How Do You Ethically Invest in a Disaster Zone?
Mindy JensenPro Member
BiggerPockets Money Podcast Host · Longmont, CO · Member since 2014 · 7k+ posts · 10k+ votesHow Do You Ethically Invest in a Disaster Zone?
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Contractor · Fort Worth, TX · Member since 2015 · 379 posts · 740 votes
9yI think generally, if you operate your business in an ethical manner, you'll invest ethically after Harvey (and Irma if that hits).
I think the free enterprise system is the best, most ethical option worldwide among all competing systems. Each individual makes decisions as to what's in their best interest, and "decision pairs" come together to determine whether it makes sense for homeowner A to sell a house to Investor B.
I don't have the power or money to undo all the damage that has been done. No one does. At this point, we're in "making the best of a bad situation" territory. I donate pretty heavily to charity, but my business is not a charity. As I run it properly, though, I create opportunities for other people to have jobs, for joint investors to gain wealth, and so on. And if homeowner A is strapped for cash, and I buy his house with a quick close and put cash in his hand, I hope I've helped him make the best of a bad situation.
What I wont do, after a disaster or not, is be one of these damn "wholesalers" - and I know there are plenty of them on this site - who go around making big promises with no cash to back it up, then terminate a contract when they can't find a buyer. Good wholesalers are honest, understand real ARV and real renovation costs, and have the cash to add the house to their own portfolio if they can't find a buyer at the price they want. Those guys are a very valuable part of the market. But they're a distinct minority. Bad wholesalers don't have that experience or understanding, don't have any cash, and are often just raising homeowners' and newbie investors' hopes with inflated ARVs and understated reno costs. I see them every day on Facebook in my local investor groups, pitching ridiculous deals on a house they've locked up, giving the homeowner hope for 2-3 weeks, then canceling when no one bites. And to do that to a disaster victim is about as low as it gets in this industry.
50 Replies
- New to Real Estate · Saratoga Springs, UT · Member since 2017 · 61 posts · 29 votes9yHi Mindy Jensen, I don't know the answer to that exactly, but I think a good start would be to look at what happened to New Orleans after Katrina, I'm guessing there were a lot of people in the same situation. Did the government (national, state, city levels) step in and create some sort of disaster credit/fund to property owners? The money that is being raised is it going only for first response or is it going towards rebuilding? Maybe we should look into what happened than and get some answers to what might happen now.
- Kyparissia, Messinia · Member since 2017 · 94 posts · 43 votes9y
My question would be how could we as investors, help make the communities we invest in more resilient to natural disasters. Or even if we should.
Think this would be tough OOS unless you already had a team in place and EXPERT local knowledge. This is just a guess, but I have a feeling a lot of these areas are going to be difficult to invest in for a few reasons.
First, costs will be huge factor. Labor/supplies will go up significantly and contractors will be busy. Plus I'd assume a lot of the good contractors will be booked solid, the not so good ones will come out and start ripping people off and not completing work. Then you have the cost of insurance, some these properties might be EXTREMELY expensive to insure....
Now for the second part of the problem and something you'd have a hard time with if your OOS.... what areas will people just leave and give up on? I'd assume some of the nicer areas will get rebuilt because those people likely have money to do so but I doubt those areas will make a good investment because costs will be high. The more traditional B/C neighborhoods could change dramatically if people decide to move elsewhere and not comeback...
- Contractor · Fort Worth, TX · Member since 2015 · 379 posts · 740 votes9y
I think generally, if you operate your business in an ethical manner, you'll invest ethically after Harvey (and Irma if that hits).
I think the free enterprise system is the best, most ethical option worldwide among all competing systems. Each individual makes decisions as to what's in their best interest, and "decision pairs" come together to determine whether it makes sense for homeowner A to sell a house to Investor B.
I don't have the power or money to undo all the damage that has been done. No one does. At this point, we're in "making the best of a bad situation" territory. I donate pretty heavily to charity, but my business is not a charity. As I run it properly, though, I create opportunities for other people to have jobs, for joint investors to gain wealth, and so on. And if homeowner A is strapped for cash, and I buy his house with a quick close and put cash in his hand, I hope I've helped him make the best of a bad situation.
What I wont do, after a disaster or not, is be one of these damn "wholesalers" - and I know there are plenty of them on this site - who go around making big promises with no cash to back it up, then terminate a contract when they can't find a buyer. Good wholesalers are honest, understand real ARV and real renovation costs, and have the cash to add the house to their own portfolio if they can't find a buyer at the price they want. Those guys are a very valuable part of the market. But they're a distinct minority. Bad wholesalers don't have that experience or understanding, don't have any cash, and are often just raising homeowners' and newbie investors' hopes with inflated ARVs and understated reno costs. I see them every day on Facebook in my local investor groups, pitching ridiculous deals on a house they've locked up, giving the homeowner hope for 2-3 weeks, then canceling when no one bites. And to do that to a disaster victim is about as low as it gets in this industry.
- Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes9y
Originally posted by @Tiago Alencar:
Hi Mindy Jensen, I don't know the answer to that exactly, but I think a good start would be to look at what happened to New Orleans after Katrina, I'm guessing there were a lot of people in the same situation. Did the government (national, state, city levels) step in and create some sort of disaster credit/fund to property owners? The money that is being raised is it going only for first response or is it going towards rebuilding? Maybe we should look into what happened than and get some answers to what might happen now.
You are right that it is best to investigate what programs exist. Of course keep in mind that investors will have less options that people who occupy as a primary residence. If it is your primary residence, it is very likely you could get money to rebuild from the government, even without flood insurance. Also contact your mortgage provider, because payment deferrals will buy people 6-12 months to figure things out.
As far as the original question, in a disaster the prices go up on all rehab and investors offer dime on the dollar to take the mess off your hands. People will make lots of money off this disaster. During a disaster, people are controlled by emotions and don't make logical decisions, so they will give anything to make the problem go away.
As far as ethics, I like to imagine I was in the other persons situation. Or better yet imagine your mother or grandmother in a similar situation. Would you be OK if someone treated your loved one like that? If so, then what you are doing is probably OK or you are a sociopath.
- New to Real Estate · Saratoga Springs, UT · Member since 2017 · 61 posts · 29 votes9y"then what you are doing is probably OK or you are a sociopath. " hahahaha so funny Joe Splitrock
Originally posted by @Mindy Jensen:
Harvey damaged 203,000 homes in Houston - at least that's the number I read this morning. I'm sure it's going to go up. I read 90% of homes destroyed did not have flood insurance.
Irma looks to be headed to Florida. She's the biggest hurricane in recorded history.
Katrina hit New Orleans in 2005 and did billions of dollars of damage.
There's an opportunity to solve someone's problem, but there's also an opportunity to take advantage of someone when they're at their lowest point.
How do you invest - truly help people out in these areas - without appearing to take advantage of them? With water infiltration, you need to act fast, so you don't really have a lot of time to negotiate. Mold waits for no one...
There is a trending discussion from an investor in Houston who incurred major damage from the hurricane, but had no insurance. How does he repair his home?
On a related note, how do you shield yourself from these problems in the future, outside of not investing near water?
mindy i am in houston for the last 8 years. i can tell you this much... pre-harvey we had arguably some of the most overvalued real estate... post harvey we will see a lot of communities simply not get rebuilt.
there is actually a lot of rental capacity in houston so i dont think its a similar situation to what NOLA had and comparisons in recent history are going to be hard to find.
in the short term , people are still gutting houses... actually theres a shortage of drywall in some of the suburbs
labor is also in shortage... but i think theres a lot of people laid off from oil and gas from the last downturn that will welcome the work with open arms.... but the problem is some of these floodway communitites simply wont come back.
there is no good solution to the problem houston has at this point without MASSIVE infrastructure development and buying properties in floodways with eminent domain (which i am sure many will be happy to have happen to their flooded house)
ive personally talked to 3 diff people that said they are planning on taking insurance money and fire selling house the first chance they get. as an investor i dont really like the risk.
I have one duplex in houston at this point and a primary residence im not sure its the time to be adding to the portfolio... i am sticking to buying more in los angeles (where i am originally from ) where i have about 16 doors at this point...
- 9yColleen F.Pro MemberInvestor · Narragansett, RI · Member since 2013 · 8k+ posts · 4k+ votes
I think people need to have an internal code of ethics and adhere to it. From a strategy standpoint investors need to consider the whole picture on rebuilding. In NJ some areas were not rebuilt. FEMA bought those areas out. People who bought post flood weren't eligible for this buyout. This leaves some scattered houses in areas of town and the area is less desirable. I would not have wanted to be an investor in that area but time will tell.
You need to consider community issues more when buying post disaster and follow the overall rebuild to see what direction it is going. Other then that I think you need to ethically act the same as you would to others in a disadvantage situation. The community issue is the biggest difference from other distressed sales.
- Rental Property Investor · Fort Collins, CO · Member since 2015 · 158 posts · 327 votes9y
This article captures the ethics of "surge pricing" well: http://reason.com/archives/2017/08/30/prices-shoul...
The phrase "price gouging" elicits emotional reactions, but in reality it's the difference between getting service and not getting it.
- Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes9y
@Mindy Jensen Tough question as "taking advantage" of someone is usually only ascertainable in hindsight. I remember 5 years after Katrina there were still stories about how large portions of the community hand not been rebuilt, etc. If an investor paid a "low price" for a flooded home in one of those areas, they were likely stuck with 5+ years of holding costs without a blink of a return on their investment. Investors in other areas, I'm sure, did much much better. I would imagine you'll see the same challenges this time around. Some investors will get castigated for "lowballing" disadvantaged residents. Other investors will likely choose poorly and buy properties in areas that will take 10 years to return to where they once were.
The above is much different than the actual "investment scams" that take advantage of homeowners offering a loan in exchange for 10% down, schemes to rehab and sell FEMA trailers, etc. There was a ton written about them after Katrina. What I would hope is that the local media does a good job of telling residents about *actual scams* vs. investors seeking a risk-adjusted return. The sad part is that many homeowners will likely have a hard time telling them apart.
As for investing near water...well...there's a reason that flood and wind damage insurance are exceedingly expensive. Not to mention that some gulf-front properties cap the replacement value for the structure. So you really have to understand how insurance plans into investments, if you're insured for the loan balance vs. "full replacement", etc.
- Investor · Bensalem, PA · Member since 2011 · 146 posts · 93 votes9y
@Mindy Jensen This is an excellent question!!! It has crossed my mind recently, and I almost feel guilty thinking about it, but life is life and these things happen. I'm glad this was put out there, looking forward to the responses
- Wholesaler · Houston, TX · Member since 2017 · 264 posts · 212 votes9y
As an investor I never feel like I am taking advantage of anyone, If anything I am helping rebuild the economy. I should be given a medal
- Rental Property Investor · Houston, TX · Member since 2014 · 91 posts · 76 votes9y
I'm a Katrina refugee who just rode out Harvey and managed to stay dry; I've lived around the Gulf Coast most of my life.
The biggest issue you will have investing in the flood zone is managing your costs. Following Katrina anyone who could lift a hammer was making $15/hr and it only went to the stratosphere for skilled labourers like plumbers and electricians.
Per a previous comment above, if you don't have an existing team on the ground and extensive experience dealing with insurance firms, I would suggest avoiding the flood zones. This is the 3rd major flood in the Houston area in 3 years.
South Florida might be a little more interesting if it gets hit hard, but I doubt it. That market is largely foreign money tucked under a mattress, so I don't see much distressed opportunity anywhere you would want to own regardless of the outcome. I'm more concerned that UM just cancelled their game vs Arkansas St.
Regarding ethics... its mostly contractors that screw people in times of crisis; which will directly affect you as a potential investor. A lot of people will happily hand you their keys to avoid bankruptcy. Question is what are YOU going to do with those properties?
- Realtor · Charleston, SC · Member since 2016 · 229 posts · 159 votes9y
@Account Closed
The answer to your question is simple. We build force fields around everything or we evaporate the oceans until there is nothing left but salt.
- Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes9y
I would say it is all about your philosophy. As a real estate professional, our job is to solve problems dealing with real estate. If you go in with the mind set of I am buying a house that has been destroyed and providing someone with a solution to their problem, then you should be ok. If you go into thinking this is going to make me rich and I am going to fleece everyone that I can, then you should be locked up. A lot of these people are looking for a solution and realize also that mold waits for no one. You coming into to the picture can be a blessing.
I remember when my dad asked me how I do what I do. I was buying foreclosed houses, renovating them and turning big profits. He asked if I feel bad for taking advantage of people. My response was that when I am at a closing and the seller is crying in joy and thanking me because I saved them from this large burden I understand that I am providing a service that is valuable.
- Severna Park, MD · Member since 2013 · 7k+ posts · 7k+ votes9y
The seller can always say " No" .
- Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes9y
I think the main thing is to be up front with them. Buy in the same way you would buy in your own market and note what makes a deal make sense for you and see if that makes sense for them. Most of them will get some insurance or other aid money too. That being said, I would also be very careful. Who knows what some of these areas will look like when all the dust settles. There may be all sorts of internal and even external migration and good areas may become worse and some may become close to abandoned. Large areas in New Orleans stayed abandoned for many years after Katrina.
- Kyparissia, Messinia · Member since 2017 · 94 posts · 43 votes9y
Here is an interesting article from a blog on resilient investing in RE. Not easy, but doable.
(https://blog.principal.com/2017/01/25/resilience-managing-real-estate-in-an-increasingly-volatile-environment/) We can't prevent these disasters from happening.... but maybe we can find ways to help the communities bounce back from them. Especially interesting is the link to the 100 Most Resilient Cities.
- Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes9y
One of the biggest, if not THE biggest, landlords in Houston is American Homes for Rent. They have 3,153 single family homes worth over half a BILLION dollars. I would suggest, @Mindy Jensen, that you interview David Singelyn (CEO) or John "Jack" Corrigan (COO) and get their take. Might be a fun experience for you, who knows? Phone number is on page 1 of . I look forward to your findings;)
- Developer · Boston, MA · Member since 2017 · 29 posts · 21 votes9y
Here's an idea, (not sure if its a good one, just popped into my head): The numbers may or may not work depending on the circumstance, but a local investor could potentially offer a "sale/lease back" to someone who owns a home damaged by Harvey but is not insured and doesn't qualify for government help (not sure how many are out there in this bucket, but unfortunately, my guess is there are more than a few):
- Home owner (seller) would sell home for an agreed upon price, to an investor.
- Investor would pay for appropriate rehab, (likely a total gut) of property to bring it back to what it was before storm hit. *The investor would of course have to take into account the inflated costs of construction when demand is high.
- Seller would then lease back property for a pre-agreed upon price for an extended period of time. Ideally, this rental figure wouldn't be so much more than their original mortgage payment that it would be unaffordable, but enough to cover the investors costs plus a few hundred bucks a month worth of cash flow.
-Ultimately the original seller would have right of first refusal to buy the property back once they have the ability to do so
- The seller and investor could agree upon timeframe as to when a liquidity event makes sense. Additionally, the investor could agree to seller finance the property if necessary.
The premise would be to create a win/win out of what is obviously a terrible situation. The home owner would be able to stay in their home, (after renovations). An investor would be able to purchase property and make cashflow as they would with a more traditional single family deal yet have the upside of a ready made tenant who already takes pride in the home/community and will likely want to buy from you as soon as the timing permits.
Thoughts?
- 9yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Mindy Jensen Brilliant post Mindy.
There was already a wholesaler who got away with murder on the BP site were the mod let about 20 people reply with please sign me up on your buyers list.. mod finally locked it thankfully.
@Michael Hayworth I think the all hat no cattle wholesaler should be treated like looters just shoot the bastards :)
Anyone who ties up a home without the money in pocket and intention to follow through.. is the lowest of the low in normal circumstances but in these cases with these flooded homes its just criminal in my mind.
@Andrew Johnson Not sure if you were around for GOZONE but this is what needs to happen the Gozone was the Gulf Opporturnies Act of 2005 post Katrina.. this allowed section 179 deducts on all new construction of flooded homes and repairs of existing homes.. Now caveat those that could take it have to be in the business.. so it does not work for most investors.. but professional investors like myself who generate 80% or more of our income in real estate we qualified and of course all the local business owners.. it caused me to spend 2.2 million in MS all the way from Oregon.. and I can tell you it was a huge boon.. think about it.. your car dealership is flooded .. it was old anyway.. you have flood insurance or at least we hope either way.. you rebuild you write off 50% year one.. guess how many new car dealerships in Jackson MS were built.. well yo probably can't but I can tell U just about every one of them rebuilt and or built brand new facilities and sold old ones.. Doctors built new offices offices went up all over the place.
Who is really going to get hosed tho in this whole deal of course is those with no insurance.. and worse yet investors with no flood insurance as they don't even qualify for any fema bene's...
@Chris Martin So unless AH4R has major flood insurance they are going to book some losses big time.. BUT if GOVMIT re establishs go zone they will go on a buying frenzy and building frenzy for those tax bene's..
- Realtor · Paterson, NJ · Member since 2017 · 134 posts · 97 votes9y
One way that you could help the native Houston residents could be to buy their homes and then rent it back to them. They need some kind shelter for their families and most probably cannot afford the rehab costs on their current home. This is just an idea to put some thought into, I see it as kind of a win win.
- Altadena, CA · Member since 2017 · 17 posts · 6 votes9y
Ethics is simply a matter of interpretation ... For me I rationalize investing in a disaster zones like NOLA, Houston or South Florida like this;
Regardless of the event that caused the disaster, "How is investing in a distressed property at a discounted price in one particular state any different than investing in distressed properties in another?
- Real Estate Consultant · Bloomfield, NJ · Member since 2010 · 2k+ posts · 1k+ votes9ysince I do a lot of community work up here and have been for many years, I would suggest first going down and getting involved with local recovery efforts. This will help give you an understand of the local culture, political layout, customs and needs of the people. Then create a business venture that can earn you a profit but also help fund the local community work that you're involved in. It's not something you'll be able to jump up off a plane and start talking about how much money you can make. Timing being of the essence or not, you still have to be sensitive and make sure that you're not coming in looking like an opportunistic vulture. Which I feel you will be no matter how you look at it if you're not looking to genuinely help people first without a dollar Sign being attached somehow.
- Real Estate Consultant · Bloomfield, NJ · Member since 2010 · 2k+ posts · 1k+ votes9yI meant to edit but the message was sent prematurely. Bottom line is that you need to get to know the local community first before making any money. The best idea is to get to know them and see how you can assist before seeing how you can make money. that's my opinion.
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