How Do You Ethically Invest in a Disaster Zone?
Mindy JensenPro Member
BiggerPockets Money Podcast Host · Longmont, CO · Member since 2014 · 7k+ posts · 10k+ votesHarvey 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?
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.
First you nee to stop with the IM HELPIN YOU OUT MINDSET. you really arent. You are helping yourself to some juicy Fixings. THATS HOW CAPITALISM works.
Paying 60% of value to a little old lady is fine if she agrees to it. Just dont kid yourself you are helping her. Not if she could list and get 95%.
You are spot on! Although I would argue that taking advantage of a little old lady isn't cool. I guess if you are going to do it, then be proud of it. Don't lie and pretend like you are helping them.
The more investors that get involved the harder it is for folks to be unethical. If a large group of investors are sitting on the sideline then there is less competition and thus unscrupulous investors have more access to the market not less. I will tell you that the sharks are already out there. I'm not too worried as Houston is filled with tons of great people coming together to help out and word of mouth is super powerful.
Everyone has to mark up in contracting right now for example due to demand. There is a huge variance in pricing even with mark up. We primarily have focused on our own builds, flips, and investor projects. We historically are well below residential guys.
Since the storm we've been quoting residential jobs every day. Often our quotes are coming in at 1/2 of their lowest quoted price. We quoted a job for a demo/rehab for our contracting business this week. Straight forward work at 4,600. Her other quote was over 10,000. If we weren't there she pays 10,000. So you can charge a premium as an investor or pay less for a house and be ethical.
You can also use your business to help out the city. Being local to Houston we've made a 3 part commitment for our business:
1) We're limiting our mark up to just enough to keep our craftsman with us (they already are getting poaching offers).
2) We offer free advice on self clean up and free quotes (with a scope of work) to anyone that asks.
3) 10% of all of our profits go to Habitat for Humanity Houston.
The community has really come together. Most of the local guys we know are helping out inside and outside their business. The more investors that get involved the faster our city will come back.
More so than sharks I am most worried about people getting hurt by mold damage. Communities have been great about cleaning up damaged properties. What they haven't necessarily done is the appropriate level of mold treatment. In a few weeks we are going to be busy doing small mold jobs and the guys with major problems will be paying huge amounts for mold remediation.
Bottom line is if you are worried about investing ethically then you should be looking in Houston. I guarantee you that the sharks are already swimming out here.
One of my best friends sells advertising for Zillow in the Florida market. I just talked to him this morning and he said they're not making sales calls into FLA today with Hurricane Irma looming on the horizon. So, if Zillow is any kind of example, it's a fine line between 'too soon,' and 'too late.'
I invested in construction in Long Beach, MS in what was deemed a GoZone area and qualified for tax incentives of 50% of the 20 year depreciation essentially giving back my investment as a tax credit. I initially had a 2 year tenant at a fixed cash flow position.
This area was a victim of hurricane Katrina and as a result flood insurance is mandatory and expensive. The area still hasen't bounced back so there is now a surplus of property and I barely break even on the property rent. I have actually seen the property decrease in value due to a surplus of inventory so be careful not to rush in.
Houston is a much bigger market than where I am located. I will probably sell this property soon, maybe to a Houston buyer on the cheap.
Hmm that's an interesting topic. When underwriting or looking at opportunities you defiantly want to leverage yourself for the worst possible situations, like what occurred. I would say to invest and provide relief rather than allow a neighborhood to become blighted or "changed". If you are able to focus on neighborhood stabilization and redevelopment while helping the community and making money... its a WIN WIN
It's the same way you approach your business in general. How can I solve a problem for someone else? You hear this over and over from the most successful individuals in business and in life. Solve problems for people and you will make money. The bigger the problem the more money.
Real estate is no different. As an investor you solve problems (whether you realize it or not). As a flipper you find unlivable houses and improve them to create a home for someone. As a landlord you provide a home for someone who may not be in a position to purchase or have no desire in owning a home but needs a comfortable, safe shelter. The most successful investors are problem solvers.
The first step is to do discovery. Understand why someone is interested in selling their property vs. fixing it and what their specific situation is. What are their needs and motivations that are unique to them? Obviously with Harvey & Irma you can make some educated guesses (no insurance, desire to move somewhere else, etc.), but ultimately you need to understand their situation and what they need, why they may want to sell, how you can structure a deal, and what the impact will be for both parties.
Once you understand that you can then evaluate if there is an opportunity as an investor and how to best structure an offer that benefits both parties. There may be a great opportunity or not. Recognize that you are ultimately working with people and realize they may have lost everything. How you approach and ensure you are actually understanding what their needs are and motivations will enable you to ethically find opportunities.
In Sept 2008 we experienced Hurricane IKE, mother-in-law house was damaged pretty bad by fallen trees and rain. Long story short, the cheap contractor did cheap job (you got what you pay for) and disappeared, never answered his phone again (out of state contractor). BE AWARE of "weird" and especially too cheap bids. Too many of them will be in Houston soon. Good luck with REI - HOUSTON STRONG!
This falls under the "if you have to ask....." scenario. We are still pulling bodies from the waters in Houston. Just today they found the body of an Omni Hotel worker who stayed to help guests evacuate and she was trapped in the flood waters and drowned. And they also found the body of a baby who was ripped from the arms of her father and drowned.
If you're trying to figure out ways to capitalize on our tragedy, there's nothing ethical about it.
After the financial crisis of 2008 destroyed the Detroit real estate market, it was the real estate investors who purchased neglected and abandoned homes and revitalized them to livable conditions. This began to increase and stabilize home values as well as provide more rental supply to the markets. When there is more supply to an area, RE & rent prices also stabilize because you're creating an equilibrium in an area that might have very tight demand.
I'm assuming (assuming is the key word) that RE investors/developers will do the same in Houston and any disaster-struck area. Most individuals will not know how to deal with massive foundation/mold/etc damage to their homes and I don't know if they want to spend the money to rejuvenate their home back to a functioning condition. if the home-owners didn't have flood insurance and they choose to walk away from their houses then the banks and city have an issue on their hands because there will be a surplus of damaged homes that can fester mold and other grossness that few will want to put money towards. If people leave damaged homes to seek other rental units, then the rental market will become very tight and the rental prices will jump until the lost homes/units are replaced. I think RE investors are the ones who can truly help in this situation because they bring the knowledge and funds to help fix these properties and neighborhoods and they'll (hopefully) turn the damaged homes into a livable property again. As Brandon and Josh have said many times, RE Investors are problem solvers and most of them are good people trying to provide ethical real estate related solutions.
Speaking of investing ethically in tough situations: When I bought a foreclosed SFR at the trustee auction, I offered the woman living there $1000 cash for keys, that was my way to help her at a tough time. I gave her year to cash the check but she never did ... who knows what she was thinking.
I recently suggested to my niece that she read 'Atlas Shrugged'. Although it's not specifically related, it's a great demonstration of how no matter how many billions of dollars of aid pour into the affected area, without capitalism that money will produce and accomplish nothing. Capitalism is the only thing that CAN rebuild these areas.
Just to be clear, I get that people will make money on the Harvey recovery. And that's how it should be. Carpenters, carpet installers, cleaners, and other contractors all over Houston will probably have their best year ever.
Obviously, there will be opportunities for investors as well. Some flooded owners will just want to unload their home for whatever they can get. Others will walk away and the bank will foreclose. But many of the uninsured are doing it themselves with the help of friends, neighbors, and complete strangers. I've been stunned at the number of people who will show up to help homeowners pull out their drywall, carpets, etc. All they have to do is post on Facebook that they need help, and total strangers show up to do just that.
And still others will try to get a FEMA buyout. I've seen news stories that FEMA and Harris County Flood Control are looking into expanding the FEMA buyout program.
Bottom line is I don't have a problem with investors profiting from an event like Harvey. Investors can do wonderful things with distressed areas. My problem is the timing. There were "how do I make money on Harvey" posts showing up before the storm even hit, and while we were drowning. It just seems kind of heartless and vulture-ish. And if this were happening to your city, you would feel the same way.
By the way, a lot of banks are offering forbearance on mortgage loans that can last up to 90 days. They're not collecting late fees or reporting late payments during the forbearance period. That extra breathing room might be enough to help homeowners get through this without losing their homes.
@ Fred Heller - not only banks but to my knowledge all credit cards are doing the same. People are really helping other people. And you are right, complete strangers are helping to clean up the mess and make it easier for homeowners.
Just some food for thought. What would happen to these areas if investors didn't come? The houses and other buildings would probably sit and rot... becoming an eye sore and health hazard to the community. Aren't investors those who come first to a disaster stricken area? Whether natural or man-made, the investors, many times foreign, that with not only their money, but time, skills and man-power, help to rebuild the communities. Do they make money of course.. but they're not the only ones who benefit. I kind of like to think of it as the cycle of creative destruction in real estate.... something new comes to take the place of something old. Investors have been around since the beginning of time, in some form or another. They are the one's who see an old office building as a low- income apartment building, Those who take arid land, and find ways to irrigate it.
@Account Closed Honestly that's exactly what should happen. I'm not talking about the homes that don't usually flood, but the ones that flood over and over again. And they won't sit there and rot. If they're purchased in a FEMA buyout, they'll be torn down and the land returned to grassland to soak up the water.
My neighborhood is not in a flood zone, and we didn't take any water, thank God. But just a few blocks south of me is a gulley that does come out of its banks when we get the really bad ones. That gulley is lined with the back yards of houses, and there is also a condo complex on it. We've had three 500 year floods in the last three years and these houses have been taken out every time. Does it make sense to keep rebuilding there?
Tooks some pics when I drove around the area the other day.
We don't get hurricanes here, but there is flooding. I live at the foot of a mountain range. Every time there is heavy rain fall, it floods. The houses that are affected most are those in the path of the water, often built on the banks of a river or on "soft land". There are clearly places where houses shouldn't be built. Also, we get wild fires a lot, and where ever there was a fire in the summer, there were floods in the winter. Nothing to hold the water. In an attempt to rectify the situation, there have been efforts on a 'volunteer level" to reforest land that has been burnt. Lot can be done by private citizens and businesses. Maybe it would be better if there was less concrete and more grass, trees and other plants.
As a brand new investor, would it be advisable to find a drywall company in which to put money at this time? Versus wholesale, flip, etc.? If so, how does one go about choosing wisely?
