August 29, 2019
The aftermath of a natural disaster is one of the most tragic scenes of loss and devastation one can imagine.
It is also an opportunity for real estate investors who have learned how to profit from destruction.
A report from the Wall Street Journal details the rise of a class of investors who are specifically targeting communities ravished by hurricanes, fires and tornadoes. They are turning small profits on homes they don’t always fix up.
More than $1 billion in damage was caused by natural disasters in the United States in 2018, which saw the fourth-highest number of such events since 1980. The three years with more all occurred during the current decade.
That has led to a rise in real estate speculators scoping out the ruins of these communities and taking a chance of quickly flipping compromised homes and lots.
Disaster investors, mostly small and midsize real-estate development and investment companies, appear to be helping drive up property sales in affected areas. Panama City saw a dip in the number of deals after Hurricane Michael hit in October 2018, but sales have since increased. In Santa Rosa, Calif., the monthly number of home sales rose 17% in the five months after a 2017 fire destroyed parts of the city… --From Wall Street Journal
The report notes there are divided opinions about whether this kind of speculation is helping or hurting the communities affected by disasters.
In one case, an investor described driving through Panama City after Hurricane Michael, taking notes on properties he intended to purchase. He would sit down with devastated homeowners, many left with little recourse, and hand them prewritten contracts offering low prices. About half of the more than 30 he visited signed the contracts on the first meeting.
Rather than fix up the homes, the investor turned around and listed them while they were under contract, averaging about $10,000 in profit for each damaged home he flipped.
Opportunists sometimes end up doing the dirty work of more established local investors, handling the leg work of first acquiring the properties before selling them at marked up prices to investors who know the area much better.
Locally, some communities are reportedly pushing back against these disaster investors, warning that homes rebuilt in dangerous areas, particularly after wildfires, could be subject to the same fate in the near future.
The prevalence of natural disasters and the likelihood that we’ll see them more frequently is beginning to transform the way residential and commercial real estate risk is assessed in certain parts of the country. While presence of speculators is potentially troubling to some communities, it’s a fairly predictable consequence of a predictable problem going forward.
