Are Flooded Homes Good Investments For First Time Investors?

13 Replies

As a newbie (or aspiring) RE investor, I'm looking to make my first purchase. I wanted to ask, with the devastation of hurricane Harvey, there are a ton of flooded homes in the Houston area that need repairs, many have been gutted to the studs already. Is it a good idea to invest in flooded homes in general, if so, is it a good idea to invest in one for my first property? After repairs, is there resell potential from buyers knowing the home has been flooded in the past? 

@Keith J. Davis Jr. I think buying a flooded home is fine as long as the numbers work which sounds cliche. Most of the home owners just want out. I have heard and spoken with some investors that feel it will take some years for the market to come back to where it was pre-Harvey. Especially for people to feel comfortable to buy in an area that was flooded. I would look into whether or not the house flooded ONLY during Harvey or also during the Tax Day flood etc. How many times has it flooded? You will also want to obtain about every certificate under the sun related to mold and anything electrical. Having those certs on hand can be the difference. 

If you're in it for rental cash flow then finding a home, rehabbing it, and renting it out shouldn't be to tall of a task. I think there will be a large transfer of wealth with these homes. Just as an example using rough numbers, the pre-harvey value of a home might have been 175-180k and climbing but now that they are gutted you can pick them up for 90k-$105k and put $35-$45k worth of rehab work. 

Personally I wouldn't flip a house in this market. I am sure some people on here have done it since Harvey and had success though.

I’ve spoke with some of my investors who have successfully done some rehab projects here in Houston. They even mentioned that they sold the home above the ARV value. @David Olson mentions a really good point. Avoid the homes that have flooded any other time other than Harvey. I feel that there’s a lot of dollars on the table in our market.

@David Olson You advised to obtain mold and electrical certificates on flooded homes. Is that something the GC would do, or is that something the investor does? If the latter, is there a centralized place that we go to for them?

@Keith J. Davis Jr. If you've got the know-how to tackle a project and/or crew to do the work, it's possible. If not, you may want to bring in a partner with more experience. Good luck! 

NO.  Not unless you know what you're doing from a construction perspective.  Flooded homes can have foundation issues, mold issues, electrical issues, plumbing issues, etc., etc., etc.  I would not advise this as a first purchase. 

Originally posted by @Minh Le :

@David Olson You advised to obtain mold and electrical certificates on flooded homes. Is that something the GC would do, or is that something the investor does? If the latter, is there a centralized place that we go to for them?

 The GC I will be working with will provide me the cert for the mold remediation. I would suggest paying up to have it done right the first time. I know some people that tried taking shortcuts and after having the mold inspection 3-4 times it finally passed. Had they done it right from the beginning they would've saved $2k. 

@ed 

@Ed E. undefined mentioned a good point. I just showed a property yesterday that had serious foundation issues. You always have to think about appeasing the buyer and more importantly the appraiser. 

Hey Keith, I actually did a flood house recently as my first flip that I'll be putting on the market in the next couple of days. You can see a few photos on my profile that I just posted with before/after.

There are several reasons to go with a flood house, and several reasons not to. You have to evaluate on a case-by-case basis. Here are a few of the pointers and things that I learned and now use when I evaluate a flood house:

  1. How many times has this house flooded? The market seems to forgive a single flood due to Harvey because it was so extreme, but if it has been hit multiple times, buyers tend to avoid it. 
  2. Mold certificates will come from the contractor who actually did the work. The seller should have done this before putting it on the market. If they have not done the mold this many months after Harvey, I would steer clear. I have looked inside a house that had not been remediated and I wanted nothing to do with it.
  3. Does the seller have the flood insurance that is transferable to you? The flood insurance gets expensive quickly, and you'll need to have this so you don't get hit with huge expenses. Also, if you intend to sell it, the buyer will want this as well.
  4. Get an inspector out there and your contractor ASAP to evaluate the house. They will be able to see things like the foundation issue that someone else posted (though that could be on any house) and also look for mold or other electrical work that you may not have noticed. Be sure to check on the A/C ducts in case mold got in there.
  5. By doing a flood house, you should get a low price to buy the house, but a high budget for the full rehab. This can be viewed as a benefit because you will essentially have a brand new house on the inside with new appliances, cabinetry, etc. and you shouldn't have much in the way of maintenance will all that new equipment.
  6. Realize that the project will take a long time to complete. The house I worked on (4 bed, 2.5 bath) took about 3 months. You're in it for the long haul.

At the end of the day, you have to do all the due diligence that you can and get the best advice from your agent, contractor, and inspector. If your gut is telling you its too risky, than don't force yourself into buying it. Keep researching until you think you are ready. Feel free to shoot me a message if you want to bounce some ideas around. Hope this all helps!

@Jeff Smith checked out your profile for the pics of the rehab. Very nice man!! Your info says your new to REI but you sure don't seem like it and I mean that in a good way. You seem to have gained some quality exp in your latest flip. Was this your first flip? Or do you have other rentals? If so, were those rehab to rent?

I have been torn between doing a flip or a rehab and rent on a first time Harvey flooded home. I have been analyzing deals daily and am ready to make offers once I start finding deals worth making an offer on. 

@David Olson , thanks for the compliment! I'm new to REI in that I only that a couple of fourplexes and that flood house (which was my first flip, but I had intended to rent originally), but it took about a year and half to do all that. In the meantime, I've done a lot of walking through houses and submitting offers, so learning just builds over time.

I was planning on one more house that was going to be a rehab to rent, but the deal fell through because the owner wasn't making any movement to actually leaving the house. Bizarre situation.

Like I mentioned, the market in Houston seems to forgive floods if it was only Harvey. If you have multiple floods, the buyers are much more cautious. Personally, I stay away from multiple flooded houses.

If the numbers work, and you've done the due diligence, put in your offer, do the inspection, get the contractor quote, and see if it all lines out. Since you'll have an option period, you can back out if it starts looking ugly. You'll lose money on the inspection price and the option fee, but it's just the price of doing business and learning.

Happy to talk more as you keep going.

I have done flips for water logged houses before, I would only cation on mold growth. Make sure before you buy it’s tested.. 

Be careful (and aware) of FEMA flood maps and changes. This was a huge mess in NJ after Sandy and was months of not knowing which properties needed to be raised, etc.

Not sure if any of that is happening in TX, but be aware of it is.

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