It’s axiomatic on Wall Street that “…the time to buy is when fear overtakes greed…when blood, or in this case water, is in the streets” says Forbes Magazine. “Now, some (investors) are eyeing billions of dollars in hurricane-ravaged properties in Texas and Florida…they can buy low, either fix-up or flip or rent them out for several years and unload them later, doubling their money or more.”
Nothing is new here. During the 1970’s, investors made huge killings when New York City was near bankruptcy. In the financial crisis of 2008, Blackstone Group and others bought scores of foreclosed homes and are now sitting on billions of dollars in potential gains.
Today, in Houston, small investors are beginning this cycle of buying up 20 – 30 waterlogged homes. Wall Street is already swooping in behind those small investors with private equity firms and pension funds to buy, repair and then rent out to displaced homeowners those flooded homes.
Sometimes, investors only offer to pick up the mortgage payments on waterlogged homes. In that scenario, the owner who had no flood insurance would lose everything he had in home equity prior to the flood. Other times, investors might offer as much as $120,000 for a damaged home. This owner who had flood insurance would then recoup much of her losses due to having that federal flood insurance.
On average, when all is said and done, homeowners make an average of $.40 on the dollar from offers on their damaged home.
Some might ask, “How could someone agree to such a terrible deal?” Others might respond by saying that It’s understandable…owners want the nightmare of not knowing how much, if anything, they’ll get for their losses to be over. And move on with their lives.
During Hurricanes Irma and Harvey, wind and water damaged approximately 1.8M homes and caused uninsured flood losses of approximately $57B, according to the real estate data firm, CoreLogic, Inc.
Investors, both small ones and Wall Street types, justify their meager offers to homeowners by saying that they’re taking on increasing risks when offering to buy those flooded homes. Risks such as escalating financing costs and labor and material expenses due to increasing numbers of storms. Challenges such as mold, local efforts to restrict rebuilding and rising costs of flood insurances.
The biggest risk to investors in flood ravaged areas, according to Jesse Kennan, leader of Harvard’s Graduate School of Design within its Real Estate Program, is climate change. “Climate change represents both risk and opportunity. The risk is that in the 2 or 3 or 5 years that the investor holds on and rents out the house, you get another event…” just as, if not more, devastating as Hurricanes Harvey, Irma, and Maria.
So yes, nothing is new here…there are always some winners when there are some losers. Funny how the winning and losing players are usually the same every time.