s a good deal; you’ll still need a willing market ready to buy.
How to Successfully Flip a Storm-Damaged Property
- Find the right fix & flip opportunity. If you are considering fixing and flipping a home that has been affected by flooding, there are a few things to keep in mind. First, make sure the house is structurally sound. Second, be aware of the current market conditions and what types of properties are selling well. And finally, be prepared to do a lot of research and spend time on the property before making an offer.
- Have your contractors do a thorough evaluation. In all likelihood, you already have contractors you know and trust to do a good job on your investment properties. Still, flood damage adds another layer of issues that you’ll need your contractors to consider. You may want to work with companies specializing in flood or fire damage to ensure the property gets the rehab it needs.
- Be prepared to spend a lot of money. Flooding can cause extensive damage to a home, which means you’ll likely need to spend a lot of money to fix it up. This includes the cost of repairs and the cost of replacing any lost or damaged property.
- Work quickly. The sooner you can get water-logged homes dried out, the better for your margins. The longer water gets to sit and seep into the house, the more you’ll need to spend getting things back to good condition.
- Don’t skimp on inspections. Invest in having an inspector come through the home before you’re ready to list it. They may notice issues that your buyer (or buyer’s inspector) will ahead of time so that you can prevent yourself from having to renegotiate or lose the sale entirely.
- Be prepared to wait. The market for flood-damaged homes is typically very slow, so you’ll likely have to wait a long time for the right buyer to come along.
- Be prepared to be patient. Flooding can be a traumatic event for a community, and many people are hesitant to buy a home that has been affected by it. It may take some time before the market becomes ready to accept these properties.
In spite of some risks, flooded homes are great fix & flip opportunities for real estate investors. In many storm-affected areas, you can find them in abundance, going for a severely discounted price. And the best part is, investing in rehabbing these homes makes you an active player in helping rebuild damaged communities.
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