After the 2016 Flood: What to Expect in Real Estate and Beyond

After the 2016 Flood: What to Expect in Real Estate and Beyond

Answers to important unresolved issues may change this, but as of now, here are our broad views on what lies ahead.

We broke down residential properties into 3 general categories, and offer our thoughts on issues related to each:

1. Homes which were untouched by the flood
As detailed in our previous article, we believe that prices for these homes should rise modestly (10-15%) over the next year. This is due to the simple law of supply and demand. Among these houses, those in so-called “no flood” zones (zones X, C, or B; properly called “moderate to low risk areas”) should be the most sought after. (Click here for a more complete explanation of flood zones.)

Undamaged houses in “flood zones” (zones A, AE, or V; properly called Special Flood Hazard Areas / SFHAs) will still be in demand, but because of their flood zone classification, they’re not quite as attractive.

2. Homes which received minimal flooding, and have never flooded before
These houses should still be very marketable after PROPER repair, especially those not in an SFHA. Sellers will have to disclose the fact that it flooded, of course. Homes such as these will take some time to repair, and once complete, probably won’t fetch quite as much as undamaged homes. However, they will have considerable value, since there are a limited number of homes which were completely untouched. It’s possible that bargains may be found among these once-flooded houses, if the owners decide to sell them as-is and move instead of repairing them.

3. Homes which received a significant amount of flood damage
Houses in this category have many potential issues to examine. Local governments are requiring inspections before issuing building permits. Also, higher water levels mean more damage, thus the “substantial repair” rules are more likely to apply. “Substantial repair” is a repair costing at least 50% of the property’s market value. FEMA mandates that properties requiring substantial repair must also be brought into compliance with current NFIP (National Flood Insurance Program) guidelines. In other words, if a house is below BFE (Base Flood Elevation) and “substantially damaged” then it must be elevated at least to the BFE in order to be compliant. Ascension and East Baton Rouge Parishes have even stricter requirements with regard to “substantial repair”. Ascension normally requires elevation to 1’ above the highest water level during a flood, and East Baton Rouge considers 40% to be the threshold for “substantial repair”. However, as of now, Ascension has relaxed their elevation requirement to 1’ above BFE, which is still tougher than FEMA’s standards.

Houses such as these will need a lot of work. If the owner had flood insurance, then they SHOULD receive sufficient funds to repair it, unless elevating is required. Flood policies include up to $30K of ICC (Increased Cost of Compliance) coverage to help elevate, but that might only pay to raise a small house on piers, and not much else. Mandated elevation is the number one concern on everyone’s mind right now! If a house needs “substantial repair” and lies below BFE, then the cost of elevation must be added to the already large repair cost. Even with flood insurance, the total is likely to be out of reach for many homeowners. People are justifiably upset about this. Some are talking about simply walking away from their homes, as they have no way to pay for everything.

If communities are left with thousands of houses which are deemed both non-compliant and substantially damaged, and whose owners cannot afford to elevate them, it will be a disaster. The houses would stand empty, meaning we could be faced with entire neighborhoods of abandoned homes.

On a positive note, it is likely that there will be opportunities among houses with considerable damage. Some owners will want to simply get rid of their damaged homes quickly, and sell them at bargain prices. This would allow those willing to invest the money, time, and effort to acquire a house inexpensively. Doing so would benefit new homeowners, property flippers, or those wanting to use the house for rental income, thus bringing new life to these homes and neighborhoods. However, buyers need to be very diligent in evaluating “bargain” houses, as any potential issues such as elevation, etc. would be theirs to face. Non-compliant homes are especially problematic, because even a cash buyer could not purchase and renovate them, and simply choose not to have flood insurance. Parishes will not issue a building permit for the repairs on a non-compliant structure, so they’d still have to elevate if the house is below BFE.

The prospect of abandoned homes is something else to consider for those thinking about picking up flooded houses cheap. Suppose that the newly renovated property is surrounded by empty, gutted houses? It won’t have much appeal, and could turn out to be a bad investment. Nobody wants to live in the middle of abandoned homes or vacant lots.

We believe that there will be new activity among even the badly flooded homes. People have a way of bouncing back strongly from disasters like this, and often the neighborhoods end up being better than before. However, that activity could be severely limited by the FEMA/local elevation rules. After Katrina, there were Road Home grants which helped many people without flood insurance. As of now though, nothing similar seems to be available, and thousands of people are gravely concerned.

We’re not sure what the solution is, but the prospect of losing a substantial part of the population (thus the tax base) should motivate governments into action. Hopefully those in charge recognize the gravity of the situation, and will fight for a workable solution. Ultimately, it’s the federal government (as in FEMA and the National Flood Insurance Program) whose guidelines are the overriding factor, so they would have to either relax the rules, or cough up the money to help fix these houses.

If you want to know more about your specific situation, give us a call or send an email. We’ll help you in any way we can.

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8 thoughts on “After the 2016 Flood: What to Expect in Real Estate and Beyond”

    1. Dear Mark,

      Thanks for your reply! As I understand it, your house is at an elevation of 52′, and the BFE (Base Flood Elevation) there is 55′, correct? If so, that puts you at a -3 for insurance rating purposes. At that elevation, if you had to get a new policy today, coverage would be very expensive.

      However, from what you describe, it sounds like you must have had less than 18 inches of water in the house, correct? I say this because you posted that they’ve already issued you your permit to rebuild. If the repairs will cost less than 50% of the value of the home, then FEMA’s “50% rule” about elevating doesn’t come into play, they issue the permits quickly and easily, and very importantly, you can continue using your existing elevation certificate. This means the flood policy you already have will still be based off of that certificate as well as the older maps.

      To me, things sound OK. However, I’m not an insurance agent. My advice is, before spending a lot of money and committing 100% to the renovation, confirm with both your insurance agent and the Livingston Parish permit office and flood plain administrator that you are good to go.

      I’m going to run this by my own insurance agent, who knows flood insurance VERY well, and let you know what he says.

      Keep me posted on what you find out, and if you have any further questions, don’t hesitate to call or email!

  1. I am in the middle of putting an offer in on a home. It is in flood zone AE but has never flooded. Will FHA finance my loan?

    1. Dear Ryhesha,

      Good question! The fact that a property lies in flood zone AE does not disqualify it for an FHA loan. (Unless it is located along the coast within a Coastal Barrier Resource System area. See this map.)

      However, I recommend asking the seller to provide a current flood elevation certificate as a condition of the sale. With that, you can get an accurate quote on flood insurance. Depending on the home’s elevation, the cost of flood insurance in an AE zone can range from very expensive to almost as little as that for houses in “no-flood” zones such as zone X.

      If you get your insurance quote quickly, and it turns out to be higher than you are willing to pay, you can then use that as a basis for canceling the contract as long as you’re still within the inspection period.

      Good luck, and let us know if we can help you!

  2. I’m looking to prepare my taxes. (This is not a tax question). IRS requires a FMV from right before and after flood, but before repairs in order to gauge what the loss is. Very few people have that, and the cost to get both retroactive appraisals is high. They also allow you to reduce a FMV from before by your cleaning and repair costs if you meet certain conditions, which we do – thus not needing a FMV from after.
    However, if the value of my home after repairs (we didn’t exceed what we had before), is more than 25% less, then it might be worth it to get both.
    So here finally is my question: Are you seeing the values of properly repaired homes that didn’t suffer substantial damage to be about what it was before the flood, or has there been a significant decline in value simply because the home flooded? We live in a neighborhood on Oak Meadow Dr. in Central that never flooded before, and has always appreciated in value. We only flooded about 6 inches.
    Cost of home in 2007 = 159K
    Most websites listed our home as worth between $170-$200K before the flood. I went online and did an online appraisal just for the heck of it back in July.
    cost of repairs – $40K
    Thank you! I hope my question helps others!

    1. Mary,

      It turns out that a wonderful appraiser whom we know well just published a report on the sales of renovated homes! The short version is that overall, the values of such homes are mostly HIGHER than their pre-flood values, due in part to the low inventory. Click here to view his report, which I think will definitely answer your question.

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