Would you buy a flip in a flood zone?

Question

I am a newbie investor that is currently looking into a house flip in Northern NJ. I have a specific house that I like, it is off-market and seems to be a good deal. The only issue with the property is that it is in a flood zone. The comps and everything for other houses in the area work out (atleast what the broker told me). Could someone please advise as to what their opinion is for flood zones, etc. and would they buy the deal?

Here are some #s on the deal: 125k purchase price, 60k rehabs, comps are 250-270k, 4% commission when sold, $4,600/annual taxes, don't expect it to be more than 60 days on market, as the city (Englewood, NJ) is in demand. Thank you for all the help!

James Mc Ree · Answer

Check with the municipality to determine if they will grant a U&O for the property at its current elevation or will they require it to be raised.  Raising will be a significant cost impact or kill the deal for you if required.

Raising/razing could result in a higher value for you after considering flood insurance.  Flood insurance rates are based on your mitigation.  Insurance doesn't require mitigation, but you can pay dearly for it if you don't.  Your future buyers will be hit by that cost and impact their affordability.

Check the property's flood frequency.  Recurring flooding at a property will make acquiring flood insurance more difficult and costly.  I believe upcoming changes to flood insurance disqualify properties with some number of flood incidents.  This may be another driver for raising/razing the property if it floods often.

Check the municipality's flood map for construction.  Flood insurance is based on the "current" FEMA flood map.  The preliminary FEMA flood map (2012) is believed to be more accurate and is more aggressive.  Some municipalities are using it for their building codes.

Otherwise, flood plain properties are just like other properties.  Buyers qualify based on the property expense, including flood insurance.

James C. · Answer

Vishesh,

Its a bit tight for my taste. 250k -10K (commish) *.7= is 168k. 125k (purch)+60k (rehab) is 185k all in. Not much room for error here. You are projecting 60 Days on the market, But what about rehab time? What happens if your market time goes to 180 days (or more?)

You are probably looking at a price drop (this is market dependent) of at least the 30 year value of the monthly flood insurance premium, if not more. To get that solve for pv by using the monthly premium as the monthly payment, current interest rate and 30 year term.

That number is the difference in affordability between a flood insurance property and one that carries no flood insurance premium. There is probably an additional risk premium for a buyer on top of the economic one, but that is anyone's guess. This all depends on what the compensating factors are, say water view, extra land, etc.

The best way is to see if you can find some comps that are in a flood zone, and get a price difference between those and ones that aren't. The difference is your flood risk premium, and you can adjust your building value using that number or %, however you do it.

If you can pull it out of the flood zone with your rehab, then you might be better off to do so. Your title company can tell you how to go about doing that.

Would I buy the deal? I don't know enough to go either way. I haven't seen the property, don't know what it needs for rehab etc. etc. etc. I can tell you on paper, it's pretty tight, and you'd better know what you are in for down to the penny.

Good Luck,

Jim