Flood zone properties. Can they be a good investment.

[John Echele]

Hello BP,

I am just starting out and trying to find my first flip house near Pacific, MO. What I have found a lot of is houses that have been flooded for sale for very cheap. Mostly small single family homes around $15,000 and even a few duplexes around $25,000. Most of these houses were abandoned after two major floods in 2015 and 2017. What interests me is that several houses have been raised above flood level and rehabbed. A local contractor gave me a rough estimate of $35,000 to raise a small house above flood level based on similar jobs in the area. Has anyone ever raised a house for a flip? What kind of problems come with flooded houses? 

[Mike Stahlman]

First I want to say I have not done this which may disqualify my answer.  You are new to investing and there are so many things to look out for so be very diligent and do a lot of research before you jump in.  Also I do not think it is good to start with the first ever flip being a super high risk long term project.  Not that it is not worth evaluating.  It is, I look at every house like this, and it works for me.  If the numbers work it works if not, then that is your answer.  

What I mean by that is this is...  Look at comps... comparable houses, with comparable fixtures you would provide, in the same area, of houses that have been raised.  This may be a hard task in it's self based on how many have been completed and sold to get those comps.  That is challange #1.  However if you can find real good comparable properties, there are a couple of things that need to be taken in to consideration.  The house will still be in a flood plane so I think that insurance is basically double the same house in a non flood plane.  Consult your insurance agent to get real numbers.  Next is the house still desirable or is it next to a highway, train, swamp, dump, or any other distraction and what are the neighboring houses like?  A trashy neighbor cannot be fixed and a train cannot be moved.  Is it accessible by way of good roads? etc.

You did not say what the foundation is, slab, crawl space basement, etc.  That could make a difference, since you can't raise a basement or slab that I know of.  

The biggest things to consider is does it fit your criteria?  As a new investor have you decided what your criteria is?  You need to have that up front.  You will change that from time to time as you travel the road and find new opportunities, and that is alright but set up guidelines and hone them as you walk this path.

Here is our criteria:  

Is it in a neighborhood that will not likely get vandalized during rehab or before occupancy?  Yes = Skip it.

Renting:

Does it beat the 1% rule?  $100,000 = $1,000 a month in rent.
Is the cash flow > $200 a month?  or $100 per door in multi family after all expenses.
What is the Cash on Cash ROI > 12% if we have to leave 10,000 long term are we making a good return on that money?

 
Flip:
Does it fit the 70% rule for the number?  Most people use the 70% rule.  Hint:Use the BP calculators 
How long will the rehab take?  Take that in to consideration.
Can you verify comps?
What is the ROI on the job?  You have to use your realistic numbers.
Are you confident you can you hit your target profit number for a flip?

Of course this assumes you are good at estimating, and have a great relationship with a couple of contractors.  If you are not experienced in estimating, get experienced.  Do not leave it to the professionals, it is not their money if them miss something big like an electrical panel being out of code or termites they did not see.  You have to turn houses and learn from your mistakes or work with someone to help you or what ever it takes.  Ask thousands of questions and get bids on all the work from several contractors.  Or use something like J Scott's book Estimating Rehab Costs.  

And one final thought.  Pay no more than 1/3 up front, on any project, 1/3 at completion, and 1/3 after final walk through with everything completed and signed off.  No sob stories.  If a contractor asks for more than that pay them for what they have completed and find another contractor.