King Solomon’s Proverbs are filled with exhortations to be prudent and wise in all dealings, and to be diligent in planning ahead, whatever the endeavor. That includes building a house. “Prepare thy work without, and diligently till thy ground; that afterward thou mayst build thy house,” he writes in Proverbs 24:27.
That advice is especially relevant when the house in question is in an area that’s vulnerable to natural disasters such as tornadoes, earthquakes – or massive storms such as the superstorm Sandy which hit the Eastern United States in October 2012. In the aftermath of that storm, a number of houses, some of them severely damaged, are hitting the housing market at bargain basement prices.
But although the prices are modest, the headaches can be big, pointing up problems such as exceptions to insurance coverage, financing obstacles and permits for repairs that can plague both residential buyers and investors interested in rehabbing homes damaged by natural disasters.
In many areas along the East Coast that were hard-hit by Sandy, the majority of homeowners are rebuilding and not seeking to sell. But for some, the costs of rebuilding are just too high. In areas with high damage, some homes were completely flooded while others sustained major damage to walls, roofs and foundations. And some properties on which structures sustained severe damage are now being sold just for the land.
That means price reductions of up to 60 percent in certain neighborhoods – even on homes with a pre-storm asking price of millions. For investors looking to buy quality properties at low pieces, or homeowners willing to take on the ultimate fixer-upper, the long-term upside may outweigh the short-term downsides of repair costs. But the costs of restoring the property may be just the beginning.
Like earthquake, tornado and other kinds of disasters in other parts of the world, Sandy made an impact on homeowner insurance. Many of the storm’s survivors found that the coverage they had didn’t include that kind of event – many “basic” homeowner packages only cover situations specifically named in the policy and others require supplemental insurance specifically targeted to events such as floods. Now, in the aftermath of the storm, some insurance companies are skittish about offering coverage to owners buying or building in those damaged areas, and premiums for coverage may be higher.
Another obstacle facing buyers of homes severely damaged by Sandy – and those seeking to buy in other disaster-prone areas – can be financing. Some lenders may be reluctant to underwrite this kind of purchase, and after the storm, numerous borrowers were at risk for mortgage defaults. Some lenders instituted special homeowner support programs just for Sandy survivors who were in danger of defaulting.
Getting permit for repairs and new constructions ahs also proved problematic for buyers hoping to cash in on a bargain purchase. Some areas have restricted building in severely damaged areas, allowing the land to return to its natural state rather than permitting residents to return to vulnerable areas. Other restrictions may apply, too, as neighborhoods try to blunt toe effects of massive demolition and hauling. And because of demand, contractors and maintenance businesses may charge hefty fees to do work in these areas.
Snapping up distressed properties in areas hit by natural disasters can be a smart move. Income property investors following Jason Hartman‘s investing strategies may be able to walk away with an exceptional deal – but as Superstorm Sandy shows, the hidden costs of buying disaster-struck property may outweigh the benefits.
The Solomon Success Team