Factoring for a Flood Zone

[Andy B.]

I am trying to come up with a purchase offer for an estate sale house that happens to be in a flood zone. The neighborhood has a small creek that runs through a portion and happens to be in the back yard of the subject house. The problem is that there is a flood zone along this creek and it only impacts 5 or 6 houses, so none of my comps are in the zone.

Of course, I would get an elevation survey to see if the structure was actually in the zone, but I am pretty certain it is. So, how do I account for the zone and its impact on re-sale?

For numbers -- the ARV in the neighborhood is $160,000; rehab is $50,000; and holding costs will be about $15,000. So, without the flood zone, I would want my offer to be in the $75,000 range but I assume that should be reduced to account for the less desirable flood zone status (unless having a creek in the back yard makes the place more desirable?).

Also, according to the FEMA website, the flood insurance is estimated to be around $1600 per year.

Should I just take that $1600 and deduct it from the mortgage to determine what a buyer would want to pay - sort of use the "what is the total monthly payment" idea or is there another way to factor in flood zone impact? Or should I just pass altogether since a flood zone house will be difficult to sell?

Thanks for the advice.