Mike's Pro Tips: Thinking about investing in flooded home?
Houston: We still have a problem. Will Harvey flood houses haunt us?
When it comes to investments there are plenty of options: stocks, commercial real estate, residential real estate, bonds, Bit Coins, and I'll even say education.
After the major disaster of Hurricane Harvey that struck Texas in 2017 with historic flooding and a record $127 Billion or more in estimated damages, we have another investment option: flooded homes.
Suddenly within a month, local investors and major investment funds from all over the United States started buying up flooded homes in Texas at a rapid pace. Private equity invesment firms sent representatives on foot going door to door or calling home owners attempting to buy entire blocks of homes in neighborhoods affected. Devastated home owners were still recovering and just getting started on the insurance process. Many like myself found out insurance would not cover damages after years of premium payments.
With a market shortage of homes already prior to the storm, demand would surge higher after as everyone flooded started to scramble for a dry place to live. The current inventory of homes on MLS right now for sale in Houston is about 3 months indicating a strong Seller's market. A normal inventory is 6 months. Market supply is definitely tighter after Harvey.
Do you think you're ready to invest in a flood house yet?
Considering you have the right financing in place or resources let's get started. Traditional bank loans don't apply to remodeling and rehabbing flooded homes.
So lets get to it. Flood homes. Good investment or bad investment?
First it all depends on the price you are buying for. Then what is your strategy moving forward?
A: Remodel and flip?
B: Remodel and hold long term as a rental?
There are several factors to consider but for simplicity of a blog post I will keep it basic.
For each option you need to have a good contractor. FYI there is no such thing as a licensed general contractor in Texas, I'll cover that in a future blog. Estimating rehab and repair costs to complete a home is key. You want to make sure the finishes match the market. Don't over remodel a home with extravagant finishes unless the comparable homes in the area are similar. Vice versa, don't skimp on finishes either or you could be holding it for a little longer than you want as buyers and tenants will look at nicer options first.
There is also the stigma to overcome: it's a flooded house.
Price and rehab budget is the key. Flippers are in business to make money. So getting the flooded property at the right price is important. In my experience I estimate about $40 per square foot to remodel a home from the studs including labor and materials, so factor that in. Flippers also need to factor in holding costs, closing costs, commissions, and other expenses into their deal.
Pro Tip: Flooded houses are not always the best bargains. If it costs you $60/sf to purchase the house + $40/sf rehab and remodel = $100/sf total, and a nearby neighborhood that did not flood has homes selling at $90/sf then it could be an issue. Your remodeled flood house now costs more than a home that never flooded. Talk to your Realtor or an experienced flipper in that market.
Buyer will be skeptical of a flooded home. Was is re mediated correctly? How bad was the flood? Did you handle the electrical repairs correctly? What about MOLD?
During your flip use licensed contractors for electrical, HVAC, and plumbing. Permits and inspections will calm down buyers. Get an air quality test by an independent company and a certificate that the home is mold free before you start rehab and remodeling.
Document and take photos of new electrical or plumbing installed in the walls for the buyers. They don't have x-ray vision and neither do their inspectors. If you replace rusty old galvanized pipes, take photos to show off to potential buyers. Take photos of how high the drywall was cut and replaced.
STAY ON BUDGET and STAY ON TIME! Then get it sold, and repeat, repeat, repeat. Well there is more to flipping than this, so consult with a professional. I'm not giving away all my tips in one blog post.
It will take time for people to get over the stigma of flooded homes. In the mean time remodeling and holding the property as a rental is another good option. Remember price is the key. So buy and hold investors know when they find a bargain by getting discounted properties under market value and remodeling them. Tenants still want a quality safe and clean home to stay in as well. So don't cut corners or compromise on re mediation or repairs.
In the mean time the city, county, FEMA, and flood districts will look for ways to make improvements to reduce flooding again. Properties will start to appreciate again in those areas, as long as there are no additional floods again. A few years later, the sigma of Harvey flooded homes will fade and investors may consider a selling opportunity.
If you plan to sell, document everything like I said for the flippers.
Either strategy you choose, DON'T DO IT ALONE!
Talk to professionals or someone with experience. Partner with someone. Work with someone who can walk you through the process and introduce you to contractors.
Be careful of the gurus who talk and teach. You want to follow the people actually doing what they say. There are plenty of seminars, gurus, experts, flipper shows, and talkers out there.
There are a few things going on in the Houston market that I believe are great opportunities that I've shared with my clients who are buying flooded homes as investments.
If you haven't: get educated. Understand the risks. Talk with the right people before you decide if this is the right opportunity for you. Make sure you are financially capable to finish or survive.
Over the past year my business partners and I have been buying, remodeling, flipping, and holding homes. We have assembled a team of good and reliable contractors that work on our projects for us. It's been so fun I haven't blogged in forever. Why am I sharing now? Because I see a lot of new investors failing, getting burned by bad contractors, or paying money for bad education from 'gurus'.
My partners and I certainly are not 'gurus'. Yet we have a track record, experience, and results. Actually out of state investors are now using us to find properties, remodel them, and either flip or lease them. We basically turn key regular and flooded properties into finished investment products for our investor clients. We find the right properties. Run the numbers and budget. Select materials and manage the contractors. Finally we market the property and get it lease or sold for our investors.
Yes I am still a Realtor. However on my weekends and spare time I love construction and frequently jump in on projects. I'm not afraid to get dirty and like to physically work on things rather than sit in an office or car. With a bachelor's degree in architecture and construction management I have always be pro active in the construction process for clients and their projects.
MIKE WONG 713.935.5800 KW COMMERCIAL
KELLER WILLIAMS REALTY SOUTHWEST
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