Fire Damage - Complete Loss

[Kyle A. Isaacs]

Good morning BP'ers -

This past Thursday, we received a phone call from previous neighbors that our rental in Florida was on fire.  To calm fears upfront and most importantly, everyone is okay, but the unofficial story is that the neighboring renters caused the fire by smoking with an oxygen tank.  My tenant reported that they heard a large explosion and then a massive fire ensued that ultimately ripped through four units.  We drove down to Florida to assess the damage and console our tenant, who has lived in the property for the past five years and was able to speak with a few contractors and the insurance adjuster.  However, I was hoping that people experienced in the community could assist me with a few questions.

Background: there are four connected units of which, the house where the fire originated is burned completely to the studs.  The firewalls seemed to do a terrific job to prevent the spread of fire but the two houses adjacent to the point of origin endured significant smoke and water damage during the extinguishing of the fire.  Several contractors stopped by to offer "support" and all stated the same thing that the house will need to be tore down to the studs, soda blasted, and then rebuilt.  Thus, I did request mitigation support and the contractors boarded some of the windows and placed a large tarp over the units to prevent further damage while we sort out things with the insurance company.  And when the contractors sent me a Statement of Work to sign, I ultimately forwarded the document to the Adjuster to let him decide whether or not to move forward.  At this point, I'm awaiting the official reports from the Fire Department and the Insurance Adjuster.

Question 1 - Investing: Being a Real Estate Investor, I called the landlord of the property where the fire originated, who turns out to be an elderly lady and requested that her son handle the situation.  My preference is to rebuild my property thus, my mindset is that I could purchase the unit where the fire originated and rebuild both properties through economies of scale.  The endstate would be to continue to rent out my property and then flip the property where the fire originated; I understand my money would be tied up for 4-6 months.  The owner's son seemed interested in this idea but a few questions arose during the conversation:

1. 1. If the owner accepted the insurance payout money, would those funds be considered capital gains?  Apparently the owner possesses a low-cost basis and thus, capital gains plus depreciation recapture wouldn't make selling the property very lucrative on their behalf.
2. 2. How would one make an offer on a fire-damaged property?  Obviously, you only purchase the land but my house was burned down due to the potential "negligence" (still awaiting official reports) of their tenants.  Has anyone found creative ways to make offers?

Question 2 - Insurance: I made the claim through my insurance company hence, they assigned an adjuster who completed a walkthrough this past weekend. 

1. 1. Can insurance companies pay money for the market value of the property or will they only go to the limit of the policy?  
2. 2. Any advice on how to mediate the relationship between the insurance company and the contractor?  My understanding is that the contractor will submit bids and the insurance company will argue the prices, which ultimately slows the process.

Look forward to hearing everyone's thoughts.