Major tornado damage in my area....should I hold off on REI?

Question

I am sure you have seen it on the news, but I live in the middle of Illinois where a major tornado destroy several hundred houses. I was hoping to purchase my first distressed property in the next month to flip. My concern is that any decent contractor will be working on getting new houses built, and/or renovating properties that weren't completely destroyed.

Is there a better way to approach real estate investing in this type of market without taking advantage of home owners already down on their luck?

Thanks in advance,

Brian

Is there a better way to approach real estate investing in this type of market without taking advantage of home owners already down on their luck?

Thanks in advance,

Brian

Bill Gulley · Answer

Michael makes a good point with contractor string out jobs. To go blasting through a damaged area you really need a crew you can count on.

Another issue is that government (city) will usually move in quickly, security first, then hazards removed, safety inspections, then the public and owners come in. You may find liget storm companies or crews. There is an issue with vulture operators and the city will be putting out the word of warnings working with contractors from out of the area who are unknown. If you have a local address you might pull in some of these guys seeking work under your umbrella.

The city of Joplin directed much of the rebuilding through the permits and in reality it was hard for out of towner's that had no track record that could be shown to get work. Owner's signed off on permits and warned about issues, so being local has a big advantages is what I'm saying. :)

Michael Woodward · Answer

.....I guess I AM getting my notifications. I just noticed that your post was from earlier today.......not sure what made me think it was older than that..... sorry....

Michael Woodward · Answer

@Brian Mergen ,  Sorry I didn't reply to your last question sooner.  I don't think I'm getting all my notifications.

Yes. My wife was on board with my investing from the very beginning.  She took some interior design classes in college and loves to work with floor plans so it was a natural fit for her.  With that said, I'm going to stop short of making any recommendations for getting your spouse on board. The dynamics of marriage are so broad and specific to each couple that I don't feel comfortable even making a suggestion.

From my personal viewpoint.....I've been married for almost 18 years so my general perspective is....if things go really well with your investing, you'll look like a hero to your wife.  If things go badly (like they often do), it could put a tremendous strain on your marriage.  I know people that have divorced over this kind of thing so the only recommendation I'll make is to be VERY cautious.  It can be a slippery slope that you can't recover from. It's best to know that everyone is in full support BEFORE you get started. The stability of my family and the well-being of my two sons and my wife are more important than my career.

My two cents......

Bill Gulley · Answer

Brian, you have a good thread started about how investors can get involved after a disaster, pages can be written on the topic and I don't recall this being discussed on BP before. It's your thread, but I'd rather see you ask about family supporting an investor in another thread which has been discussed before. :)

Sorry to hear about the damage, I went through Joplin hours after the tornado and volunteered.

A disaster really opens opportunities, but you must be very aware of the emotional toll on property owners and not be seen as a storm chasing vulture.

I'd say that a good approach would be to get out there and first volunteer to help without an agenda to profit. You will hear people talk about moving. Really depends on the situation but I'd not really hit them up in the first 4 or 5 days, let it all sink in, give them space.

I'd say hundreds sold out in Joplin, don't know really, but many sold to move into new or other homes. Some were living in travel trailers and tents a year later.

Insurance offers to settlements come quickly, usually low as they play games to avoid claims, holding out takes time and money to get by. Some insurance offers may be equitable.

You can make an offer so that you will be entitled to the insurance proceeds.

The big plus there is that the insurance will generally cover more than the underlying mortgage, so this is an opportunity to just buy the equity. There will be many who don't want to mess with contractors and repairs, some want to walk away.

On the news you'll see owners being interviewed saying, with the old American attitude of fighting back and rebuilding, they're not moving! You'll get that initially and some will stay and fix especially if it's the long owned family home. But, when it comes down to money, time and effort, hardship of living in a travel trailer, an equitable offer may change minds.

There are so many arrangements that a fix and flipper could employ that the possibilities are endless, and doing so that really does benefit the community and the owner, certainly not vulture tactics.

I'd say too, that in such situations, with an investor buying as a business transaction, seller financing would certainly be in play, at least in the short term so that improvements can be made and the property marketed while getting some cash to the owner to get over the hump.

I'll stop there, but opportunities come out of all kinds of hardship situations, you can't help the fact that some devastating event occurred, attempting to do business is not wrong so long as you approach it with the right attitude keeping in mind the community and individual trauma involved. I look at it much like someone having a car accident and going to the hospital, doesn't mean the hospital or doctor doesn't send them a bill, as that is expected :).

Brian Mergen · Answer

Thanks everybody! Sorry it's taken me so long to respond.

At this point I am taking the wait and see approach. The city is still in clean-up mode as there is much work to do. Also I am still trying to get my wife on board with real estate investment as a whole. She is very, very conservative, and I want her to be supportive, and engaged in what I would like to do.

I am considering taking the next 6-12 months to just study the my area to determine what properties are selling, for how much, and how long they are taking to sell.

@Michael Woodward I just listened to the BP podcast you did. I was very informative, along with many others and continue to gain valuable knowledge from them. Was your wife on board when you started investing? Any insight into getting a spouse on board would be helpful. Also I have a 4 year old, 2 year old, and another on the way so extra time is not something I have a lot of...another reason I am considering delaying my plans.

Thanks again!

Michael Woodward · Answer

@Brian Mergen ,  I made plans to move to SW Florida to build new houses in the summer of 2004.   Right before I was scheduled to make the move, the state was hammered by hurricane Charlie and several others that destroyed MANY homes all over the state.  I was worried about what that was going to do to my plans to build new houses.

It's a long story but the net effect was that construction went CRAZY all over the state for a couple of years.  Storm chasers (not the ones making storm videos but the ones that chase these storms to do construction work) poured into the area.  That was both good and bad. The area needed lots of help to rebuild but a lot of the "contractors" that showed up where less than ethical.

You are right to think that it will probably be difficult to find a good contractor to do the work.  The really good ones will likely be instantly booked for a year or more.  If I were you, I would spend a LOT of time on the phone over the next few days talking to contractors/subcontractors to get a feel for their availability.  It usually takes the insurance companies several weeks or months to approve major repairs like these so a lot of the contractors will be waiting around for the insurance to give the go-ahead.  You might be able to get in the front of the line but even if you do get someone one the hook, it's still pretty risky.

Keep in mind that most contractors are notorious for starting many projects at once and keeping them all in play so they will have a guaranteed workflow for many months.  You could end up waiting a VERY long time to get your project completed.

I really can't recommend whether you move forward.....or not move forward..... There are a lot of unknowns that come with this kind of scenario.  I would definitely test the waters BUT...I would do it VERY carefully.  If you feel the risk is too high, just put it off for a few months until the dust clears a little.

My two cents..... Good luck!

Charles Morgan · Answer

I was thinking something like: homeowners who would rather purchase a replacement home than wait for a rebuild, and would like a down-payment for it. They may have been considering a trade-up anyway and this could be a golden opportunity for both of you.  Make sure you will be getting clear title and hopefully the insurance money (Read: consult a lawyer).

Michaela G. · Answer

If I were you I would look at the possibility of flipping lots.

Lets say a property is damaged beyond repair and the insurance company pays off the mortgage. Hopefully, something extra for the homeowner.

The homeowner will likely rent something , because they need a place to stay.

What many don't think about is that they now own the lot. Hopefully, the insurance company paid for demolition or the homeowner is on the hook for that.

So, I would make a list of every property that looks destroyed . I would then create a list of builders that do new spec homes in the area (look for construction sites or new construction and look at the ownership records to find the builder)

Then I'd create a mailer to those home addresses, which should be forwarded to the present homeowner address. Come up with something custom tailored to their situation and ask if they aren't planning on rebuilding, if they'd be interested in you taking the lot of their hands and could they use some extra money in their present situation?

I don't think that's really taking advantage of anyone, but rather you may offer them a source of extra income that they might not be thinking about. And you might find some builders that would love to pick up more than one lot in some neighborhood that has enough value for them to build on spec.

Just an idea