The pitfalls of trying to renovate and resell flooded homes, which should also concern buyers.
After any major flood event, such as the great flood of 2016, there are generally many damaged homes available for purchase, often at low prices. While such homes may offer great opportunities, they also bring with them a higher than normal number of factors which must be carefully considered. This is true for both those who might want to renovate them, as well as purchasers.
As with any renovation project, the wannabe “house flipper” must evaluate the potential market value of the finished home, and compare it to their total costs. Those costs include acquisition, renovation, interest, permits, and sales commission. One must always allow for unexpected cost overruns, and plan accordingly while keeping Murphy’s Law in mind.
With a flooded house, there are even more factors in the equation. Such properties generally require much more extensive renovations due to the nature of the damage. Mold remediation must be performed, additional inspections and permits may be required, etc.
Even assuming all is done properly and a flooded house is truly made whole again, there is something else which can wreak havoc on its prospects for being sold. We touched upon this briefly in a previous article written after the 2016 flood but recently we saw something which prompted us to discuss it here in further detail.
We noticed several houses which had been flooded, renovated, and listed for sale. All of the houses were located in low-lying areas, so we figured they’d been damaged pretty badly. They had been on the market for quite awhile, and were not selling. Looking closer, we saw that some of the sellers were offering to pay the first year’s flood insurance premium for anyone who bought their house! What this tells us is that the new flood premiums are extremely high, so high that potential buyers are turning away.
A couple of these listings actually stated what the current flood premiums are, and described them as pre-FIRM (aka “grandfathered”) rates. They ranged from about $1,350.00 to almost $1,600.00 per year. While these are expensive, they are nothing compared to current, non-grandfathered rates. One of the listings had a flood elevation certificate, showing it was 3′ below BFE (Base Flood Elevation). While technically transferable, grandfathered policies are, in our opinion, on borrowed time. As we have discussed in our 4-part series on flood insurance, the government is determined to do away with such policies. Our fear about houses like these is that if the policy lapses, or Uncle Sam finds another reason to remove the grandfathering, then the owner would have to pay current actuarial rates. Our guesstimate is that those premiums would be well above $2,000.00 per year, and almost certainly MUCH more!
So, if you’re a would-be investor who wants to renovate and flip flooded houses, remember that even if ALL of the other numbers work, the potential costs of future flood insurance may very well make the house extremely difficult to sell. Similarly, if you are a buyer and find a house which has been perfectly renovated, with properly documented mold remediation etc., keep in mind that you could face potentially unaffordable flood insurance premiums.
In the post-flood market, it is more important than ever to have an agent working for you who knows the dangers and can guide you through them. Otherwise, the risk can be very high.
Images on this post are Copyright © 2017 Puttknob Photography, LLC. Used with the permission of and with many thanks to Adin Putnam, the photographer.