In August 2017, Houston experienced the worst natural disaster to hit the area: Hurricane Harvey. FEMA calculated that approximately 190,000 homes were damaged or destroyed by the historic hurricane, and many of the flooded houses are being put on the market. Investors are questioning how to proceed in this post-devastation real estate market, contemplating the value of flipping a flooded house. By taking into consideration a buying and holding strategy, being conservative in your valuations, and carefully watching your numbers, deciding to flip can yield a profitable result.
How will Harvey affect Houston real estate prices?
For any type of house that has flooded, a depreciation of value is expected. The main difference between Harvey and previous hurricanes that hit Houston is 80% of the houses that flooded were not in the flood zone. When water was released from the Addicks and Barker Reservoirs, properties that were never expected to flood were dealing with upwards of a couple of feet of water. These damaged properties will not be worth their pre-Harvey value in the immediate future.
On the other hand, houses that did not flood will be expected to appreciate over the next several months. This will be due to a shortage of housing: people whose houses flooded are looking to purchase new homes. For this situation, real estate investors should prepare for a seller’s market.
Why does a house’s value decrease after a flood?
Anytime a house takes on water, the seller is required by Texas state law to disclose that the property has previously flooded. When a storm as large as Harvey hits and its devastation is common knowledge, potential buyers are going to be wary about purchasing a property that flooded only a few months ago. If you buy and flip a house six months after Harvey when the hurricane is still fresh in everyone’s mind, then the odds are you will need to lower the selling price in order to entice the buyer.
So how do you combat this when your goal is to make a profit? By being conservative in your evaluation and taking into consideration a pre-Harvey discounted value. How much of a discount depends on several factors and could range from 5% to upwards of 30% depending on the amount of water that entered the home, whether the home has flooded previously, and the location. An even better strategy would be to implement a buying and holding strategy. Purchase a flooded home or property, fix it up, and rent it for two or three years before putting it back on the market. This allows time for the stigma surrounding Harvey-flooded properties to dissipate and for values to adjust.
How is the value of a flooded house determined?
The value of a flooded house is determined through an appraisal. But an appraisal is in essence just an opinion of value, so if you order a property appraisal from 10 different appraisers, then you’ll more than likely end up with 10 different numbers. Until some of these flooded homes are sold on the market, it’s difficult to determine their actual value.
The lenders at Noble Mortgage reached out to a few appraisers, and we’ve determined they’re calculating property values one of two ways:
- Using pre-Harvey values: Some appraisers are taking into account what the homes have sold for in the past without applying any discount until they have more data.
- Using post-Harvey values: Other appraisers are actually going through the process of discounting properties based on their opinion.
Tips for the Houston Real Estate Investor Flipping a Flooded House
The most important thing to keep in mind is to make sure you’re being conservative in your valuations. If you’re flipping flooded properties, you can’t rely on pre-Harvey numbers. They’re going to be worth less, so be conservative with your valuations if you plan to flip.
Consider Buying and Holding
Buying and holding is currently the smartest strategy in the Houston market because any home that flooded is going to depreciate in the next six, 12, and 18 months. If you can buy a property at a discount and hold it for a two or three-year period, then it presents an opportunity to capture a lot of equity over the next several months. Then after the next couple of years of renting the property, you can keep it long-term if it proves more profitable, or you can decide to sell in a more forgiving market.
Watch Your Numbers
Anytime you’re repairing a home in a devastated real estate market, you can expect prices to increase. Materials to rebuild will be costlier, and contractors may charge a higher rate than pre-Harvey. Keep in mind repair bids as well: have your contractor visit the property, add a contingency to the budget, and make sure you’re checking everything in the house that could have been damaged. This includes not just sheetrock, flooring, and cabinets; but electrical systems, air conditioning, and damaged appliances as well. The goal is to keep track of the numbers, so your data will tell you whether flipping will be profitable or not.
Should you be flipping houses in Houston right now?
There are numerous opportunities present to flip a house depending on not only your approach, but the location as well. Houston areas such as the Inner Loop, inside of 610, the Beltway, and other high-end zones are well-insulated and less likely to depreciate depending on the price range. In the master-planned subdivisions in the suburbs, you can expect a little more appreciation because there are more opportunities for buyers to purchase a property in an area that did not flood. As long as you’re buying them right, flipping houses in Houston is still a profitable investment.
How can Noble Mortgage help you?
When purchasing a flooded home, you’re not going to be able to walk into your neighborhood bank and get a loan to purchase that property. Fortunately, there are two other options you can choose: pay cash or go to a hard money lender.
A hard money loan from Noble Mortgage provides you with up to 100% of the money you need to purchase the distressed property and to fund the necessary repairs to get it back on the market. Reach out to us today, so we can help you make knowledgeable and profitable decisions in your house-flipping venture!