Are Flooded Homes Good Investments For First Time Investors?

Question

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. · Answer

@David Olson Account ClosedThank you for the positive feedback

Jeff Smith · Answer

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: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. 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.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.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.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.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!

Michael Pittman · Answer

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.

Michael Pittman · Answer

@ed Account Closedundefined 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.

Account Closed · Answer

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.

Mike McCarthy · Answer

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.

Sean Babischkin · Answer

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

Jeff Smith · Answer

@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.

David Olson · Answer

@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 · Answer

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.